2670 | Logistics | Business Process Outsourcing

India as a U.S. Trading Partner: Far Beyond BPO: Knowledge@Wharton (http://knowledge.wharton.upenn.edu/article.cfm?

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India as a U.S. Trading Partner: Far Beyond BPO
Published : January 12, 2011 in Knowledge@Wharton

President Obama's visit to India in November was a welcome opportunity for both the United States and India to focus on the positive aspects of their economic relationship. Rather than directly address the politically delicate issue of outsourcing thousands of U.S. service jobs to India, the President and his entourage of business leaders called attention to the growing volume of trade between the two countries and the vast new opportunities for much closer trade and investment ties in the future. Overall, more than $14.9 billion in bilateral trade deals were either announced or highlighted during the visit, according to the White House, This is a single/personal use copy of Knowledge@Wharton. including $9.5 billion in new U.S. exports to India, reportedly For multiple copies, custom reprints, e-prints, posters or plaques, please contact PARS International: supporting an estimated 53,670 U.S. jobs. "These cross-border reprints@parsintl.com P. (212) 221-9595 x407. collaborations, both public and private, underpin the expanding U.S.-India strategic partnership, contributing to economic growth and development in both countries," said the Office of the Press Secretary in a statement. India's role in the global economy -- and U.S. perceptions of that role -- continue to evolve at a rapid pace. Less than two decades ago, conversation about India in the U.S. often focused on its poverty and the foreign aid that the U.S. and other developed countries offered to alleviate it. Now, the emergence of Indian companies on the world stage draws increasing notice. Such players include Tata Motors, which owns prestigious British brands Jaguar and Land Rover, and global IT service providers like Infosys. Too often, however, India's growing prowess in networked business process outsourcing (BPO) attracts negative attention, especially among those Americans who feel their jobs are threatened. In 2009, U.S. companies bought $2.3 billion worth of BPO services in India, up from $1.5 billion in 2007, as Indian firms continued to improve the range of their offerings . But as President Obama's visit highlighted, there is a lot more to the U.S.-India business relationship than India's enormous skill at supplying back-office services. Although U.S.-India trade is still overshadowed by trade with China, India is gradually becoming an important partner for the United States. U.S. exports to India have expanded from just $3.6 billion in 2000 to $18.2 billion in 2010 (12 months through June), compared with $69.6 billion in U.S. exports to China in 2009. On the other side of the ledger, U.S. imports from India have grown from $10.5 billion in 2000 to $26.4 billion in 2010 (12 months ending June), still dwarfed by the $296 billion in imports from China in 2009. Much of the growth in commodity trade is occurring in non-consumer sectors that attract little public attention but where U.S. manufacturers remain highly competitive. During his visit, President Obama announced 20 export deals, some involving big-ticket items like passenger jets, gas and steam turbine engines and oil-and-gas equipment supplied by such Fortune 500 names as Boeing and GE. In what other ways is the U.S.-India business relationship likely to evolve? And what are the remaining weaknesses in India's infrastructure and workforce that will affect this relationship as well as India's future growth? Redefining Business Processes While an estimated 85 million to 100 million Indians have already moved out of poverty into India's middle class, that's only a small percentage of the country's 1.17 billion people. The country's workforce still has a long way to go before it can match up with that of the major industrialized nations of North America, Europe or East Asia, notes Ravi Aron, a senior fellow at Wharton's Mack Center for
