| Linking up with the global economy: A case study of the Bangalore software industry |
| Chapter 4: A Case Study of Bangalore |
  
Bangalore has been described as "a gateway to new global frontiers" and "a harbinger of a new global labour force that works in cyberspace and that, like much of the world's financial markets, operates beyond the reach of governments" (Stremlau, 1996, p. 158 and 154). This section begins with a look at why Bangalore became a centre for software development in India, both from the location and policy perspectives. It then focuses on the growth of the industry in the city and on the quality of the linkages that have emerged between Bangalore and the global economy, which is, important in determining the course of local development. It highlights some of the dilemmas that have emerged for Bangalore and the challenges that face the local software industry as it contemplates the future.
 4.1 Bangalore: a natural location for the software industry
Bangalore is located on the Deccan Plateau, almost in the centre of the Indian peninsula. At an elevation of 920m, Bangalore is known for its mild, "salubrious" climate through out the year and until recently was regarded as a "pensioner's paradise" because it was a small and sleepy town, by Indian standards. It had been developed as a cantonment town by the British who enjoyed Bangalore's climate. It is simultaneously regarded as a high tech city. It is located in a state, Karnataka, which has had a long history of support for science and technology. The Maharaja of Mysore unveiled a programme for state involvement, which emphasised engineering and higher learning at the Mysore Economic Conference in 1911. After Independence, the tradition of public sector involvement has continued in Karnataka (interviews). Moreover, "Jawaharlal Nehru, India's first prime minister (1947-1964), had a vision for Bangalore...(C)alling Bangalore India's `City of the Future', he sought to turn it into India's intellectual capital" (Stremlau, 1996, p. 157). Since the fifties, many of India's public sector high tech industries have been located in Bangalore.
Because of its dust-free environment, between 1956 and 1960, large public sector undertakings like Bharat Electronics Limited (BEL) and Hindustan Aeronautics Limited (HAL) were established by the Government of India in Bangalore, along with national defence research laboratories and the Indian Institute of Science. Bangalore was also chosen as the site for these strategically sensitive industries because of its distance from India's borders. In the 1970s, the Indian Space Research Organisation and Bharat Heavy Electronics Limited (BHEL) were also located in Bangalore (interviews and Sharma, 1994, p. 85). In the 1980s, due to soaring real estate costs and overcrowding in Bombay, there was an influx of Bombay industrialists who relocated the high-tech aspects of their businesses to Bangalore.
One of the results of this concentration of electronics and aeronautics industries in Bangalore was the backward and forward linkages that were created. There were many upstream and downstream activities that emerged to support these industries and were linked to electronics in some way. The academic community in Bangalore contributed to the vibrant nature of these industries and to the ancillary businesses. In the last 15 to 20 years many private sector electronics companies have sprung up in or moved to Bangalore to take advantage of the pool of talent that is resident there. BEL, alone, had a labour force of over 16,000 (interviews). The electronics and computer industries are closely related. Bangalore was, therefore, a natural location for the computer and IT industry to locate. The climate and dust-free environment enhanced its attractiveness for this industry. As software development has superseded the production of hardware in India, Bangalore has become a key location for the software industry in India.
Another result of the clustering of electronics-related industries in Bangalore and the large public sector enterprises was that it brought people from all over India to Bangalore, giving the city a very cosmopolitan character and culture, very different from most other cities in India. In addition, relatively low rents and cost of living in Bangalore when compared with Bombay and Delhi made Bangalore attractive from a cost point of view. Furthermore, Bangalore is the state's capital, which has many advantages in terms of proximity to policy-makers and the government offices through which a lot of the paper work is done, and to an airport. One interviewee suggested that for these reasons, Bangalore was the only city in India that most multinational corporation expatriates would be willing to live in.
Industry observers feel that what makes a location attractive for the software industry in particular is the culture of the city. The industry, which is comprised of a young, highly educated, workforce, itself breeds a certain lifestyle. The location, therefore, has to have the potential to allow this lifestyle to grow. Bangalore has always been regarded as an open city. Many interviewees felt that other promising locations in India were too conservative. Furthermore, the rapid changes that characterise the industry require a culture that can quickly adapt to and absorb technological advances and developments in the industry. Because of its academic community and the presence of many high-tech industries, Bangalore has a culture of learning that is lacking in other locations.
A strong industrial base is also important as it provides an environment in which technology and information are shared through collaboration or through the rotation of labour which leads to a certain amount of technological diffusion (interviews).
With the arrival of Texas Instruments in Bangalore, not only did the Indian software industry get noticed but also did Bangalore as a location. TI's primary aim in coming to India was to establish a base in the Asia/Pacific region. "India was selected because of its strong educational system in theoretical sciences and engineering" (NASSCOM, 1995, p. 384) and for its very large English-speaking, highly skilled labour force. Bangalore was also chosen because it was considered to be a location in India which would better suit the lifestyles of TI's international staff, for many of the reasons stated above.
The software development centre set up by Texas Instruments had a direct satellite link with its headquarters in Dallas, Texas. Because there was excess capacity on that satellite link, TI was able to share the line with other businesses that needed such a link. This opened up the way for a lot of smaller domestic software companies to begin to undertake data entry and basic software programming jobs for distant clients (interviews, March, 1996).
Bangalore soon came to be known as "the Silicon valley of India". In 1989, Hewlett-Packard also set up a 100 per cent owned subsidiary in Bangalore (HP India Software Operations Pvt. Ltd.) that was 100 per cent export oriented. Now most of the top computer and software companies in the world have wholly owned subsidiaries or joint ventures with Indian companies that are based in Bangalore, including IBM, Oracle, Novell, Fujitsu, and Digital Equipment. Bangalore also is headquarters to a large number of Indian software companies. Many other multinationals get much of their software development work done in Bangalore. Siemens, Deutsche Bank, Motorola, Citicorp, VeriFone etc. all have branches in Bangalore where software development occurs for their entire system.
4.2 The policy environment
There was a concerted effort amongst policy makers to create an environment in Bangalore where high-tech industries would flourish. But the fact that, in the last five years, Bangalore has become known for its software development industry, did not come out of an explicit policy decision. Subsequent to the arrival of the industry measures were taken to make investment more attractive, in keeping with the government's new role.
