Monday, September 24, 2007

Infosys - The Toyota Way

In the linked article Jitendra V. Singh, dean of Singapore's Nanyang Business School argues that Indian firms should use the rupee's strength to their advantage by adapting their business models in innovative ways, much as Japan's automakers did during the 1980s.

The article provides a good starting point for Indian IT industry to think ways to reduce their currency risk. The risk is inherent by the nature of business where predominantly revenue is in USD while costs are in INR. Ideal situation as also suggested in the article is to follow Japanese automakers when they shifted production of low margin products to US thereby reducing impact of currency appreciation. But in the Indian scenario the fundamentals are different. While Japanese did enjoy the low cost advantage but they also had very high productivity which enabled them to be highly competitive even when shifted manufacturing to US. The Indian IT industry is still far from matching US productivity let alone surpass it. Indian advantage is genuinely labor arbitrage which more than compensates low productivity and enables firms like Infy to earn margins close to 30%. But as the article speculates on an exchange rate close to INR 20 / USD this would kill the Indian advantage if productivity does not rise large enough and also fast enough. The fact with any arbitrage is that it remains only for a short while before markets become efficient and wipe it out.

The exchange rates are beyond control of Indian IT firms so what can they do to still stay competitive? Answer lies in productivity improvement. Apart from organic ways of doing it through training, companies like Infy should use their accumulated funds and make logical overseas acquisitions in the space of high end IT services. The integration of these companies and their practices back in India would be very important as it is here where the productivity gains are required. High end services would also enable to expand the margins thereby providing thicker cushions against USD fall. These overseas acquisitions will also help IT companies in having a more geographically balanced revenue-cost structure thereby providing a partial hedge.

So overall its not just the Toyota Way for Indian IT companies but they need to find a innovative solution to the rupee appreciation. How about a (Shinning) India providing large part of revenues to Infy in our very own rupee?
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3 comments:

Alok said...

Insightful stuff! I am getting a regular reader of your blog to catch up with the interesting thing happening around.

Would like to share one thought on this - In order to protect margins one other thing, Indian IT companies can do is to expand themselves into high end IT services and outsource their low end IT work to countries where it would be cheaper to do and link the costs their in USD.

Also time has come that they strongly explore other markets

I am sure there would be more things they can try for which they should hire C..:)

Abhishek said...

It would be a good option to expand into further low cost destinations if they can manage talent there. But moving to higher end first is critical.

The low cost destinations as the linked article suggested can be tier 2 Indian cities also, which though will not help much against currency risk but can definitely increase margins.

Nagesh.MVS said...

Yes this is good opinionto expand low cost.If they do that they will definetely reach higher Work from home India .