The Rise of India

As you pull into General Electric’s John F Welch Tech -nology Center, a
uniformed guard waves you through an iron gate.Once inside, you leave the dusty,
traffic-clogged streets of Bangalore and enter a leafy campus of low buildings
that gleam in the sun. Bright hallways lined with plants and abstract art,
"it encourages creativity," explains a manager–lead through
laboratories where physicists, chemists, metallurgists, and computer engineers
huddle over gurgling beakers, electron microscopes, and spectrophotometers.
Except for the female engineers wearing saris and the soothing Hindi pop music
wafting through the open-air dining pavilion, this could be GE’s giant
research-and-development facility in the upstate New York town of Niskayuna.

It’s more like Niskayuna than you might think. The center’s 1,800
engineers–a quarter of them have PhDs–are engaged in fundamental research
for most of GE’s 13 divisions. In one lab, they tweak the aerodynamic designs
of turbine-engine blades. In another, they’re scrutinizing the molecular
structure of materials to be used in DVDs for short-term use in which the movie
is automatically erased after a few days. In another, technicians have rigged up
a working model of a GE plastics plant in Spain and devised a way to boost
output there by 20%. Patents? Engineers here have filed for 95 in the US since
the center opened in 2000.

IIIT-Bangalore Student Tyagi

Pretty impressive for a place that just four years ago was a fallow plot of
land. Even more impressive, the Bangalore operation has become vital to the
future of one of America’s biggest, most profitable companies. "The game
here really isn’t about saving costs but to speed innovation and generate
growth for the company," explains Bolivian-born managing director Guillermo
Wille, one of the center’s few non-Indians.

The Welch center is at the vanguard of one of the biggest mind-melds in
history. Plenty of Americans know of India’s inexpensive software writers and
have figured out that the nice clerk who booked their air ticket is in Delhi.
But these are just superficial signs of India’s capabilities. Quietly but with
breathtaking speed, India and its millions of world-class engineering, business,
and medical graduates are becoming enmeshed in America’s new economy in ways
most of us barely imagine. "India has always had brilliant, educated
people," says tech-trend forecaster Paul Saffo of the Institute for the
Future in Menlo Park, Calif. "Now Indians are taking the lead in colonizing
cyberspace."

This techno take-off is wonderful for India–but terrifying for many
Americans. In fact, India’s emergence is fast turning into the latest
Rorschach test on globalization. Many see India’s digital workers as bearers
of new prosperity to a deserving nation and vital partners of corporate America.
Others see them as shock troops in the final assault on good-paying jobs. Howard
Rubin, executive vice-president of Meta Group Inc., a Stamford
information-technology consultant, notes that big US companies are shedding 500
to 2,000 IT staffers at a time. "These people won’t get reabsorbed into
the workforce until they get the right skills," he says. Even Indian execs
see the problem. "What happened in manufacturing is happening in
services," says Azim H Premji, chairman of IT supplier Wipro Ltd.
"That raises a lot of social issues for the US."

A Cafe in mindspace, A 140-acre office development in Mumbai

No wonder India is at the center of a brewing storm in the US, where
politicians are starting to view offshore outsourcing as the root of the jobless
recovery in tech and services. An outcry in Indiana recently prompted the state
to cancel a $15 million IT contract with India’s Tata Consulting Services. The
telecom workers’ union is up in arms, and Congress is probing whether the
security of financial and medical records is at risk. As hiring explodes in
India, the jobless rate among the US software engineers has more than doubled,
to 4.6%, in three years. The rate is 6.7% for electrical engineers and 7.7% for
network administrators. In all, the Bureau of Labor Statistics reports that
234,000 IT professionals are unemployed.

The biggest cause of job losses, of course, has been the US economic
downturn. Still, there’s little denying that the offshore shift is a factor.
By some estimates, there are more IT engineers in Bangalore (150,000) than in
Silicon Valley (120,000). Meta figures say that at least one-third of new IT
development work for big US companies is done overseas, with India being the
biggest site. And India could start grabbing jobs from other sectors. AT Kearney
Inc. predicts that 500,000 financial-services jobs will go offshore by 2008.
Indiana notwithstanding, US governments are increasingly using India to manage
everything from accounting to their food-stamp programs. Even the US Postal
Service is taking work there. Auto engineering and drug research could be next.

More Science in Schools

Tech luminary Andrew S Grove, CEO of Intel Corp., warns that "it’s a
very valid question" to ask whether the US could eventually lose its
overwhelming dominance in IT, just as it did in electronics manufacturing.
Plunging global telecom costs, lower engineering wages abroad, and new
interactive-design software are driving revolutionary change, Grove said at a
software conference in October. "From a technical and productivity
standpoint, the engineer sitting 6,000 miles away might as well be in the next
cubicle and on the local area network." To maintain America’s edge, he
said, Washington and the US industry must double software productivity through
more R&D investment and science education.