One element that may account for the success Bangalore has had in attracting high-tech industries is the fairly stable relationship between the state government and the private sector. Despite changes in government, some fairly drastic in terms of policy stance, industrial policy in the state has been fairly consistent. Industry leaders have come to expect that any changes vis-a-vis industry would be planned and could be anticipated. There has been a close and stable working relationship between top executives of companies in Bangalore and the chief minister. The last Chief Minister of Karnataka, H.D. Deve Gowde, who went on to become the prime minister of India from May, 1996 to April 1997, was invited to address the World Economic Forum in Davos. He took the opportunity to highlight investment possibilities in Karnataka and invited foreign businesses to consider investing in the state and the city of Bangalore (Nicoll, 1995, p. 24). That trip attracted a great deal of attention amongst business leaders around the world, and according to interviews, has resulted in some actual investment.
In the mid-1980s, the Karnataka government in conjunction with the Department of Electronics created an Electronics City, or KEONICS as it is called, 18 kilometres outside Bangalore on 330 acres of land. The aim was to provide the facilities and infrastructure necessary to promote investment in the electronics industry, including a guaranteed supply of electricity, telecommunications facilities and a technical training centre, which focuses on electronics. A number of software companies have bought land there, including Infosys. It also houses the STPI headquarters in Bangalore. There were also a lot of incentives in place to attract the electronics industry in the form of financing, tax-relief offered by the government. These were later extended to software when it became apparent to the State Government that the software industry was going to be an important source of revenue. Another example of the supportive policy environment is the Karnataka State Industrial Investment and Development Corporation Ltd (KSIIDC), which has been around since 1964. KSIIDC is an investment promotion agency. It is involved in project identification and provides information, financial assistance through a variety of schemes as well as assistance in obtaining the necessary clearances.
Some analysts consider, however, that it was foreign investment that really led to the boom in the software industry in the 1990s. Without it the industry would certainly have developed but at a slower pace. It could be said that Texas Instrument's choice of Bangalore had a demonstration effect both for foreign investors and in terms of guiding policy makers. State policy-makers witnessing the interest coming from foreign investors, began to develop Bangalore as a software industry centre and to target the industry as a "thrust" area in the "Package of Incentives and Concessions for New Industrial Investments in Karnataka 1993-1998". One of the reasons stated for focusing on the software or informatics industry was that it was non-polluting and energy efficient. Among the concessions and incentives are investment subsidies, which are "enhanced" for thrust areas, and sales tax concessions.
Throughout the 1990s, the State Government has been quite successful in marketing Bangalore. It has supported initiatives such as the collaboration between the European Commission and the Department of Electronics of the Government of India called 3SE, Software, Services, Support and Education Centre Limited, which was launched in June 1994, by providing the office space and infrastructure. The purpose of 3SE is to "promote co-operation between the EC and India in the field of computer software" (3SE brochure). It recognises the fact that the Indian software industry needs to diversify its markets and that European companies have been slower to take advantage of the high quality/low cost software development environment that India provides, in terms of their sourcing activities. 3SE provides information services to European companies about Indian software companies in terms of matching needs, i.e. it maintains a database of member companies (Indian) that it can share with European businesses looking to outsource or form alliances. It also informs Indian software users of products brought out by EU companies. It is also a source of information to European companies about investment conditions and regulations in India (interviews, 3SE brochures and Paul Taylor, Financial Times, Dec. 6, 1995, p. V).
These efforts have served to further encourage investment in this industry in the last few years, which has been pouring in to the extent that Bangalore is beginning to lose some of the charm that attracted the industry in the first place. The infrastructure in the city has been unable to keep up with demand. Despite the efforts put into attracting investment, policy makers have not been able to anticipate the burden that would be placed on existing infrastructure. Hence, infrastructure development lags behind as it will be discussed in the second half of this section.
4.3 The nature of the software industry in Bangalore
There are varying accounts of how many software firms are actually located in Bangalore because of differing definitions of what constitutes software development. Altogether it is estimated that there are about between 150 and 300 software firms in Bangalore, the majority of which are medium-sized, i.e. between 100 and 150 employees and only about 10 per cent of which have over 500 employees (interviews). More than two-thirds of the companies in Bangalore are Indian. The foreign component of total investment in the software industry, however, is about 70 per cent (Economist, March 23rd, 1996, p. 67).
NASSCOM, which has a membership that represents 97 per cent of the industry's revenues and is inclusive of all firms that have more than 20 employees, has a membership in Bangalore of 38 software firms. Of the 38 members, 2 were established in the 1970s, PSI Datasystems and Advanced Micronic Devices Ltd; 5 were operational pre-1986, including Infosys and Wipro; 14 between 1986 and 1989 and 17 in the 1990s. All the foreign investment has come after 1986, Texas Instruments, Digital and Hewlett-Packard set up operations between 1986 and 1989, and 5 subsidiaries and joint ventures were created in the early 1990s (NASSCOM, 1995).
There is also a wide range of software activities in Bangalore, from the basic body-shopping activities to cutting edge research. Bangalore has emerged quickly as a software centre, surpassing Bombay, one of the first software centres
in India. Firms in Bangalore were among the first in India to react to the PC revolution (Sharma, 1994, p. 86
). There is, therefore, a feeling that on the whole, the level of activities undertaken by the more established firms and the multinationals in Bangalore is more sophisticated and high-tech than in other cities in India.
Of the firms listed with NASSCOM, the majority are moving away from the traditional definition of bodyshopping, i.e. coding or basic programming, to more sophisticated on-site services and to offshore development activities. There are signs that the industry is slowly moving into the development of software packages as well but this is still at an embryonic stage. The following section focuses on the types of activities that are being undertaken in Bangalore. It is interesting to note that differences seem to emerge between firms depending on their origins, i.e. if they are Indian; whether they are large or small; how they entered the market; if they are wholly or partially owned subsidiaries; and if they are joint ventures.
4.3.1 Foreign direct investment in Bangalore
As has been discussed before, some of the first firms to undertake software development in Bangalore were wholly-owned subsidiaries of foreign information technology multinationals like Texas Instruments, Hewlett-Packard, VeriFone and Motorola, which were totally export oriented. These companies do almost all of their software development for their parent companies. The initial objective in locating in Bangalore was to take advantage of the low cost of labour, and the high quality of the output and to be poised for the opening up of the domestic market. These companies started off by allocating basic programming and software development tasks to their operations in India, but in recent years the level of sophistication of the work being done in Bangalore has increased tremendously, due to the high standards of the professionals.
