The Indian Outsourcer to Watch is Based in Teaneck

Posted by: Bruce Einhorn on March 25, 2011

(This post originally referred incorrectly to HCL Technology. The correct name is HCL Technologies.)
Indian outsourcers are getting ready for more growth. Indian newspaper The Economic Times reports today that the big five IT services companies—Tata Consultancy Services, Cognizant, Infosys, Wipro, and HCL Technologies—are on a hiring spree, adding tens of thousands of new workers in India. Their net headcount increased by 114,000 in the nine months ending in December, 2010. That compares to just 47,000 in the same period the year before. In part, the strong hiring is because of the low-base effect: In 2009, Indian companies were still coping with the uncertainty of the global financial crisis and were being cautious about adding employees. However, the growth is also a sign that the Indian outsourcers expect more business coming their way soon.

Ironically, the company to watch here isn't even Indian. Cognizant's stock price has gone up 58 percent since July 2010 and the stock got another boost on Thursday after Goldman Sachs said Cognizant (CTSH) was one of its top picks in the IT services sector. Cognizant's home office is in Teaneck, New Jersey and the stock is traded on Nasdaq, but it has a major presence in India and it's growing in the country. Last month, the company announced it will invest more than $500 million in four Indian cities through the end of 2014. That will give it space for 55,000 workers. With a workforce at the end of 2010 of 104,000 workers, Cognizant is going to be giving India's big outsourcing companies even more of a scare in the months and years ahead.

In Electronics, Japan Still Matters

Posted by: Bruce Einhorn on March 17, 2011

In the global technology industry's pecking order, Japanese consumer electronics companies long ago surrendered their top spot to more nimble competitors like Samsung Electronics and Apple. Many of the country's chipmakers also struggled as competitors in Korea and Taiwan thrived. Meanwhile, marketing executives at major multinationals turned their attention to China and India, the world's new economic powers. For many, Japan was largely an afterthought, a declining power with an aging population.

The turmoil following the March 11 earthquake has provided a rude reminder that, when it comes to the global electronics industry's supply chain, Japan still matters. The country's factories produce about one-fifth of the world's semiconductors and 40 percent of electronic components. Japan's Mitsubishi Gas Chemical and Hitachi Chemical combined make almost all of the world's BT Resin, a raw material used in chip packaging, and Hitachi Chemical has 70 percent market share for a type of chemical slurry used by semiconductor producers for polishing chips. Tech executives and investors therefore should be worrying about a prolonged shutdown of production in Japan, where many factories are closed and there's no clear sign of how much damage they suffered or when they might reopen. Typically, big chipmakers like Taiwan Semiconductor Manufacturing Co. keep between four to six weeks of supply, so uncertainty about maintaining supply from Japan is not a problem -- for now. However, "all these Japanese companies are not able to give us an estimation of when they are able to resume their production," says Warren Lau, an analyst in Hong Kong with Samsung Securities. He warns there could be "some destruction" in the supply chain that could cascade down to affect companies like Apple.

One Western company that might feel the pain soon is Nokia, a major purchaser of Japanese components for mobile phones. The region hit by the earthquake, tsunami, and nuclear accident is home to many manufacturers of those parts, and the disaster is likely to hit the handset industry the most, according to a March 14 report by Barclays Capital. For Nokia, finding other sources in the event of an extended disruption to the supply chain won't be easy, Barclays analysts wrote, since the struggling Finnish company's "declining market share has reduced its once legendary ability to procure alternate supply."

As they wait to see if and when the power comes back on at Japanese factories, companies are trying to trying to find back-up suppliers. In some cases, though, there aren't viable alternatives that can produce in the scale that companies need. "The shortfall of supply will be so huge," says Samsung's Lau. "These companies will have to make difficult decisions."

China's Surprising Trade Numbers

Posted by: Bruce Einhorn on March 11, 2011

By Dexter Roberts

Amongst the flood of economic statistics released this week by Beijing, the trade numbers certainly were some of the most notable. With imports up 19.4% and exports up just 2.4%, the least since 2009, China registered a $7.3 billion trade deficit, its first since last March (by contrast, the Bloomberg survey of economists had been predicting a surplus of $4.9 billion). So does this mean the world should expect China to start running a trade deficit regularly, a possibility that would likely lessen trade frictions, and might even ease global pressure on China to more quickly appreciate its currency, the yuan?

