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India: Why Apple Walked Away


Apple CEO Steve Jobs has long had a thing for India. After work- ing at game developer Atari (ATAR) in the mid-'70s, Jobs took a break and backpacked around the subcontinent in search of spiritual enlightenment. Upon his return to the U.S., his more capitalistic instincts took over, and he and Steve Wozniak launched Apple. Today, of course, the seeker-turned- billionaire enjoys a reputation as one of the most successful entrepreneurs and savviest marketing minds on the planet.

Yet he is also a tough-minded executive who knows when to cut and run. That's why Apple Computer Inc. has shelved plans to build a sprawling technical support center in Bangalore, even as IBM (IBM) and other tech powers are ramping up. Just three months back, Apple appeared to be on the same trajectory, and there was talk of the company hiring 3,000 workers by 2007 to handle support for Macintosh computers and other Apple gear. Many in India even speculated that Jobs might travel there this year to publicize Apple's commitment to the country.

It wasn't meant to be. In late May, Apple dismissed most of the 30 new hires at its subsidiary in Bangalore. (A handful working in sales and marketing will stay on.) Spokesman Steve Dowling would say only that Apple had "reevaluated our plans" and decided to provide support from other countries. Another source familiar with the situation, though, says the decision was cost-driven. "India isn't as inexpensive as it used to be," the source says. "The turnover is high, and the competition for good people is strong." Apple feels it "can do [such work] more efficiently elsewhere."

The shutdown highlights concerns about the sustainability of India's fast-track economy. True, India grew 9.3% last quarter and is still home to the world's largest and fastest-growing offshore outsourcing sector, which last year generated some $17.3 billion in revenues and employed nearly 700,000 people, according to the McKinsey Global Institute. Yet India's benchmark Sensitive index, or Sensex, has dropped by 20% in the past month as global investors have fled emerging-market stocks. And the outsourcing sector is now plagued by concerns about rising wages. Entry-level pay at tech and outsourcing companies climbed by as much as 13% annually from 2000 to 2004, while salaries for midlevel managers jumped 30% a year during the same period, to a median of $31,131, according to McKinsey and Nasscom, India's software industry association.

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Apple's move has generated media attention -- "Apple Software Logs Out of India," The Times of India shouted in a headline -- but it may be a special case. Although part of the circuitry that powers the iPod was developed in Hyderabad by engineers working for PortalPlayer Inc. (PLAY), Apple never intended to outsource high-end software development to its Bangalore shop: Unlike most tech companies, Apple does almost all of its R&D and product development near its Cupertino (Calif.) headquarters.

Apple, meanwhile, isn't abandoning India altogether and still aims to sell to the country's flourishing market. On May 29 the company announced a tieup with HCL Corp. New Delhi-based HCL, which has worked successfully with Nokia Corp. (NOK), will support Apple's growing iPod sales in India. "We will put Apple products through the same distribution network as we do with Nokia, and offer after-sales service for all things related to the iPod," says Saurav Adhikari, HCL's vice-president for strategy.

So Indians will get their iPods, but Bangalore won't get that service center. Owing to his earlier spiritual quest, Steve Jobs may have a soft spot for India. But when it comes to running a $14 billion enterprise, his capitalistic instincts are likely to win out every time.

By Manjeet Kripalani and Peter Burrows


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