- Hewlett Packard India Software Operations Pvt. Limited (HP-ISO) undertakes a variety of software development projects such as porting applications, network management, CASE development, multi-media, product development, as well as providing support and maintenance for HP products. HP has invested $1.5 million in hardware and software for this facility. In addition, the facility has its own satellite link and in 1995 was working on establishing direct phone capabilities with HP worldwide (NASSCOM, 1995, p. 182).
- Motorola runs a facility to manufacture and market pagers and established a research centre in Bangalore to write the software for all Motorola businesses. "It is also developing software for the $3.4bn Iridium project, which is due to become operational in 1998, and will provide global wireless hand-held telephone services via a network of 66 low-earth orbit satellites" (Taylor, 1995, p. 24). Their software research centre in Bangalore has achieved Carnegie Mellon's Software Engineering Institute's Capability Maturity Model level 5 rating (SEI-5). It is the only Motorola facility to achieve that rating and is one of the few companies in the world to do so as well (Stremlau, 1996, p. 153). Furthermore,
the Bangalore centre has received the Motorola CEO's Quality Award (NASSCOM, 1995, p.262
).
- The Texas Instruments facility in Bangalore is also reputed to be its best location, in terms of level of sophistication of the work being undertaken. Research is being done on designing "complex semiconductor devices for the Unites States electronics group" (Financial Times 1996).
- VeriFone has set up a top of the line facility in Bangalore with a high-speed link to its headquarters in San Francisco to design and develop Transactions Automation Systems (NASSCOM, 1996, p. 182 and 404). In addition, Oracle and Novell have also invested in research and development facilities in Bangalore. Novell's activities in Bangalore include the development of network services for UNIX, network file systems and storage management services. Its managing director in India describes the Indian subsidiary's role as follows "(W)e have world-wide responsibility for these areas and operate as a logical extension of product teams in the United States" (Financial Times 1996).
Another type of FDI in Bangalore has come in the form of small 100 per cent export-oriented units which have been set up by multinationals like Siemens and Deutsche Bank, to develop software for internal use and provide support and maintenance for the software systems in their world wide operations. Most of these companies have no ambitions in terms of developing and marketing software packages nor are they interested in entering the Indian market in the area of software. The choice of Bangalore comes out of a decision to decentralize or outsource certain functions of their business and to have access to inexpensive but high-quality labour.
There are also a number of partially owned subsidiaries of foreign multinationals.
- Digital Equipment India Limited (DEIL) is a 51 per cent subsidiary of Digital Equipment Corporation (DEC) in the United States. It initially entered India to produce hardware but found that unprofitable and has since shifted out of hardware to develop software solutions to support Digital hardware. It works mostly for DEC and its clients. DEIL takes on no risk in this type of work; it is guaranteed a market. Furthermore, DEIL does not design and develop any projects. Its role is to implement segments of projects. Initially, the focus was on providing software for Digital hardware in India, now DEIL is increasing the share of exports in its portfolio. DEIL has a number of senior consultants who are highly skilled and travel to other DEC subsidiaries as advisors.
- PSI Data Systems Ltd. is a subsidiary of Groupe Bull in France. From the mid-1970s to 1990 PSI was an independent mainframe producer. In the late 1980s, the mainframe industry collapsed leaving PSI in a very poor financial state. Soon after that Groupe Bull acquired a 24 per cent share in the company that has now risen to 51 per cent . Its aim was to gain access to the Indian market and to take advantage of the talented labour force. PSI's focus has changed considerably. It no longer manufactures hardware, instead it has projected its core competency in the area of software and services. Initially, body-shopping or on-site services were the main activity, as PSI supplied good engineers at a low cost. This is no longer the case as the charges for sending experienced engineers to their clients have risen considerably and could be regarded as equivalent to rates charged in the United States. The management feels strongly that the low cost advantage that India currently enjoys will be short-lived. Furthermore, PSI has limited the work carried out for Groupe Bull to 25 per cent of its projects. The reason is to expand the client and project portfolio. It is also placing emphasis on improving its coverage the need of the domestic market and the Far East, as currently the United States and Europe make up the largest portion of the company's revenues.
Joint ventures between large IT multinationals and Indian partners are another form of foreign investment in this industry and are increasingly becoming more popular. A joint venture has certain advantages for both partners. For the Indian firm, there is the opportunity to establish a reputation and a client base in a foreign market; furthermore, there is very little risk involved as most of the work is done through the foreign partner. A drawback to joint ventures may result if the Indian partner is producing only for the foreign partner, in which case, the opportunity to build up expertise and expand the client base may be limited. For the foreign partner, an Indian partner facilitates entry into the Indian market as it may already have an established reputation and often makes it easier to set up operations in India because of familiarity with the bureaucratic procedures and access to a large pool of software professionals. Of the Bangalore firms, the joint venture between IBM and the Tata group called Tata Information Systems Limited (TISL), is the largest. TISL undertakes software development for IBM but IBM is not its only customer. The focus for the future will be to expand the customer base in the US, Europe and East Asia. For IBM, the joint venture provided an opportunity to return to India in advance of the domestic market opening up and for the purposes of accessing the skilled labour force. For the Tata group, the joint venture gives access to a much broader client base.
The recent joint venture between Microsoft Corporation and Tata Consultancy Services reflects the degree of confidence software multinationals have placed in Indian companies, TCS "will provide software development, consultancy and value-added services for Microsoft's Windows NT operating system and its Back office software" (Financial Times-IT, p. 4, November 6, 1996). In Delhi, Hewlett-Packard has a joint venture with HCL, one of the largest IT conglomerates in India and HCL recently created another strategic alliance with Perrot Systems Corporation. Many strategic alliances like the HCL-PSC also see India as the gateway, in this industry, to the Asia-Pacific region, which they predict will be the largest market in the world for software in the coming decade. They aim at using Indian workmanship and US experience and capital to attack a third market, such as that of the Asia-Pacific.