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according to Aron. there is a relatively small group of "extremely capable entrepreneurs who are redefining business" so that India can overcome its remaining weaknesses. power grids -.and the unwillingness of Indian politicians to invest in that infrastructure or in the country's emerging pool of workers.S. "the onus fell on private industry" to train the bright prospects in-house -. who might have been better off if the Indian government had not left the country's economic emergence largely to the small group of entrepreneurs at the top. the Indian firms learned valuable lessons about how to train and manage labor." says Aron. notes Aron. They are the internationally recognized elite who are leading India's emergence as a global center for outsourcing services. Below them. "the growing lower middle class that is making it possible. He estimates that "only about 10%" of engineering graduates currently meet the highest global standards. They did that by offering the same sorts of services to multinational companies on the backs of the world's most reliable telecom networks.wharton. he says. "You impose an entirely new set of quality requirements [on such engineers] because you know what it takes. The good news: Because the Indian government did not invest in training programs for its young engineers. president of Hyderabad-based NAPS India. Legal services is one way in which Indian providers are expanding their range of outsourced offerings. is a second group. and you get terrible politicians who keep them down. in the middle of the pyramid. "Indian courts are extremely slow. "Many of the early IT majors learned how to manage [in India] in spite of the lack of infrastructure" because they had to do so in order to survive. the dreadful condition of its over-burdened courts. But the situation in India is quite different. This is the labor force that executes the vision of the group at the top. and have used that knowledge to provide services for U.S. Training in the Private Sector In another creative adjustment to local frailties.its broken-down roads. bridges. In the process. multinationals that outsource medical billing and other   All materials copyright of the Wharton School of the University of Pennsylvania." Below that second group is the old India: an enormous third group of workers whom Aron describes as "the victims of the state. As recently as 2005." workers ill-suited for playing a role in a modern industrial society. "This underclass votes on the basis of caste and religion. "They find ways to get around its frailties and develop certain unique capabilities. according to Aron. Trading Partner: Far Beyond BPO: Knowledge@Wharton (http://knowledge. notes Aron." Likewise.                    Page 2 of 4  ." Aron says.upenn.edu/article.in this case.India as a U." notes Aron. These are the people. high-level engineers by taking it upon themselves to train their own people to meet the highest global standards. Aron says the situation was even worse than that. At the highly regarded top of India's pyramid. Indian companies have succeeded despite the country's infrastructure. "India has a huge number of lawyers who are constantly on call.and they proceeded to do so. and it remains bad. and other foreign companies.S. and demand for their offerings is strong. the leading home-grown entrepreneurial companies have responded to the shortage of formally trained. They figured out how to offer their Indian customers back-office processes that had predictability." says Aron. which are far more predictable than those in India. both physical and human. reliability and scalability." McKinsey then went on to make a disturbing forecast: Demand for engineers would reach 138% of supply by 2008." The result is a new service for export: English-speaking Indian lawyers who are available to provide legal services for multinationals on the other side of the globe. some of those unique capabilities "have become devastating weapons to take on other multinationals" from outside India. not because of it. says Aron. India's emergence as a location for outsourced legal services also reflects its creative adaptation to its own weaknesses -. which locates and hires employees for U. The entrepreneurs who have led India's limited transformation have done so despite the continued poor quality of its physical infrastructure -. so a case can go on for as long as 25 years before it is resolved. Ironically. With all its delays and inefficiencies. leaving India unable to develop its full potential for outsourcing IT services. The whole world knows that China's recent transformation into a modern nation is based on enormous government-led initiatives to improve that country's infrastructure. McKinsey reported that only 25% of engineering graduates in the Hyderabad region were "suitable for employment in multinationals. says Jacob Shasho.cfm?articleid=2670) Technological Innovation who is also a professor at the Johns Hopkins Carey Business School. Having learned how to provide high-quality services "in a place where there is every possible frailty you can think of. these Indian firms gained confidence that they could compete elsewhere.

