The move India must make—from renting IQ to creating its own IP, and servicing clients overseas to leveraging technology to improve its own large-scale societal problems.
Mention India and most people think of outsourcing or offshoring. But it is much more than that today. In sector after sector, from business processes and models to technology, Indian entrepreneurs and companies are delivering breakthroughs in cost-performance. And it's not just about labor cost arbitrage anymore; it is about disruptive innovation in technology and business models. Examples include the ability to develop drugs and vaccines at one-tenth the cost; the world's lowest rates for mobile phone calls; and offshore product development companies, or OPDs, creating not just features but whole products for their clients at about one-third the cost.
Ravi Venkatesan, chairman of Microsoft India, said with his characteristic clarity:
"There is no doubt that the Indian IT industry has put India on the world map. It has created wealth and jobs on a scale we couldn't even imagine a decade ago. It has given us the self-confidence to dream of India as a developed nation and to see ourselves as a knowledge society—and our population as an asset, not a liability."
Ravi made this comment at the Microsoft Innovation Summit I just returned from in Bangalore, India's silicon hub. He went on to talk about how the country needs to make the transition to Indian IT 2.0, with IT 1.0 reaching its limit. India must move from renting IQ to creating its own intellectual property, and move from serving clients overseas to thinking about how it will leverage technology to improve its own large-scale societal problems. India must go beyond labor arbitrage to creating a real, sustainable innovation-based economy. It must move from innovation from India to innovating for India.
Will India become the third-largest economy in the world (behind the United States and China), as the now famous Goldman Sachs report predicts? Will it happen within 25 years, according to Keystone India? I personally believe that entrepreneurs and investors have some extraordinary opportunities in India today, because the key elements for an innovation ecosystem are gradually falling into place. India is at a tipping point, but make no mistake, challenges remain.
India—Almost Always On, or Off?
As any India traveler knows, to get to the technology parks you share pockmarked roads with sacred cows, horse-drawn carts, and motorized rickshaws, along with vans and modern cars that congest roadways. Power outages are taken for granted during meetings. The real infrastructure woes in India, however, are about airports, educational systems, Internet penetration, job creation, and GDP dependence on services. India says it is addressing the problem, but the numbers tell a different story. India spends just $35 billion a year on infrastructure (with its population of more than 1 billion, about 230 million less than China); whereas China spends $260 billion annually. It's also alarming that IT investment in India is only 3.5% of total capital investment. The flip side of that underinvestment points to a huge opportunity for Indian entrepreneurs—and there are many positive signs underway.
In fact, when I visited India in late April, I was surprised how much progress had been made since I was there 18 months ago. For one thing, India now has a large and growing middle class, nearly 300 million strong, surpassing the size of the entire U.S. population. It also boasts a huge installed base of mobile phones and 30 percent CAGR in everything from PCs, cars, and credit cards to appliances. India certainly does not want for growth: GDP increased 8.2% last year with 7% is expected this year.
India Bound—Going Where the Talent Is
There are also huge numbers of Fortune 500 and Global 1000 companies setting up development centers in India—both small companies and mega ones such as Microsoft, Intel, and IBM. Large retailers like Wal-Mart are desperately trying to get a foothold in the market. Despite reservations about power and manpower in India, several large German companies are investing in the country, specifically BMW (600 million euro) Bosch (500 million euro), and Siemens (600 million euro) over the next few years.
What's the draw? A huge pool of talent, and talent to be. More than half of the population is under the age of 25, making India the youngest labor force in the world. And of that middle class I mentioned, many are highly educated. India and China, the new global tech powerhouses, are fueled by 900,000 engineering graduates of all types each year, more than triple the number of U.S. grads.
Despite these advances, there are still 750 million largely rural poor. We know that huge numbers of Indians will not participate in India's growth without access to information. Last year, through Project Shiksa, we made a commitment to provide every Indian with access to a connected computer by 2010 through a rural kiosk model that we are now piloting. Our goal is to set up PC kiosks in at least 200,000 villages. To reach people their native language, we started, Project Bhasha—making Windows and Office interfaces available in 14 local Indian languages.
We're learning about how to approach this emerging market, but believe that ideas will be monetized only when an economically viable ecosystem is in place. And that requires capital.