4.3.2 The domestic firms in Bangalore
A large number of the 150-300 domestic firms said to be located in Bangalore, particularly the small firms, still provide body-shopping and on-site services. In addition, in the late 1980s and early 1990s, many of the smaller Indian firms in Bangalore and in other cities tried to get their start in the software industry through data entry and transcribing activities, which are fairly low-tech, labour-intensive activities. Through the use of high-speed data communications and telecommunications links, doctors in hospital in the United States, for example, are able to speak into a transmitter as they do their rounds. Simultaneously, their words are transcribed by firms like Healthscribe, in Bangalore, and within 24 hours, electronically transmitted back to the hospital via satellite. Observers of the industry feel, however, that this type of activity and data entry activities will not survive because they simply are not profitable enough to cope with the rapidly rising costs of real estate and labour in Bangalore. Other locations in Karnataka, like Gulbarga in the northeastern part of the state, are able to undercut Bangalore in the provision of these particular services. As the barriers to entry into such activities are so low, the main start up costs being satellite connectivity, telephones, fax machines and personal computers, there is a great deal of competition. Furthermore, it is becoming increasingly apparent that firms that are in this line of business but have ambitions to move into software development find it difficult to make that transition because these activities are substantively different from software development in the level of skills required.
Data entry work ...should arguably be excluded from software export data. Typical examples of contracts include digitisation of maps, architectural drawings and texts (often known as document conversion), and the typing in of airline coupons. Despite the aspirations of the Indian firms involved, this has rarely laid the basis for subsequent software services contracts (Heeks, 1996, p. 80).
The larger and more established Indian owned professional software firms in Bangalore also got their start in the software industry by providing body-shopping or on-site services. They realised early on, however, that this was unsustainable and that the returns would be much higher in off-shore development. Through the use of personal and professional contacts in the United States, these firms they quickly established a client base and their reputations for delivering quality work on time, which made the transition into off-shore software development more swift. A number of the founders of software firms in Bangalore in the 1980s and 1990s had worked in the United Stated after obtaining graduate degrees at American Universities. Many had stayed on in the United States because of the lack of opportunities in India in the IT industry. However, with the change in policy towards hardware imports in the mid-1980s, some of these non-resident Indians (NRIs) perceived a change in the attitude towards software development and information technology and decided to come back to India to set up their own businesses.
The larger domestic firms are steadily diversifying their activities. Although there is still a great deal of on-site work being done, industry people say that this is an important component of the process of software development. Since the main market for Indian software exports is in the United States and involves primarily service-oriented activities, it is convenient for software professionals to spend some time in the environment for which they are developing software.
This allows them to familiarise themselves with and what is to be achieved by the software. Many of the projects that are undertaken, therefore, may involve a segment of the work in Bangalore and a segment on-site. For example, apart from undertaking contract work in the form of producing specific segments of larger projects, Indian firms are increasingly getting involved in completing fixed price turnkey projects in the area of customisation of software solutions. This entails sending professionals to the client to study the specifications of the system or the project. The work is then carried out and tested in India, and finally installed on-site. So far, most Indian firms have not been given entire systems to design. There is still a great deal of involvement by the client in this area, in terms of design and monitoring. The list of clients of many of these Bangalore-based firms is impressive. Infosys Technologies for example has done projects for AT&T, GE, Reebok, Nordstrom, Nestlé, Holiday Inn, May Department Stores, Nortel (interviews, and NASSCOM, 1996, p. 410).
There are many Indian software firms that are part of l
arger Indian conglomerates. Wipro Infotech Group, Tata Consultancy Services, and Tata Elxsi, Ashok Leyland Information Technology Limited, Sonata Software are examples.
- Wipro Limited which was a manufacturer of vegetable oils, soaps and toiletries, got into the software business in the mid 1980s and has since had projects with AT&T and GE, in addition to Seagate Technologies, Intel, Tandem, IBM, JP Morgan, Xerox, Sony and Casio. In 1996, Wipro was expected to double its export revenues to Rs. 1.6 billion (approximately US$ 45 million). "Wipro has set up dedicated development centres for several of its clients to work with them on a long-term basis. Following its success in growing revenues and profits, Wipro Systems is now looking at moving up the value chain. It is now working towards building intellectual property/patents in select areas" (Rao, 1996, p. 13).
- Tata Elxsi was created as a joint venture between the Tata group and Elxsi, which produced mainframe computers. In the early 1990s, however, Elxsi went out of business because of the general shift away from the use of mainframes in the global computer industry and the advent of the personal computer. The Tata group kept the name Tata Elxsi but it now belongs to the Tata group of companies. Most of Tata Elxsi's projects are for Japan and East Asia. It is one of the few companies in Bangalore with Eastward oriented software exports. One of its biggest clients is Hitachi.
- Ashok Leyland, which is known for its involvement in the transportation sector, particularly in the production of trucks, also expanded into software development. Ashok Leyland Information Technologies was started in 1993, while Indian Organic Chemicals got into the software business as early as 1986, creating Sonata Software Limited. These software firms specialise in systems integration, customising software applications and software solutions, both on-site and offshore. They also have a few software packages that they market locally and hold distributorships for foreign software products (NASSCOM, 1995, and interviews).
There are indications that foreign clients of Indian software firms are becoming more and more confident of the ability of these firms to design and manage whole projects. As was mentioned earlier in the case of Wipro, a few firms offer services such as "dedicated development centres" or virtual laboratories, whereby they devote a number of professionals and facilities to meeting the software development needs of one particular client. The Financial Times reports of one such arrangement between BFL Software and FedEx Logistics (Financial Times, 1996). Infosys also provides this service for some of its clients.
