India may lose cost edge in IT

By SiliconIndia   |   Friday, 27 February 2004, 08:00 Hrs
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MUMBAI: IndiaÂ’s low cost advantage in the technology sector could be slowly declining. A recent survey suggests that the long-term substitution threats are becoming more evident, as early adopters of offshore services (such as GE) are exploring other cheaper destinations like China, Mexico , Eastern Europe and the Philippines, reports Economic Times.

“This has eroded cost arbitrage in the offshore business,” the survey states. According to analysts, a decline in cost arbitrage is driven by structural changes that have taken place in companies, such as Infosys. Wage deflation and rising unemployment rates in the IT sector (in US) has capped the pricing power of Indian software vendors.

A top senior official admitted that the pressure on offshore salaries is on the rise. He said that most Indian software companies have seen a rise of 10% to 12% on their offshore salaries in the last one year, while salaries in the US have remained flat. “Though cost arbitrage has declined, it has not come to alarming levels and is not expected to in the near term,” he added.

According to Forrester Research vice president Stephanie Moore, offshore wages have certainly risen for large vendors, and much of that has been driven by factors like attrition and higher compensation packages of consulting and professional service firms such as Accenture, EDS and IBM.

“Indian vendors want to do the high value work and therefore have a greater need to bring work offshore,” Moore said. The cost of offshore labour is going to become a huge concern as companies spend more on sales and marketing activities and on high priced consultants. It could adversely affect profit margins as well, industry watchers say.

The survey on the Indian IT sectorÂ’s cost advantage vis-a-vis other countries was conducted by brokerage firm, ABN Amro Securities India . A recent Hewitt Associates study predicts an increase in offshore wages for the current year.

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