When Strong partnership became hindrance to growth: An example from Indian Software Industry, 1990-2004
Rakesh/Mishra
Abstract
This paper investigates the impact of changes in technology on the joint venture firms in Indian Information technology (IT) Industry. It has compared the performance of two groups of firms. One group has Joint Venture (JV) firms between Indian business house and foreign technology leader and other has 100% owned Indian firms. The technology change under study is increase in microprocessor power. The study outlines the changes in the microprocessor power and its impact on the strategic environment of the Indian IT Industry. It has looked at the strategic changes that JV firms undertook to negotiate this technology change and its impact on revenue growth and profitability (PAT) of the firms.
In the face of fast technology changes Joint venture firms did not grow as well as independent firms. These joint venture companies had realized the attractiveness of software service sector quite early but could not changeover their business focus fast from hardware to software. From the perspective of Indian partners of JVs the study illustrates that strong partnership will become hindrance to growth in case of fast technological changes which throws new opportunities that cannot be pursued within the objectives of partnership.
Introduction to Indian Information Technology Industry
Information technology (IT) industry in India is comparatively a new industry. From the data in CMIE database we see 7 companies in the area of Information Technology existing in 1990. Some of these were Joint ventures. Joint ventures in Information technology industry were diversification efforts of established business houses of India e.g. Tatas, Birlas and Goenkas. After 1990 a number of new software companies were incorporated every year (table 2). The birth rate of companies picked up pace after 1994 and between 1994 and 1999, 123 new companies were incorporated. Indian software export grew from Rs. 0.3 billion in 1990 to 475 billion in 2002-03 (Nasscom, 2004).
Indian software industry is much smaller compared to the global software industry. According to NASSCOM forecasts, the global IT services market is likely to grow from 394.8 billion in 2000 to US$ 700.4 billion by 2005. Total software export from India is three (3) percent of the global software export, which is miniscule.
But what has attracted world’s attention is the rate of growth of the industry. Average annual growth rate of exports for ten years from 1991/92 to 2001/02 is 43%. In terms of Indian rupee the export for last five years grew at CAGR (compounded annual growth rate) of 62.3 percent. Domestic software growth rate is 46.8 percent. Also this industry has been export oriented and has grown without much support of domestic software industry, which is unique.
It has generated huge employment opportunities for educated youths of India. Software industry has impacted the Indian industry in a deeper way by giving some new and innovative business philosophy like stock options for employee. It has produced an example for other industries that are desperately looking for ways to thrive in globalizing, liberalizing Indian economy.
In its report ILO (1997) lauded the emergence of the Indian software industry as a shining example of how third world countries can take advantage of the liberalization of trade practices among nations and emerge as world leaders in some industries using their strength.
Evolution of Indian software industry is interesting. In a short history it has shown the clear picture of organizational selection.
Nature of product/Service
Indian IT Industry developed to meet the domestic IT needs of the country but more importantly software development capability of Indian technical manpower allowed it to supplement the Information technology Industry in US. Initially firms came to meet hardware demand like Tata Unisys, Digital, ICIM Fujitsu etc. But hardware demand started getting met largely by imports after 1996, due to the reduced import duty. There were firms which were fulfilling the software demand in India and overseas. Firms producing software packages in India is negligible. What most of the firms focused on was export of software development services. Due to the country advantage this business became so profitable that most of the firms became primarily focused on providing software services to US and other overseas market. Today is a predominantly service industry providing software development services. It is also trying to provide other service like Business process outsourcing etc to its clients. Hardware products manufacturing is limited to low-tech Personal computer and Printers and met to a large extent by grey market players.
Growth of processing power of microprocessor
In 1964 computers heralded into a new era. This became possible due to the Integrated circuits technology which used semiconductors to miniaturize transistors. Now thousands of tiny transistors could be put on small silicon chips. Miniaturization not only made the components take less space, but it also made it faster and economical as far as energy consumption was concerned.
