US slump to aid innovation feels Silicon Valley

US slump to aid innovation, feels Silicon Valley

The US slowdown will help India and other countries offering backend support in the form of outsourcing

V.E. Krishna Kumar

Friday, February 15, 2008

SUNNYVALE: The global IT industry is not too worried about the talk of a recession in the US economy and slow growth causing reduced technology consumption.

In fact, experts believe it could prove to be a blessing in disguise as diminished IT spending could trigger off another wave of innovation coupled with outsourcing.

Companies would be forced to think out new strategies for tapping the global marketplace, with a specific eye on the APAC region.

“Outsourcing is going to continue as businesses have seen it as viable and efficient strategy for staying competitive. It allows them to focus on their core competence and outsource what is non-core to their business,” says Vish Mishra, venture director at Clearstone Venture Partners, one of the first VCs to open offices in India.

Of course, there are others who feel that the slowdown would actually show companies like Google in better light for having adopted the global-sourcing model – or hiring the best resource irrespective of where the person is located and paying them global salaries.

“We believe IT outsourcing companies are in a position to benefit regardless of the direction the economy takes over the next few quarters,” says Dylan Cathers, Standard and Poor’s analyst in the Business Week.

He says that if the economy firms up, companies will have to increase capacity to handle the additional work, especially after the numerous downsizings that have occurred over the past few years.

So, will all this help India and other countries offering backend support in the form of outsourcing? The answer is an emphatic Yes.

Recent research reports show that the slowdown in the US economy will be matched by a spur in business growth in the Asia Pacific region, of which India is a part.

“Asia Pacific and the oil-exporting areas of Eastern Europe, Middle East, and Africa will be the main engines of growth,” says Andrew Bartels of Forrester Research.

Total global spending on technology goods, services, and staff, the global IT operating budget from a CIO perspective, will reach $2.4 trillion in 2008, which represents an eight per cent increase from over the last year.

Forrester Research, which had lowered its outlook for growth in US IT investment, purchases, and spending in 2008 said global IT purchases will grow by six per cent in 2008 as against 12 per cent in 2007.

But Silicon Valley veterans are not alarmed by all these reports and are generally quite bullish about their industry.

“Overall I am fairly bullish about the tech sector. Technology has steadily contributed to US productivity gains over the past 40 years and it is going to continue in the future,” was the optimistic view of Mishra.

Venture capital investment in US companies continued to climb in 2007 with the most deals and capital invested since 2001 for a total deal count of 2,648 and capital investment of $29.9 billion, according the Quarterly Venture Capital Report by Dow Jones VentureSource.

This was marginally ahead of 2006 figures while the total capital invested represented an eight per cent increase over the same period.

Things followed a pretty similar pattern back home in India as well.

Venture Intelligence, an Indian VC and private equity-tracking firm, found that the 2007 investment total was slightly higher than 2006, when 94 deals attracted about $500 million.

NEA-Indo-US Ventures, founded by Valley veteran Vinod Dham, invested in four companies.

Dham, considered the father of Intel’s Pentium chip, felt that outsourcing has played a crucial role in putting India on the global business map.

India faces challenge in the product innovation and intellectual property area which are essential for the country to move to the next level on the technology ladder, he feels.

“Outsourcing has played a role in laying a foundation making India an IT destination and creating an image that Indian engineers are IT-savvy. However IT services industry is more of a labor arbitrage industry and innovations are made more in intellectual property and product creation and there is certain amount of challenge here compared to services area,” he says.

However, India has started to make progress in the semiconductor space compared to yester years.

According to Ravi Thummarukudy, co-founder of GDA Technologies that was acquired by L&T Infotech Limited, “India is now in a better position to take advantage of this opportunity. Last time around, the Indian semiconductor industry was in its infancy with only a few big names boasting of capabilities that were locked in for in-house use. Today, things have changed substantially.”

“The truth is that a carefully crafted Indian design strategy can still give the strategic edge for big companies or a fresh lease of life to the startup. Also, service companies that have invested in internal R&D and IP blocks provide better leverages, and you may even outsource the complete product engineering if needed,” he says.

So is India ready? Can India withstand the repercussions of a falling US dollar and continue to innovate?

There is certainly great scope to ride another wave of opportunity as US is poised to enter a bumpy road for at least next two quarters before the Federal government’s tax rebate kicks in putting the country’s deficit to a record $113 trillion

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