Box 2: Profile - Infosys Technologies
Infosys Technologies is located in KEONICS in Bangalore. It is sprawled over a vast well-landscaped plot of land, which better resembles a college campus than the site of one of India's largest professional software companies. It was established in 1983 when there were few other companies in the industry. It currently boasts over 1,000 employers who work on state-of-the-art equipment with the latest technological innovation. Infosys has been growing at about 60 per cent per year over the past 4 years and has been doubling its labour force each year. Infosys opened its doors at a time when Indian software development talents were still relatively unknown and underdeveloped. The founders themselves had worked in the United States before coming back to India to start the company. They had a large network of contacts in the Untied States, which helped them in obtaining their initial contracts. In an effort to establish a reputation, projects were undertaken in which people were sent abroad to work on-site. The managers of Infosys soon realized that this was not a viable business strategy for two reasons: first, the company lost a lot of talented manpower and second, the residual value of the activity was too low to warrant expansion into other activities. Export revenues currently account for 85 per cent of the company's total revenues, of which over one half comes from fixed prices turnkey projects. Maintenance of systems that were developed by Infosys accounts for over a third. Off-shore development centers (OSDC), which are man hours that they dedicate to the software development work of specific clients, and packaged software account for the rest. Infosys has been responsible for introducing and developing the concept of 24-hour productive day utilizing the time advantage that India has by being ten and a half hours ahead of the Eats Coast of the United States. The quality of work and the professionalism with which projects are handled is reputed to be world class. Infosys went public in 1993 and 23 per cent of its equity holders are foreign institutional investors. The company spends over $20,000 per new recruit in capital expenditure and training. It has its own educational research group with 17 full-time members who provide four months of technical training for the new recruits and two weeks annually of intensive skills upgrading for each employee, including senior level management. Employees have access to the latest in technology, a policy which is expected to lead to higher productivity and greater job satisfaction. Infosys offers its employees stock options based on their performance and potential. As of early 1996, there were 150 Rupee millionaires in the company. The aim is to have 1,000 by the year 2000. The work environment is geared to individual needs, providing flexible working hours, access to gym facilities and a canteen. As a result, Infosys has a lower than average attrition rate.
Indian firms are also getting into software packages in niche areas, focusing primarily on the domestic market in which there is some degree of protection. Competing in the international market with giants like Microsoft would be virtually impossible for them. One way in which their products are getting to the international market is through partnerships with multinationals, which market the products under their own name. "Some indigenous Indian companies like Bangalore-based BFL Software - recently appointed Compaq Computer's `Partner of the Year' - have developed shrink-wrapped software packages which are then re-badged and sold by their overseas clients" (Financial Times, 1996, p. 3). This could be described in original equipment manufacturing (OEM) terms, "whereby contractors make goods to be sold under another company's brandname" (Gereffi, 1996, p. 84)
. One of the advantages of this is that it exposes local firms to international standards in quality and production processes (Gereffi, 1996, p. 85).
Tata Elxsi and others are also involved in research and development and devote a percentage of their resources and manpower to new areas of software development, such as networking, imaging and video-conferencing software, and anticipating future trends. A number of firms are working on the Year 2000 problem, which is destined to affect the vast majority of computers and computer software programmes that are not equipped to deal with the date change at the turn of the millennium. Among others, Infosys and BFL Software in Bangalore and IIS Infotech and HCL in Delhi have come out with software packages designed to provide solutions to this problem (Financial Times 1996, p. 4).
The need to prove international quality by the Indian software industry has manifested itself in the goal to achieve ISO certification. According to NASSCOM, 90 Indian software firms have received ISO 9000 certification by April 1996, and a further 82 intend to achieve it in the next two years. Seven of the firms with ISO certification listed by NASSCOM are Bangalore firms, and have reached ISO 9001. These include Infosys, Wipro, TISL, Verifone, Sonata, BFL and PSI Datasystems. At the time of the field trip for this study, Tata Elxsi was in the process of obtaining ISO 9000. Most of the firms acknowledge that while ISO certification does not necessarily improve their competitiveness, it is important for establishing to clients that their procedures and processes are sound. In addition, it gives their workforce a goal to strive for and a sense of achievement once the target is reached (NASSCOM, 1996, pp. 66-67 and interviews).
4.3.3 Employment in the Bangalore software industry
The software industry itself is not a big employer, especially by Indian standards. Approximations suggest that it currently employs between 7,000 and 15,000 people in Bangalore. As the number of software firms in Bangalore has been steadily increasing over the years, and as many firms have been growing rapidly, new jobs have been created every year. Both TISL and Infosys Technologies reported doubling their staff every year since they began operations. TISL now has about 1,000 employees, as does Infosys. Wipro employs about 1500 software professionals and another 150 support staff. Digital employs about 650. Siemens employs about 200 people in Bangalore. Other multinationals, TI and Motorola have a staff of between 200 and 300.
Jobs have also been created through the establishment of backward linkages. One example is the Business Partner Programme of TISL (the Tata-IBM joint venture). Fulfilling a commitment that TISL made to the Government of India, this programme is aimed at encouraging technical diffusion and producing opportunities for Indian companies to gain experience by undertaking projects that require meeting international standards. At any given time, there are a dozen companies involved. TISL outsources to these companies projects in which it does not have expertise or does not want to invest manpower in TISL evaluates and selects the companies based on a number of criteria including profitability. The standard of the companies has been fairly high until recently. It is becoming increasingly difficult, however, to find the quality and the range of experience in companies, perhaps reflecting the tightness of the labour market in this industry. Most firms in Bangalore, however, do not invest in backward linkages and outsourcing. The intense competition for clients as well as the fact that the clients are still mostly searching for low costs results in a perception that sharing and trust are a luxury that most firms cannot afford for fear of losing their clients (interviews).
The phenomenal growth of the industry both in terms of the number of firms and their profitability, particularly amongst the bigger, more established firms, has led to a surge in demand for qualified and experienced software professionals. Firms in Bangalore experience very high turnover rates as their best and more experienced personnel are "poached" by other firms in Bangalore or by American firms which recruit them when they are working on-site or through advertisements in Indian papers. Many also leave for higher education. Several firms in Bangalore have attrition rates between 20-30 per cent, much higher than the national average of 15-20 per cent. Some attribute this to the clustering of firms which makes poaching somewhat easier. Turnover is highest amongst those with 2-3 years of experience and those who have gained project management skills. Furthermore, the average stay of a software engineer with a firm in Bangalore is about 2 years.