food processing. "They don't have direct contact with clients in India unless the client needs legal services for a case that takes place in India. in the firm's recent report. U. is expected to grow at a compound annual rate of 9." says Aron. Because companies will be hard pressed to serve such an intricate network. rated the country highest in its Emerging Markets Logistics Index because of the huge potential size of the market and its "growth attractiveness. "Apart from the steady expansion of operations by large domestic industrial groups. professional logistics services can be extended up to rural areas. "While foreign companies need to engage logistics service providers -. which have a huge potential consumer base in these areas. says Manda." Already. Growth Opportunity for Transportation Specialists The weaknesses in India's physical infrastructure could turn out to be a growth opportunity for foreign companies that supply critical transportation services. according to Aron.S. has taken advantage of the peculiar characteristics of India's supply chains. which are more localized.K. supply chains for manufacturers and agribusinesses -. which reached $75.which have tended to be localized -. programming. Although the rise of outsourced legal services may seem threatening to U.since they are not conversant with the culture.wharton. the process of coordinating the flow of components to various factories would have been more   All materials copyright of the Wharton School of the University of Pennsylvania. "Owing to these efforts. and coordinate R&D and production efficiently. pharmaceuticals and consumer durables industries. logistics service providers -.will need to extend across the country so that companies can distribute their products cost-effectively. the focused development of inland waterways and the strengthening of road networks through the national highway development program are expected to improve the market reach of most industries. but this cream-of-the-cream is huge" because the size of the population is so large. Trading Partner: Far Beyond BPO: Knowledge@Wharton (http://knowledge. "We get to the point where the client doesn't feel any difference between dealing with an employee who is next door and an employee [who is] in India. multinationals that outsource medical billing and other back-office processes to India. especially in the consumer goods.domestic companies are outsourcing their logistics activities to organized third-party logistics [firms] to focus on their core competencies.India as a U. "You don't have 14 or 15 grades for the same auto part in India. about 6.including multinationals like UPS and FedEx -. says Srinath Manda. The Indian economy is really dependent on BPO and KPO [knowledge-process outsourcing] for such services as accounting and legal research.-based Transport Intelligence Ltd. "Apart from the development of dedicated railway freight corridors.S.                    Page 3 of 4  . some Indian entrepreneurs are finding innovative ways to leverage the weaknesses of India's transportation infrastructure to their competitive advantage." says Manda. Maybe only 10% to 20% of the population can be in the IT sourcing sector. Despite India's shortcomings. accounting/bookkeeping and legal research. leading to a higher scale of logistics activities outsourcing. These characteristics have made it possible for Tata to source car components closer to its factories. less differentiated and less specialized than those in North America. an increasing number of global majors in industries ranging from automotive and electronics to pharmaceuticals and cement have been targeting a spot in the highly lucrative Indian market.S. You need only to take the cream of the cream.-based lawyers." Despite India's well-deserved reputation for call centers. according to a recent report by Frost & Sullivan." The problem with most industrial and retail sectors is that there are multiple levels of intermediaries. for example. or distribution landscape of the country -.could expand their sales in the country.19 billion in 2009. most employees are engaged in such activities as medical billing. Shasho says that most outsourced services are not voice services.9% between 2009 and 2014. Spending on transportation and logistics in India. As demand for manufacturing and agricultural products expands.edu/article.2% of the country's total GDP." notes Manda. "Imagine a very long cord to the client in India. a Frost & Sullivan industry analyst. a business research and consulting firm. to $120." Manufacturers and logistics companies are hampered the most by the country's poor infrastructure connectivity in rural areas. You don't need all of the more than one billion people in India." Shasho says that India's technical infrastructure is "very advanced." notes Shasho. government policies. Instead.cfm?articleid=2670) which locates and hires employees for U.upenn. Shasho points out that Indian workers are not allowed to provide legal advice since they are not licensed to practice law in the United States. Otherwise.42 billion. Bombay-based Tata Motors.

little more than $2. which sells for only 100.upenn. And it gets 3.S. Trading Partner: Far Beyond BPO: Knowledge@Wharton (http://knowledge.5 times the mileage of a Toyota Camry. That makes it possible for the company to manufacture the world's least-expensive car. the Tata Nano.000. As for the design of the Nano. custom reprints. (212) 221-9595 x407." This is a single/personal use copy of Knowledge@Wharton.000 rupees. too.   All materials copyright of the Wharton School of the University of Pennsylvania. "Even if you doubled the cost. posters or plaques.edu/article. "You overcome your handicaps and so you become very effective in competing around the world.India as a U. notes Aron.wharton.                    Page 4 of 4  . please contact PARS International: reprints@parsintl.com P." says Aron. "The roads are terrible. For multiple copies. it would be very cheap. it. and the Nano had to be very agile" to move between cows and bullocks on the road.cfm?articleid=2670) costly. takes advantages of India's weaknesses. e-prints.

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