But there’s also a far more positive view –that harnessing Indian
brainpower will greatly boost American tech and services leadership by filling a
big projected shortfall in skilled labor as baby boomers retire. That’s
especially possible with smarter US policy. Companies from GE Medical Systems to
Cummins to Microsoft to enterprise-software firm PeopleSoft that are hiring in
India say they aren’t laying off any US engineers. Instead, by augmenting
their US R&D teams with the 260,000 engineers pumped out by Indian schools
each year, they can afford to throw many more brains at a task and speed up
product launches, develop more prototypes, and upgrade quality. A top electrical
or chemical engineering grad from Indian Institutes of Technology (IITs) earns
about $10,000 a year–roughly one-eighth of the US starting pay. Says Rajat
Gupta, an IIT-Delhi grad and senior partner at consulting firm McKinsey &
Co.: "Offshoring work will spur innovation, job creation, and dramatic
increases in productivity that will be passed on to the consumer."

Whether you regard the trend as disruptive or benefical, one thing is clear.
Corporate America no longer feels it can afford to ignore India. "There’s
just no place left to squeeze" costs in the US, says Chris Disher, a Booz
Allen Hamilton Inc. outsourcing specialist. "That’s why every CEO is
looking at India, and every board is asking about it." neoIT, a consultant
advising US clients on how to set up shop in India, says it has been deluged by
big companies that have been slow to move offshore. "It is getting to a
state where companies are literally desperate," says Bangalore-based neoIT
managing partner Avinash Vashistha.

As a result of this shift, few aspects of US business remain untouched. The
hidden hands of skilled Indians are present in the interactive websites of
companies such as Lehman Brothers and Boeing, display ads in the Yellow Pages,
and the electronic circuitry powering the Apple Computer iPod. While Wall Street
sleeps, Indian analysts digest the latest financial disclosures of US companies
and file reports in time for the next trading day. Indian staff troll the
private medical and financial records of US consumers to help determine if they
are good risks for insurance policies, mortgages, or credit cards from American
Express Co. and JP Morgan Chase & Co.

By 2008, forecasts McKinsey, IT services and back-office work in India will
swell fivefold, to a $57 billion annual export industry employing four million
people and accounting for 7% of India’s gross domestic product. That growth is
inspiring more of the best and brightest to stay home rather than migrate.
"We work in world-class companies, we’re growing, and it’s
exciting," says Anandraj Sengupta, 24, an IIT grad and young star at GE’s
Welch Centre, where he has filed for two patents. "The opportunities exist
here in India."

If India can turn into a fast-growth economy, it will be the first developing
nation that used its brainpower, not natural resources or the raw muscle of
factory labor, as the catalyst. And this huge country desperately needs
China-style growth. For all its R&D labs, India remains visibly Third World.
IT service exports employ less than 1% of the workforce. Per-capita income is
just $460, and 300 million Indians subsist on $1 a day or less. Lethargic courts
can take 20 years to resolve contract disputes. And what pass for highways in
Mumbai are choked, crumbling roads lined with slums, garbage heaps, and homeless
migrants sleeping on bare pavement. More than a third of India’s one billion
citizens are illiterate, and just 60% of homes have electricity. Most
bureaucracies are bloated, corrupt, and dysfunctional. The government’s 10%
budget deficit is alarming. And the risk of war with nuclear-armed Pakistan is
ever-present.

So it’s little wonder that, compared to China with its modern
infrastructure and disciplined workforce, India is far behind in exports and as
a magnet for foreign investment. While China began reforming in 1979, India only
started to emerge from self-imposed economic isolation after a harrowing
financial crisis in 1991. China has seen annual growth often exceeding 10%, far
better than India’s decade-long average of 6%.

In the Valley’s Marrow

Still, this deep source of low-cost, high-IQ, English-speaking brainpower may
soon have a more far-reaching impact on the US than China. Manufacturing–China’s
strength–accounts for just 14% of the US output and 11% of jobs. India’s
forte is services–which make up 60% of the US economy and employ two-thirds of
its workers. And Indian knowledge workers are making their way up the New
Economy food chain, mastering tasks requiring analysis, marketing acumen, and
creativity.

This means India is penetrating America’s economic core. The 900 engineers
at Texas Instruments Inc.’s Bangalore chip-design operation boast 225 patents.
Intel Inc.’s Bangalore campus is leading worldwide research for the company’s
32-bit microprocessors for servers and wireless chips. "These are corporate
crown jewels," says Intel India president Ketan Sampat. India is even
getting hard-wired into Silicon Valley. Venture capitalists say anywhere from
one-third to three-quarters of the software, chip, and e-commerce startups they
now back have Indian R&D teams from the get-go. "We can barely imagine
investing in a company without at least asking what their plans are for
India," says Sequoia Capital partner Michael Moritz, who nurtured Google,
Flextronics, and Agile Software. "India has seeped into the marrow of the
Valley."