These third generation computers saw an increase in the memory up to 2 megabytes (MB) and processing speed of up to 5 MIPS. This increase in processing power made it possible for computers to use operating system to coordinate the working of its various components, CPU printers and other devices. Human operators were no longer needed. Monitors and keyboards were introduced to replace punch cards. These computers were designed as upgradeable. Third generation computers were accompanied by the software that people could use without extensive training. Programming languages like RPG and Pascal were developed to help programming. Computers became cheap and easy to use. These computers found a large role in businesses.
Fourth generation of computers started in 1980 and is continuing since then. These computers use very large scale integrated (VLSI) technology and has 200,000 to over 3 million circuits per chip. Since 1980 microprocessors speed has increased from 5 MHz to over 200 MHz and memory capacity has increased from 2MB to 4GB. Cost of processing has been continuously falling for all types of computers Mainframe, Mini and Micro. Cost of performing 100,000 calculations have plunged from several dollars in the 1950s to less than $0.00004 in 1995 and still going down further. Today computers have become household goods. The power of computers that took one large room is now available in a small desktop. These computers have found widespread use in businesses, governments and households. Fourth generation computers lifted the limitation of processing power and storing capacity.
This gave a fillip to software demand. Now people could develop software to meet their need without bothering about the processing power of the computers. This fuelled innovation in the software and created a huge demand for services for developing and maintaining the software.
Impact of the technology change
Till 1969 software used to come bundled with the hardware but in late 1960s IBM had realized the huge potential of software and beginning 1st January 1970 IBM started charging for software separately. This invited many software players who could develop software economically for the hardware supplied by the manufacturers. As a result total software industry revenue grew from US$2.5 Bn in 1979 to US$25 Bn in 1985 and continued growing astronomically.
Now it was the software that was limiting the use of hardware. Software development was time consuming and labor intensive. The need for programmers who will develop and maintain the information system was increasing rapidly for US government projects and US industry. Information system was becoming a crucial input for the efficiency and effectiveness of firms. The need for programmers outstripped the supply very soon and projects started experiencing delays due to unavailability of programming professionals. With the standardization of job activities, programming languages and hardware environment the technology and skills within the software development became standardized. This made it easy for projects to source people from outside even from other countries (Greenbaum 1976, Kraft 1979). TCS tried to exploit this opportunity by starting its software export in 1974. It also helped TCS meet its export obligations to import hardware. This opportunity of providing onsite programming services grew as high quality human resource became available for programming job. 1980s saw a large number of computer hardware finding its way in India and this increased the availability of trained software programmers.
Firms pursuing IT opportunities with hardware vendor partnership
As early as 1960 India was identified as a manufacturing base for mainframe computers by IBM and ICL a British mainframe manufacturer. IBM wanted to develop India as a manufacturing location for its businesses in Eastern hemisphere but due to government’s policy of self-reliance, it did not happen. India lost a big opportunity to East Asian countries like Taiwan, South Korea and Singapore. And it could not develop itself as a hardware manufacturing location ever after. 1980 saw several joint ventures between Indian companies and hardware multinationals. From the data taken from CMIE database we get following companies existing in 1989 in software industry: CMC Ltd., Digital globalsoft Ltd., P S I Data systems Ltd., Tata Infotech Ltd., Tata Sons Ltd. (Tata Consultancy Services), Zensar technologies Ltd, Wipro, International data management Ltd. and Abacus Computers Ltd. Most of these companies were diversification attempts of big established business houses into growing hardware Industry.
- Tata Burroughs was established in 1977 which became Tata Unisys Ltd in 1987. 100% export oriented computer peripheral manufacturer. Unisys being a partner and major customer. Unisys 40%, Tata 40%
- Digital Equipment Corporation (India) Ltd. Incorporated in 1988. Focused on hardware business DEC (US) 40% Hinditron 35%.
- ICIM Fujitsu Ltd. started in 1983 as a JV between International computers (UK), Fujitsu (Japan), and RPG group. Fujitsu ICL was having 40% and RPG group had 40% stake. Focused on producing line printers and mini/micro computers
- PSI Data systems started as an Aditya Birla group company in 1973 to manufacture products for telecom and IT sector. In 1988 group Bull a French hardware company took 26% ownership in equity that increased to 50.35% in 1998. Group bull designs and develops servers and software. Bull was a major investor, Customer and partner. More than half of the business used to come from Bull Corporation.