Bangalore, which is in a State that boasts 9 universities, 51 engineering colleges, 169 polytechnics and 35 technical training institutes, produces a resource base of over 20,000 skilled, technical professionals every year. While the technical colleges and universities are top of the line in terms of preparing their students with the basic skills, they have not concentrated on applied sciences. Furthermore, it is said that the educational institutions have been unable to keep up with the advancements in technology and therefore are unable to train their students with the latest software or hardware. Therefore, although the graduates are rapidly absorbed by the software industry, they need between 4-6 months technical and on-the-job training before they are useful and productive members of a team. Because of the very high turnover rate, firms are increasingly reluctant to invest in training, as there is no guarantee that the investment will pay off. The top firms take the view that it is a risk that they have to take, and try to compensate the staff both financially and in other ways, such as providing a stimulating and challenging work environment, bonuses, recognition for a job well done etc. Many human resource managers in the top firms are also concentrating on recruiting not just the best students but the second tier of graduates. It is widely held that the best graduates tend to be harder to hold on to, therefore, the wiser investment in human resource management is recruiting and training the second-best, who, it is hoped, will be more loyal. What emerges however, is a somewhat segmented labour market, where the larger firms are in a position to harness commitment on the part of their work force as they have the resources to provide a more stimulating working environment. The smaller firms, on the other hand, are unable to invest as much in their employees, with the result that they experience more unstable working conditions.
4.3.4 Wages
One of the effects of the high demand for skilled and experienced staff and of the high turnover rates is the pressure on salaries. When industry salaries are analysed in purchasing power parity terms (as shown in table 3), which takes into account the cost of living in India, it becomes evident that firms located in Bangalore have to offer compensation packages that cover the cost of living as well. This costs them much more than it costs their foreign clients, for whom the exchange rate makes doing business in Bangalore very attractive. For these reasons, the salaries in the software industry in Bangalore have been rising at between 20-30 per cent a year. While they are still low relative to California standards (see table 4), industry analysts can envision a time in the not too distant future, the next 10 years, when India will no longer be considered a low labour cost location. When the multinationals arrived in Bangalore, to attract the cream of the crop, they immediately raised salaries in the industry, offering salaries approximately 20 per cent over the going wage. Indian firms, in order to still be attractive to the best software engineers, have had to offer if not the same salaries, conditions that made up for the difference. Some forward thinking firms, Infosys Technologies and Baysoft, for example, are offering their employees a chance to buy into the company and share the profits. Nevertheless, the software industry pays far better than any other industry in Bangalore. A software professional in the industry can expect to be paid on average between Rs.10, 000 ($286) and Rs.20,000 ($571) per month depending on experience.
Some industry people feel that the wages do not reflect productivity (Mehta, 1996, p. 27). In some situations, due to the lack of experienced personnel, 70 per cent of the revenue comes from as little as 30 per cent of the staff. Others feel that the wages reflect the demand for Indian software skills and will fall as and when the demand declines. The danger for most firms is that if the wages continue to rise unabated, and there isn't a commensurate increase in productivity or an appropriate shift to a higher level of value-added activities, India will lose business to other countries where wages are lower.
Apart from putting pressure on new entrants to the industry, who are unable to offer competitive salaries, the industry is affecting the local labour market. The starting salary of a "first class graduate" is about Rs. 12,000 (or $343) a month in the software industry, compared with the per capita income of urban Bangalore which is Rs. 10,546 (or $300) a year (TECSOK, and Financial Times, 1995a). It is clear that the salary structure of the software industry exceeds other sectors of the city's economy. A software engineer in other industries in Bangalore cannot expect to earn more than half of what he would make in the software industry. This has meant that other businesses are losing good people to the software industry.
Other industries, particularly those that are not export-oriented, are unable to keep up with the salary increases in the software sector. Bangalore has traditionally had a very large middle class, with more than 55 per cent of the working population employed in technical or skilled jobs (Sharma, 1994, p.87). The software industry represents the higher end of the middle class. Interestingly enough high salaries in the software industry apply to non-professional people as well. Apparently even a janitor in the software industry is paid much more than a janitor in other sectors (interviews).
4.3.5 The quality of the jobs created
The effect of Bangalore's participation in this global production chain on software professionals in the city has been revealing. First of all it has given a lot of graduates from the IITs the opportunity to work on software and in the computer/IT industry in their own country. Until the mid-1980s, opportunities for this kind of work in India were negligible, so India ended up training world class engineers and then losing them mostly to the United States. Secondly, whether the firm is involved in body-shopping, or has moved up to doing offshore software development, the software industry in Bangalore has enabled Indian engineers to travel, to work with the latest technologies, and to enjoy challenging and motivating work. The constant communication, either via satellite or by travelling, with clients in the United States, has created an environment in which software professionals in India are learning how to adapt to different working styles and cultures, and are absorbing the work ethic that dominates the software industry globally. They are also improving their communications skills. As they begin to work on projects for the domestic market, these lessons, particularly those related to management style, may be passed along to other industries.
On the downside, Indian jobs are still very much at the mercy of United States clients. As wages and costs increase in Bangalore, as will be discussed later, United States clients may shift their business to other locations in India or to other countries. The types of jobs that are allocated also affect the ability of Indian software professionals to improve their skills and their future opportunities.
4.3.6 Summary
A wide variety of software development activities are performed in Bangalore. There are a large number of small and medium-sized software firms, almost all Indian in ownership, that operate at the lower end of the software value chain. These firms provide services such as coding, programming and testing, either through body-shopping or off-shore, with extensive on-site work. The next level of activity entails customisation of software and the development of software solutions. Many Indian software firms are provided with the specifications by the client and are responsible for the implementation. Some larger Indian firms are beginning to participate in the design of projects. The Indian subsidiaries of multinationals in Bangalore are devoted to the captive development of software for use at headquarters or by other subsidiaries; this also involves to a large extent design, and customisation and adaptation of software. There are only a few firms involved in research and development. These tend to be Indian subsidiaries of IT multinationals, such as Texas Instruments and Motorola. At the highest value-added level, the development and marketing of software packages or original brand name manufacturing, there are very few players in Bangalore, and these are mostly Indian firms catering to the small domestic market. A few firms are involved in original equipment manufacturing, as they develop software products to b level e marketed under established international brand names.