It’s seeping into the marrow of Main Street. This year, the tax returns of
some 20,000 Americans were prepared by $500-a-month CPAs such as Sandhya Iyer,
24, in the Bombay office of Bangalore’s MphasiS. After reading scanned seed
and fertilizer invoices, soybean sales receipts, W2 forms, and investment
records from a farmer in Kansas, Iyer fills in the farmer’s 82-page return.
"He needs to amortize these," she types next to an entry for new
machinery and a barn. A US CPA reviews and signs the finished return. Next year,
up to 200,000 US returns will be done in India, says CCH Inc. in Riverwoods,
Ill., a supplier of accounting software. And it’s not only Big Four firms that
are outsourcing. "We are seeing lots of firms with 30 to 200 CPA–even
single practitioners," says CCH Sales vice-president Mike Sabbatis.

The gains in efficiency could be tremendous. Indeed, India is accelerating a
sweeping reengineering of corporate America. Companies are shifting bill
payment, human resources, and other functions to new, paperless centers in
India. To be sure, many corporations have run into myriad headaches, ranging
from poor communications to inconsistent quality. Dell Inc. recently said it is
moving computer support for corporate clients back to the US. Still, a raft of
studies by Deloitte Research, Gartner, Booz Allen, and other consultants find
that companies shifting work to India have cut costs by 40% to 60%. Companies
can offer customer support and use pricey computer gear 24/7. US banks can
process mortgage applications in three hours rather than three days. Predicts
Nandan M Nilekani, managing director of Bangalore-based Infosys Technologies
Ltd.: "Just like China drove down costs in manufacturing and Wal-Mart in
retail," he says, "India will drive down costs in services."

But deflation will also mean plenty of short-term pain for US companies and
workers who never imagined they’d face foreign rivals. Consider America’s
$240 billion IT-services industry. Indian players led by Infosys, Tata, and
Wipro got their big breaks during the Y2K scare, when US outfits needed all the
software help they could get. Indians still have less than 3% of the market. But
by undercutting giants such as Accenture, IBM, and Electronic Data Systems by a
third or more for software and consulting, they’ve altered the industry’s
pricing. "The Indian labor card is unbeatable," says chief technology
officer John Parkinson of consultant Cap Gemini Ernst & Young. "We don’t
know how to use technology to make up for the difference."

Wrenching Change

Many US white-collar workers are also in for wrenching change. A study by
McKinsey Global Institute, which believes offshore outsourcing is good, also
notes that only 36% of Americans displaced in the previous two decades found
jobs at the same or higher pay. The incomes of a quarter of them dropped 30% or
more. Given the higher demands of employers, who want technicians adept at
innovation and management, it could take years before today’sUS IT workers
land solidly on their feet.

India’s IT workers, in contrast, sense an enormous opportunity. The country
has long possessed some basics of a strong market-driven economy: private
corporations, democratic government, Western accounting standards, an active
stock market, widespread English use, and schools strong in computer science and
math. But its bureaucracy suffocated industry with onerous controls and taxes,
and the best scientific and business minds went to the US, where the 1.8 million
Indian expatriates rank among the most successful immigrant groups.

Now, many talented Indians feel a sense of optimism that India hasn’t
experienced in decades. "IT is driving India’s boom, and we in the
younger generation can really deliver the country from poverty," says
Rhythm Tyagi, 22, a master’s degree student at the new Indian Institute of
Information Technology at Bangalore. The campus is completely wired for Wi-Fi
and boasts classrooms with videoconferencing to beam sessions to 300 other
colleges.

That confidence is finally spurring the government to tackle many of the
problems that have plagued India for so long. Since 2001, Delhi has been
furiously building a network of highways. Modern airports are next. Deregulation
of the power sector should lead to new capacity. Free education for girls to age
14 is a national priority. "One by one, the government is solving the
bottlenecks," says Deepak Parekh, a financier who heads the
quasi-governmental Infrastructure Development Finance Co.

