Donald Trump, Outsourcing, and India’s IT Services Sector

America’s new president Donald Trump, in his inaugural address, has called for “buy American and hire American.” He has put on notice manufacturing companies such as the big three automakers in Detroit, German car maker BMW, Japanese companies such as Toyota, and others such as Carrier – the maker of air-conditioners – to produce in the United States (US) for the American market by hiring American labor. If they do not comply, he has proposed a border tax on all semi-finished and finished manufactured goods imported into the US by American and foreign manufacturers to make them as expensive as they would be if they are entirely produced within US borders employing American labor.

Foreign production chains have become common in the manufacturing sector not only for cars and other equipment but also for computer hardware. Apple, for example, produces its flagship iPhone in China and Taiwan. China has also become a favorite destination for chip manufacturers with even Intel Corporation making some of its chip line there, moving jobs outside the United States.

Trump has not, however, yet targeted outsourcing in the services sector, primarily the large information technology (IT) industry for similar treatment as manufacturing. Instead, the US Congress has taken up legislation to overhaul the visa program for importing highly skilled workers majority of whom work in the IT services industry. The proposed legislation is bi-partisan in nature, having sponsors in both the major political parties – Democrat and Republican.

The bill, if passed into law, will primarily affect the ability of Indian software companies – which derive more than half their annual revenue of USD 150 billion from North America – to staff their US operations with less expensive Indian software professionals on H1B visas because the proposed law will hike the minimum wage an H1B professional is to be paid to USD 130,000 per year from USD 60,000. Upon news of the legislation which is yet to become law, the share prices of the major Indian software companies which have significant exposure to the bill fell by nearly 4%.

Indian software companies which export software to the US, ironically, may not have much to worry about. The effect of the proposed law could be that, in order to keep the costs of developing software down, US companies could outsource more work to India because much of the technical work of creating software can be done remotely, at a fraction of the cost which could be incurred in the US, without the need to shift personnel from India to the US paying the new and substantially higher H1B wages. Local US staffers of the Indian companies could then be US permanent residents or citizens in sales, marketing and project management functions.

The bigger worry for the Indian IT industry should instead be its dependence on software exports to the US and Europe especially given the rising sentiment in both places to create local jobs by making, buying, and hiring locally. It is very possible that software imports to the US, similar to manufactured goods, could also be charged a border tax to promote making, buying, and hiring American. According to NASSCOM, the association of companies in the Indian IT sector, the Indian domestic market for IT services is only about USD 35 billion a year. For a large country such as India this is a minuscule market that needs desperately to be developed and, hopefully, the Digital India initiative of the Indian government will do that.

As the General Electric (GE) Chief Executive Officer (CEO), Jeffrey Immelt, recently said, the changing nature of globalization does not require ambitious multilateral trade deals setting up large free trade areas to be global but country-by-country arrangements. Indian software firms should have local US offices, produce software locally by hiring American labor for the American market, competing with domestic US IT corporations rather than employing Indians remotely at low cost in India. Likewise, US corporations should set themselves up in India to develop the Indian software market, competing domestically with Indian IT firms. This could be a win-win for both US and Indian IT corporations and for US and Indian workers.

Going local and global will be the key to the future success of the Indian IT industry. The IT companies must expand around the world to cater to local clients using local labor while moving up the technology value chain. The era of outsourcing work to India has come to an end.

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