This stratified nature of the software development activities in Bangalore, i.e. the largest segment of activities being lower down in the chain and the smallest segment being at the higher end, reflects to a large extent the competitive advantage Bangalore has enjoyed until now. The large number of skilled but low cost software programmers and engineers, with the ability to produce quality software and deliver it on time has attracted much business to and created many jobs in the software industry in Bangalore. In a constantly changing world, however, there is no time for complacency, a fact of which the industry seems to be well aware. The next part of this section looks at some of the changes in Bangalore that might affect the industry and its competitive advantages.
4.4 The growth of the industry and the changing locational advantages of Bangalore
This subsection addresses the issue of what changes have been brought about by the clustering of software firms in Bangalore as well as by other factors such as rural-urban migration and the establishment of other industrial sectors. It will discuss how the city has managed to cope with its rapid growth and what effect this has had on its initial locational advantages. It should be said that very little empirical and analytical work is available either on the impact of the software industry and on the changes that have occurred in Bangalore in the recent past. For instance in the data that has been compiled by the government, software is not separated out as a category, so even attributing the tax or export revenue that is earned by the state due to this industry requires some extrapolation. What is presented below, therefore, is mostly a qualitative assessment, based on interviews, personal observation and from newspaper and journal articles.
4.4.1 Visible changes
"In the past five years, Bangalore has become Asia's fastest growing city" (Stremlau, 1996, p. 160). According to the last census the population of Bangalore in 1991 was about 4.8 million (TECSOK), more recent estimates suggest that the population is up to 5.6 million (Halarnkar et al., Business World, 3-16 April, 1996, p. 35). This was up from 1 million in 1951 and 2.9 million in 1981 (FEER, Jan. 18th, 1996, p. 41). Much of the increase can be attributed to the high population growth rate and rural-urban migration. The inflow of retirees and the relocation of other high-tech industries from Bombay to Bangalore also explain much of the growth in the city. However, in the mid 1980s when the multinationals came to Bangalore seeking to set up software development centres, the city got a further boost, from their investment and the investment their presence generated by encouraging more Indian firms to get into software development.
It is evident that the city is prospering. There is a great deal of construction underway. The downtown area contains an abundance of hotels, restaurants and shops. The city has also grown in size, with a large number of apartment buildings coming up a little further out of town towards the airport. Furthermore, recently, the Tata group and a consortium from Singapore in conjunction with the Karnataka Government negotiated the establishment of a vast software technology park just outside the city. The Tata-Singapore Software Technology Park will provide the entire infrastructure, including the road, the electricity power plant and water supply, the buildings, and the telecommunications facilities. There will be 1 million square feet of space available, and marketing for this space has just begun. Another aspect of this planned new park is the construction of an international airport in Bangalore.
By many accounts, including a recent article in Wired magazine (February 1996), an example of the cosmopolitan nature of Bangalore is the proliferation in the number of pubs. These are packed with young software professionals, who flock to pubs after work to unwind with a beer. "Almost every night in establishments like Pub One, Knockout, Sonia Green's Thumbs Up, Pubworld and NASA, the young guns of India's software industry gather, drink beer, groove to Hindi Disco, and, naturally, talk computers" (Rapaport, 1996, p. 112). The notorious Kentucky Fried Chicken is one of a number of new fast-food chains. The British department store Littlewoods is planning to open a branch in Bangalore, the first in India.
What is illustrated by these examples, is the increased level of activity that has resulted from the rise in investment in Bangalore. Some of these changes reflect the tastes of ex-patriates working for multinational companies in Bangalore and the more "Westernised" tastes of the Indian educated elite or of the "foreign-returned" Indians, who have come to Bangalore to set up software development firms. They also reflect the overall liberalisation process that is occurring in India. All these activities have contributed to the creation of work for a number of people both in the formal and informal sectors, although there is very little data to verify the extent to which this is attributable to the software industry.
4.4.2 Property prices
One of the results of the increased investments by the software industry and the very high salaries it pays, by Indian standards, has been the huge increase in property prices and rents, to levels that parallel New York and Tokyo, and a general increase in the cost of living. Bangalore was not prepared to go from the small cantonment town of the 1950s and 1960s to the high-tech boomtown of the 1990s. When software firms started to arrive in the mid-1980s, not much had changed since the 1950s. Subsequently, there has been a huge increase in construction, which was just able to keep up with demand. According to the Financial Times, some estimates suggest that property prices "have trebled or quadrupled in the four years since India's liberalisation policies gave a hefty shove to what had already been a long period of steady property price growth, (1995a, p. 24). There has also been a recent interest in Bangalore real estate on the part of non-resident Indians from Hong Kong and Singapore, leading to a 200 per cent increase in land prices in some areas (Financial Times, 1995a).
In the last 5 years, land prices around the central business district have increased from between Rs. 1200 and 1800 per sq. foot in 1991, to Rs. 2,500 in 1994, to between Rs. 6,500 and 10,000 per sq. foot. Rents have gone up from Rs. 15 per month a few years ago to Rs. 100 per square foot per month. Housing prices have increased fivefold in five years. (Financial Times, 1995, p. 24 and FEER, 1996, p. 41). Nonetheless, although real estate prices have risen faster than those of Bombay and Delhi, Bangalore is still cheaper (FEER, 1996, p. 42).
4.4.3 Infrastructure
Bangalore faces an immediate hurdle if it is to continue to attract investment, that of overcoming the infrastructure problem. As was stated earlier, Bangalore was a small town, with small town infrastructure. It was never anticipated that Bangalore would grow so quickly. Many Bangaloreans feel that the government of Karnataka, while very skilfully attracting investment, has not done enough to prepare the city for this new investment. Infrastructure development seems to have fallen short of needs of the city and of the investors.
Roads and Transportation: Since 1991, the number of vehicles on the roads of Bangalore has increased by about 33 per cent. Either way the number of vehicles in Bangalore is similar to that of Delhi, which has double the population. There are no metered taxicabs in Bangalore, which makes it difficult for tourists or business travellers to get about. Road space in Bangalore (11.9 per cent) is significantly lower than the international norm of 20-30 per cent. Furthermore, since 1991, there has been no increase in the number or size of the roads in the city (FEER, 1996, p. 41 and BW, 1996, p. 35). "(T)he city has no main highways for trucks and only 300 traffic police for 30,000 intersections" (Stremlau, 1996, p. 160). The traffic jams and the prolonged commute time have had a tremendous economic impact as commuting times have doubled. As people arrive at work exhausted, having battled fellow commuters for space on buses or roads, some industry people feel that productivity levels have dropped since the early 1990s (interviews). Furthermore the pollution in Bangalore has increased tremendously over the last five years, with thick layers of smog covering the city most days of the week, there is a respite on Sundays, when blue skies are visible (FEER, 1996, p. 41).