Future Vision

India also is working to assure that it will be able to meet future demand
for knowledge workers at home and abroad. India produces 3.1 million college
graduates a year, but that’s expected to double by 2010. The number of
engineering colleges is slated to grow 50%, to nearly 1,600, in four years. Of
course, not all are good enough to produce the world-class grads of elite
schools like the IITs, which accepted just 3,500 of 178,000 applicants last
year. So there’s a growing movement to boost faculty salaries and reach more
students nationwide through broadcasts. India’s rich diaspora population is
chipping in, too. Prominent Indian Americans helped found the new Indian School
of Business, a tie-up with Wharton School and Northwestern University’s
Kellogg Graduate School of Management that lured most of its faculty from the
US. Meanwhile, the six IIT campuses are tapping alumni for donations and
research links with Stanford, Purdue, and other top science universities.
"Our mission is to become one of the leading science institutions in the
world," says director Ashok Mishra of IIT-Bombay, which has raised $16
million from alumni in the past five years.

If India manages growth well, its huge population could prove an asset. By
2020, 47% of Indians will be between 15 and 59, compared with 35% now. The
working-age populations of the US and China are projected to shrink. So India is
destined to have the world’s largest population of workers and consumers. That’s
a big reason why Goldman, Sachs & Co. thinks India will be able to sustain
7.5% annual growth after 2005.

Skeptics fear US companies are going too far, too fast in linking up with
this giant. But having watched the success of the likes of GE Capital
International Services, many execs feel they have no choice. Inside GECIS’
Bangalore center–one of four in India–Gauri Puri, a 28-year-old dentist, is
studying an insurance claim for a root-canal operation to see if it’s covered
in a certain US patient’s dental plan. Two floors above, members of a
550-strong analytics team are immersed in spreadsheets filled with a boggling
array of data as they devise statistical models to help GE sales staff
understand the needs, strengths, and weaknesses of customers and rivals. Other
staff prepare data for GE annual reports, write enterprise resource-planning
software, and process $35 billion worth of global invoices. Says GE Capital
India president Pramod Bhasin: "We are mission-critical to GE." The
700 business processes done in India save the company $340 million a year, he
says.

Indian finance whizzes are a godsend to Wall Street, too, where brokerages
are under pressure to produce more independent research. Many are turning to
outfits such as OfficeTiger in the southern city of Madras. The company employs
1,200 people who write research reports and do financial analysis for eight Wall
Street firms. Morgan Stanley, JP Morgan, Goldman Sachs, and other big investment
banks are hiring their own armies of analysts and back-office staff. Many are
piling into Mindspace, a sparkling new 140-acre city-within-a-city abutting
Bombay’s urban squalor. Some three million square feet are already leased to
Western finance firms. By year-end, Morgan Stanley will fill several floors of a
new building.

For Silicon Valley startups, Indian engineers let them stretch R&D
budgets. PortalPlayer Inc., a Santa Clara (Calif.) maker of multimedia chips and
embedded software for portable devices such as music players, has hired 100
engineers in India and the US who update each other daily at 9 a.m. and 10 p.m.
JA Chowdary, CEO of PortalPlayer’s Hyderabad subsidiary Pinexe, says the
company has shaved up to six months off the development cycle–and cut R&D
costs by 40%. Impressed, venture capitalists have pumped $82 million into
PortalPlayer.

More Bang for the Buck

Old economy companies are benefiting, too. Engine maker Cummins plans to use
its new R&D center in Pune to develop the sophisticated computer models
needed to design upgrades and prototypes electronically. Says International
vice-president Steven M Chapman: "We’ll be able to introduce five or six
new engines a year instead of two" on the same $250 million R&D budget–without
a single US layoff.

The nagging fear in the US, though, is that such assurances will ring hollow
over time. In other industries, the shift of low-cost production work to East
Asia was followed by engineering. Now, South Korea and Taiwan are global leaders
in notebook PCs, wireless phones, memory chips, and digital displays. "If
we continue to offshore high-skilled professional jobs, the US risks
surrendering its leading role in innovation," warns John W Steadman,
incoming US president of Institute of Electrical & Electronics Engineers
Inc. That could also happen if many foreigners–who account for 60% of US
science grads and who have been key to the US tech success–no longer go to
America to launch their best ideas.

Throughout US history, workers have been pushed off farms, textile mills, and
steel plants. In the end, the workforce has managed to move up to better-paying,
higher-quality jobs. That could well happen again. There will still be a crying
need for US engineers, for example. But what’s called for are engineers who
can work closely with customers, manage research teams, and creatively improve
business processes. Displaced technicians who lack such skills will need
retraining; those entering school will need broader educations.

Adapting to the India effect will be traumatic, but there’s no sign
corporate America is turning back. Yet the India challenge also presents an
enormous opportunity for the US. If America can handle the transition right, the
end result could be a brain gain that accelerates productivity and innovation.
India and the US, nations that barely interacted 15 years ago, could turn out to
be the ideal economic partners for the new century.

By Manjeet Kripalani and Pete Engardio With Steve Hamm in New York
in BusinessWeek. Copyright 2003 by The McGraw-Hill Companies, Inc