Not so fast. As numerous analysts pointed out, including Goldman Sachs and UBS, the unusual trade numbers have much to do with the seasonal effect of the Chinese New Year, which fell in early February this year. That holiday tends to have a much larger impact on exports than on imports, as factory owners and workers tend to take off not just the official holiday, but often the days surrounding Chinese New Year, too. "We believe the trade deficit is likely to be a temporary phenomenon distorted by the Lunar new Year," write Yu Song and Helen (Hong) Qiao in a Goldman Sachs Asia Economics Data Flash dated March 10. "Distortions affect exports much more than imports because exporters have a much greater tendency to take extended holidays." UBS for its part is predicting China will still run a $150 billion trade surplus for the whole year--"smaller than in 2010 but still sizable," writes economist Tao Wang in a March 10 note.

Still, the latest trade numbers--and the likely smaller surplus this year--will provide ready ammunition for Beijing as it faces further criticism on the value of the yuan. Chinese officials already have been defending the country's currency policy during the ongoing legislative session that closes Monday. "We're likely to see some narrowing in the trade surplus, perhaps to the $150 billion range in 2011 from $180 billion last year," says David Cohen of Asian Economics in Singapore in a Bloomberg article earlier today. "China will no doubt attempt to point to this number to deflect the criticism from the U.S. and other trading partners that the yuan is devalued."

Alibaba Replies on Piracy Claims

Posted by: Andy Reinhardt on March 3, 2011

By Bruce Einhorn

Following my post the other day about the difficulties at Alibaba, company spokesman John Spelich contacted me to point out a few things. First of all, he says Alibaba is not considering an IPO for Taobao, its popular consumer retail site. "We've said repeatedly on record that we have no plans to IPO Taobao," he writes via e-mail.

Second, he disputes my contention that the U.S. Trade Representative's placement of Taobao on its "notorious markets" list was a blow to the company. Yes, Taobao is once again on the list, as it was last year, but so is bitter rival Baidu. Spelich pointed me to Alibaba's in-house blog, which highlighted this bit of good news in the USTR's report: "While recognizing that Taobao is making significant efforts to address the availability of infringing goods through its website, it still has a long way to go in order to resolve those problems." Moreover, Spelich says we should notice the kind words an industry group has for the company. "Alibaba should...be commended for their cooperation with videogame right holders in the removal of infringing items," the International Intellectual Property Alliance writes in its report recommending that USTR keep China on the government's Priority Watch List for copyright protection and enforcement.

Third, Spelich says Alibaba first revealed the fraud among suppliers on its B2B site last November. "We took action to terminate 1,200 paying members," the company reported then, "not only those who have been reported and proved to be fraudulent but also members who demonstrate a high probability to commit fraud."(See page 4 under "Gold Supplier.")

Are we making too much of this latest news, then? Spelich says yes. "It's old news," he argues. He's right that Alibaba revealed the fraud cases last year. This time, though, the company also said that about 100 of its salespeople were involved, either intentionally or through negligence. And this time the CEO and COO both stepped down to take responsibility.

Alibaba's Bad Week Gets Worse

Posted by: Justin Bachman on March 1, 2011

By Bruce Einhorn
As if Chinese Internet company Alibaba.com didn't already have enough problems, the U.S. government has delivered another blow to chairman Jack Ma's group. The U.S. Trade Representative today put Taobao, the Alibaba-owned company that is China's largest online retailer, on a list of "notorious markets" that help sustain piracy and counterfeiting. This comes as Alibaba continues to struggle with the fallout from its Feb. 21 announcement that more than 2,000 of its suppliers had defrauded Alibaba users. Alibaba.com's chief executive, David Wei, and chief operating officer Elvis Lee resigned to take responsibility.

For a good take on the impact of the fraud scandal at Alibaba.com, check out this story by my colleague Frederik Balfour. The B2B site is the only part of the Alibaba group that is publicly listed, so of course the news of turmoil there is painful. The stock price has dropped sharply in the past week. But the latest problem, involving Taobao, is potentially just as damaging over the long-term. Taobao is huge in China and an IPO would help Alibaba to capitalize on that popularity. Getting called "notorious" by the U.S. government will probably make it much more difficult for Alibaba to do that.

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