KEONICS, the Electronics City, is 18 kms outside the city centre. The government has been building a four-lane highway out there for the last two years but so far only 8 kms have been built. This is said to be because of litigation over land along the route. It takes over 40 minutes to traverse the first 10 kms, which is the two lane part of the road that goes out through crowded neighbourhoods, the last 8 kms are along the 4 lane "highway" and can be done in less than 10 minutes. There are a number of software firms that are located in KEONICS, including Infosys, Hewlett-Packard, 3M etc., but it is increasingly difficult for them to rely on public transportation to get their workers to work on time. Many of them have their own team of buses that make the trip between Bangalore, where most of the software professionals live, and KEONICS a number of times a day. The government of Karnataka maintains that the road to KEONICS will be completed soon. The state government is trying to encourage firms to choose locations outside Bangalore to lessen the burden on downtown roads, but as most roads leading out of town are like the Hosur road out to KEONICS, they are not likely to have much success (interviews).
In the downtown area, an elevated light train mass rapid transit system covering 90 kms is being planned. The Karnataka government awarded the build-own-operate contract to an international consortium in January 1996 at a cost of $1.3 billion. The system is expected to be ready in 2003 (interviews, FEER, 1996, p. 42, and BW, 1996, p. 31). It is hoped that when operational this system will ease some of the pressure on the roads and reduce the pollution.
In terms of access to Bangalore from abroad, there is only a domestic airport, with regular flights to Bombay and Delhi for international connections; "the airport, which has a 700-person capacity, is now swamped by a daily average of 6,000 passengers" (Stremlau, 1996, p. 161). Not having an international airport in Bangalore has been described as a nuisance by interviewees as Indian software professional are constantly travelling for on-site work and clients come to Bangalore for business. As was mentioned earlier, there are plans to build an international airport and it is a precondition for the Tata-Singapore Technology Park. It is estimated that the international airport will be ready in about 3 years.
Electricity and Water: By far the biggest problem for firms in this city is the lack of an adequate supply of electricity. There are daily scheduled power cuts. In a bad drought, these can be between 4 to 7 hours long. Because of the poor monsoon last year, power cuts have been particularly severe this year. But "even with a decent monsoon, Karnataka cannot meet its needs. Power cuts are already a routine, for demand exceeds supply at peak periods by at least 17 per cent, not allowing for suppressed demand" (Nicholson, Financial Times, Oct. 5th 1995, p. 23). The regular power supply, when it delivers, provides fairly low voltage electricity, with frequent fluctuations. Currently, 70 per cent of the electricity is drawn from hydroelectric power the rest is thermal. The state generates 3,500 MW of electricity but at the rate at which it growing by the year 2000, it will need over 9,000 MW. 10 per cent of current supply of electricity is required to pump water up to Bangalore, because of its high elevation (FEER, 1996, p. 41). Water is, therefore, also in short supply.
There are a number of projects that have been proposed to meet the growing demand, but most are still under negotiation. The largest is a proposal by Cogentrix, an American power development company to build a 1,000-megawatt power plant. Estimates suggest that such a plant will take over 6 years to complete. In the meantime smaller plants, 50-100 MW, which can be operational in 2 years, are being planned and in best estimates will be ready by the end of the century. All this will cost over $8.6 billion, money that the government just does not have. The Cogentrix project is being guaranteed by the central government (Financial Times, Oct. 5th, 1995, p. 23, FEER, 1996, p. 41 and interviews).
Software firms in Bangalore have insulated themselves from the public electricity supply. All of them have installed uninterrupted power supply, high-powered diesel generators, some even have backups for the backup. In this business, software firms cannot afford even the slightest fluctuation in the voltage because thousands of man-hours of work could be lost. The reliance on these diesel generators by most businesses in Bangalore however has added to the pollution problem and to the heat.
Telecommunications: The telephone system in Bangalore is insufficient. Furthermore, phone lines are poor. According to the FEER, Bangalore was not amongst the first four metropolitan areas to be provided with cellular telephone networks, it is only in the past year that the cellular phone technology has come to the city. Until this happened local communications were very difficult, what is commonly described as the "last-mile problem". International communications are fairly easy due to high-speed satellite links which firms have either installed themselves or which they have access to through the STP scheme.
4.4.4 Summary
In a short time, Bangalore has experienced rapid growth and international recognition in the field of software development. This has resulted in what few other locations in the world can boast: a promising position in the international market for software. Furthermore, the establishment of the software industry in Bangalore has led to many opportunities for its residents. There are many signs of prosperity and the city has grown to be internationally recognised. Furthermore, the potential benefits for Bangalore are enormous. This high tech industry is beginning to influence Bangaloreans' perceptions of information technology and what it can do for their businesses, in terms of efficiency and in terms of linking them up with the global economy. Moreover, the work culture of the global software industry is starting to permeate to other sectors, either through the movement of people between sectors or through the computer.
The rapid growth of Bangalore, however, has not come without its problems. Like many developing country cities seeking to participate in the global market, Bangalore is undergoing growing pains. Although there was a great deal of effort on the part of the state government to seek out investment, both foreign and domestic, and to encourage the software industry to locate in Bangalore, not enough was done to prepare the city for the onslaught. The ability of the city to accommodate new investment and migration was overestimated. Other states in India, like Maharashtra and Haryana, have had more success in anticipating the electricity needs of their industries and are continuously upgrading. Maharashtra, for example, is an electricity-surplus state. Furthermore, the city depends heavily on State grants, as its tax revenues were only $66 million in 1994. This may be due to the fact that the more profitable businesses in Bangalore are 100 per cent export-oriented and have been given tax holidays as an incentive to locate in India. Financially, Bangalore might find it hard to provide the infrastructure that is required to cope with the inflow of people and investment. The way the city responds to these challenges will have a bearing on Bangalore's future in the global software industry chain. Bangalore needs, now, public support to re-establish some of the locational advantages that have led to its current position and status.
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