Lack of Capital? Why Seeding the Market is So Important
Similar to most other regions of the world, investment capital fuels growth. After meeting with VCs there, I see India becoming a strong destination for them, especially those with investments in the Internet, consumer, and mobile/telephony areas. Norwest's Promod Haque thinks that once penetration of broadband and wireless increases, the Indian market will mimic China. I met with Westbridge Capital Partners, India's largest venture capital fund with approximately $350 million under management, which has now joined forces with Sequoia Capital to become Sequoia Capital India. Other VCs doing some interesting deals include Draper Fisher Jurvetson, KPCB, Battery Ventures, and Artiman Ventures. In addition, InvestusCap and Seedfund are about to invest their funds in early-stage companies, a boon for Indian startups. And Norwest Venture Partners just raised a $650-milllion fund, with the primary focus on investment-worthy companies in India.
Clearly, Indian startups are maturing—most focusing on serving the local Indian market, not cross-border relationships. While the largest scale they have reached is about $20 million, it's an encouraging sign. It's also interesting to note that many Indians from the Valley are returning to India to set up their startup companies as well as to leverage the engineering/labor-cost advantages. While many startups we talked with have big ideas, they will need coaching to pitch ideas for funding and must be willing to accept possible failure, a normal part of the entrepreneurial culture. Deal-flow quality is improving, but more has to be done before any substantial investments will be made early in startups. Some VCs still won't go to India simply because the exit strategies are unclear and infrastructure unpredictable.
For those VCs who do want to leverage the India advantage, OPDs play a crucial role.
Why Is Off-Shore Product Development So Disruptive?
What's capturing the market's attention about OPDs in India? First, software is built to quality standard CMMI three or better—making it much higher than U.S. companies have built to in the past. Second, production costs are from 30 to 50% lower than the U.S. equivalent. And third, time-to-market for new software is 40 to 50% faster than it was just five years ago.
Until now, India has been considered a cost-arbitrage nation where only low-end services were performed. OPDs are changing this notion in a big way by building "whole software products" out of India. This means that India's talent is targeting things higher up the value chain and developing IP-centric skills. This in turn lays the foundation for future product and service creation. I believe that OPDs are the breeding ground of future software entrepreneurs and will impact the local software ecosystem. They are working closely with global VCs who want to leverage the India advantage for their startups. There are many instances where once a startup in the U.S. gets funded, the development work for the products is quickly outsourced to an OPD.
Interesting OPDs include Symphony Systems, NESS India, Persistent, and Aditi Technologies. Ness, for example, has established 30 labs where R&D and product development are being done for many of the world's top software companies such as Business Objects and Chordiant. Aditi helped a startup build a successful online retail music product and a Fortune 100 company create home and entertainment software. Persistent Systems, a world class OPD company based in Pune—growing some 60% a year—received a $13.8 million investment last year from Norwest.
Microsoft's Involvement in the Ecosystems—from Bangalore to New Delhi to Mumbai
We believe that innovation and intellectual property are the areas that will unleash the next wave of growth for India, and Microsoft is committed to fostering an ecosystem that will help fuel this growth. From our Microsoft India headquarters in New Delhi, to our development center in Hyderabad, to the most recent Microsoft Executive Summit with more than 253 CIOs from Indian enterprises in attendance in Mumbai, a lot is happening.
At our "India Is Innovation" Summit in Bangalore—a continuation of the strategy set in place with the launch of the Microsoft Innovation Centers during Bill Gates's visit in December 2005, we met with more than 150 Indian companies, as well as venture capitalists, incubators, academia, and analysts. We talked with entrepreneurs about how they could be a part of the global product opportunity, and talked with venture capitalists and academic incubators about their role in catalyzing the local software economy. The summit also included a Microsoft startup showcase, where companies pitched their ideas to a panel of VCs. Startups that showcased interesting technologies include SQA Technologies, Pacsoft, Infozech, TutorVista, Pine Labs, e-Caliber, and CoOptions. TutorVista (a Sequoia investment), for example, leverages Internet technology and global resources to make personalized education affordable to students globally. It was started by Indians (serial entrepreneurs) from Silicon Valley.
We also launched an innovation book with 27 case studies of successful products developed by Indian startups over the last few years. Some of featured products include InSite 2005 from Aurigo Software, Wasp3D from Beehive Systems (for the global broadcast industry), Whizible EPM from Compulink, Skelta Workflow Accelerator from Skelta Software and OAT Systems, a complete RFID framework solution.
What all of this points to is this: India is transforming itself in a fundamental way with all the elements of the innovation ecosystem coming together. Disruptive innovation is taking hold in India. It's no longer a question of if, just when and how fast. At Microsoft, we passionately believe in India's potential and are investing in the right direction to make this a reality.
