2008 April 17 Thursday
India Outsourcing Advantage Dwindling

India has ceased to be the automatic easy decision for saving IT worker costs.

Contracts are written in dollars, and as much as 60% to 80% of Indian service providers' revenue is in U.S. dollars, but more than half of their costs are incurred in rupees, according to an October report from Forrester. Indian outsourcing powerhouses like Wipro are feeling the squeeze. They've strived to cut costs, and now they're raising prices to keep margins from narrowing further. "We are relentlessly driving for higher pricing for our services and have seen price increases from our customers in the range of 3% to 6%, and our new customers are coming in at around 5% higher than our average," Wipro Chairman Azim Premji said on a conference call with investors on Jan. 18.

Duke University professor Arie Lewin estimates that the benefit of doing business, from a labor-cost point of view, in such locales as Bangalore, India, will disappear for some companies in three to four years. That's due to a combination of dollar depreciation, wage inflation, and other costs. Others say it will take longer. "Costs are escalating, so the level of labor arbitrage isn't as great as it used to be, but that's not to say labor arbitrage is disappearing, nor will it disappear in the next 10 years or so," says Sid Pai, partner and managing director of TPI India, a sourcing advisory firm.

How fast that arbitrage advantage disappears depends in part on how far and fast the US dollar drops.

IT workers in Argentina are (surprisingly) about as cheap as in India. I would not have expected that. We are told relentlessly by open borders supporters that Mexicans are dirt poor and we have to let them into the United States out of charity. Yet Mexico has about twice the salary level for IT workers as Argentina.

The average annual salary for an IT worker in the U.S. is about $75,000, according to a late 2007 report by Alsbridge, an outsourcing consulting firm. In India it's about $7,779 and in Argentina, it's slightly higher at $9,478. In Brazil, the annual wage jumps to $13,163, and in Mexico it climbs to $17,899.

Argentina, with a national average IQ 9 points above Mexico, looks like it might be an IT employer bargain. The Western Hemisphere time advantage is an important consideration in that calculation. Supervising people 12 time zones away isn't easy.

Share |      By Randall Parker at 2008 April 17 10:04 PM  Economics Labor


Comments
Quequeg said at April 17, 2008 10:48 PM:

I made a modest prediction a year ago that Outsourcing to India will stop in 2.3 years.

In my prediction, I was focussing on the exchange rate, but someone from India mentioned that wages are rising 15% per year. A weaker dollar combined with higher wages in Rupees could really put a damper on outsourcing to India.

ziel said at April 18, 2008 6:50 PM:

Randall, what's the deal with Argentina - with a basically European population, it should be a well functioning nation, but it's a bit of an economic basket-case. They're a real one-step-forward two-steps-back kind of country. They operate like a banana-republic, yet have a first-world population. Any insights?

Randall Parker said at April 18, 2008 7:15 PM:

ziel,

Argentina sets the record as the highest per capita income country to cease to be a democracy. I think that provides an important clue. Maybe there's not enough social capital and that leads to bad government.

Certainly their economy has been ruined by bad governments, elected and dictatorial. They've had their economy ruined repeatedly by bad monetary policy. What causes that?

Per capita GDP rises due to positive small changes year after year stretching back many decades. What might provide a clue: Look at per capita GDP growth rates of Argentina vs the US over the last century starting from when their per capita GDPs were very similar to where they are today. I bet that Argentina's growth rate has a larger standard deviation. My guess is their "train wreck" periods wipe out the gains during their less mismanaged periods.

IQ distribution: The US has a similar average IQ to Argentina. But given two countries with similar average IQ and I predict the country with the larger standard deviation in IQ (that would be the United States as compared to Argentina) will perform much better. I point to La Griffe Du Lion's La Griffe du Lion showed in his Smart Fraction Theory and Smart Fraction Theory II as an indication that the number of people above some IQ threshold matter. If everyone has an IQ of 97 that'll be one messed up society. If the society has half with 67 IQ and half with 127 IQ it will be fairly prosperous albeit weird and messed up.

Quequeg,

Indian software developer friends tell be developer salaries in India have been going up even faster than 15% per year. I'm seeing that companies have to pay a lot more for talent over there.


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