Firms pursuing IT opportunity Independently
- CMC Ltd. came to maintain the IBM computer installation in 1975 under deptt. Of electronics. Before its divestment in 2001 to Tata Sons Ltd. government of India was majority stakeholder in the company up to 77%. After divestment it is a subsidiary of TCS ltd. and Tata sons holds 51% of its equity.
- Tata Sons Ltd. (Tata Consultancy Services) was pursuing software opportunities. TCS started its software service export in 1974. It was a 100% owned subsidiary of Tata Sons Ltd till 2004. It is the largest software company in India and largest service exporter.
- WIPRO Ltd. Western India vegetable products limited was renamed Wipro ltd. in 1984. Slowly Wipro shifted its focus from other businesses to providing Information technology services globally. Actually the diversification took place in 1980. Initially it was also in manufacturing of hardware for Information technology Industry. But due to market pressure it changed its focus to software services and in 1992 it went global with its global IT services division.
Period of confusion and Experimentation in business focus (1990-91)
No new companies joined the Industry in 1990. Among the new firms starting in 1991 most of them were focused on hardware business but were niche players. They were collaborating with niche hardware players and do software business related to the hardware partner. Mahindra British telecom and Tata Elxi were Joint Ventures.
Figure 1: New Entrants in 1991 and their business focus
Global Tele Ltd / Network Engineering and IT ServicesI C D S Ltd. / NBFC also in Hotel Business, diversification in Software
Mahindra British Telecom Ltd. / Telecom Software and Services
Tata Elxi Ltd. / Hardware manufacturer and System Integrator for SGI hardware
Lan Eseda Inds. Ltd. / Software
Rolta India Ltd. / Manufactures work servers/ hardware and software. Computer graphics, mapping and engineering software
In 1991 Information technology Industry in India IT industry in India was populated with firms having various focuses. Some firms had their origin in hardware business that they had started with collaboration of foreign hardware manufacturers. Though they had changed their focus to exploit the new software opportunity but to a large extent previous business focus was still there. Some of the firms had their origin in the domestic market as management consultants, large company data processing centers, ex-staff of local IT Company. These IT companies were focused on domestic software market. And, there were firms focused on software exports.
Till 1990-91 this confusion remained and experimentation with business focus continued.
Looking at the performance of these two clusters in 1990 we see that –
Figure 2: Performance of firms in 1990
Companies / Revenue / %PAT / Business FocusTata Unisys / 391.2
(80,310) / 131.4 / Hardware & software (captive supplier)
Digital India / 416 / -3.89 / Hardware
ICIM Fujitsu / 619.1 / 1.95 / Hardware
Companies / Revenue / %PAT / Business Focus
TCS / 882.1 / 10.12 / Software domestic & Export
Infosys / Not Avlbl / Software Export
Mastek / Not Avlbl / Software domestic
Figure 3: Performance of firms in 1991
Companies / Revenue / % Rev Growth / %PAT / Business FocusTata Unisys / 527.1
(170,350) / 25.78 / 12.79 / Hardware & software (captive supplier)
Digital India / 631.4 / 34.11 / 3.79 / Hardware
ICIM Fujitsu / 792.5 / 28.00 / 3.62 / Hardware
Companies / Revenue / % Rev Growth / %PAT / Business Focus
TCS / 1.2904Bn / 46.29 / 13.48 / Software domestic & Export
Infosys / 50 / Not Avlbl / Software Export
Mastek / Not Avlbl / Not Avlbl / Software domestic
- Profitability of purely hardware focused companies like Digital India and ICIM Fujitsu is very low (approximately 4%). Though they are showing high revenue growth
- Firm like Tata Unisys, that has realized the software business opportunity and has started providing software services though constrained by the objectives of the Joint Venture are showing good profitability and good revenue growth
- Firms focused on software business like TCS is also showing good profitability and good revenue growth.