India Finds Globalization Cuts Both Ways

For decades, India has been a huge beneficiary of the trend toward globalization.  Instead of taking on manufacturing as the Chinese did, the Indians chose to take advantage of ever-dropping communications costs and specialize in the knowledge economy.  Hundreds of businesses set up shop in Bangalore and Hyderabad to sell software development and call center services to any organization who wanted to save money on such activities.  Low-cost communications made this not only possible, but profitable.

This didn't do the American software development business any good at all, of course, because Indians worked for 1/5 the price of Americans.  Corporate stalwarts like IBM laid off thousands of Americans and transferred their jobs to India.

Much smaller firms tried it, too, but it turns out that offshoring doesn't make sense for small jobs because the management overhead is too great.  There's still a fair amount of software development and even call-centers in the United States and some previously-offshored work has come back.  For a billion-dollar software development job, however, offshoring makes compelling business sense.

In the past, you had to staff the hierarchy with Americans who understood what the project was trying to accomplish.  It took vast expense to persuade your best people to move to the other side of the world, but it was still worthwhile.  Instead of getting a billion-dollar job done for $200,000 as originally hoped, it would cost you a half-billion; not bad, and a big hit with stockholders.

What's more, Indians have been learning the business for 20 years now, so you no longer need as many expats as in the beginning.  That makes savings grow over time.

The Worm Turns

Time Magazine reports that American jobs continued moving to India and other Asian countries during the Obama depression even as American salaries were dropping.  It wasn't clear why, but Time assumed that labor costs were dropping fast enough in India to keep the country competitive.

Given all this, it's a surprise that Rajan Tata, Chairman of Tata, one of India's largest and best-known global companies, is complaining that it's too hard to do business in India.  The Wall Street Journal reports:

More than half of Tata's revenue now comes from overseas, up from 5% when Mr. Tata took over. [in 1991]

Tata's 2010 sales were $67.4 billion, up 12-fold since 1991.  At that time, Tata's sales were about $5.6 billion, 95% of which, or $5.3 billion, were in India.  Sales in India increased at half the rate of sales overseas.  Why?  Because  Mr. Tata is having trouble getting permission to expand his Indian factories to create more Indian jobs!

A year ago, the Guardian reported that the factory where Tata planned to produce the Nano, one of the world's lowest-priced cars, was the target of protests:

Tata Motors will move production of the world's cheapest car from a new factory in India's West Bengal state if violent protests by local farmers - forced to sell their land for the site - continue, its chairman warned today.

In a blow to the country's image as an emerging centre of manufacturing might, Ratan Tata told a press conference that demonstrations over the acquisition of farmland threatened to delay the launch of the Nano, scheduled for October.

In the end, despite having secured all the required government approvals, Tata abandoned a partially-built factory and started over in another location.  Despite that setback, Mr. Tata acknowledges that the situation is better than it was 20 years ago:

"Economically it is a much more open environment. It's one that fosters a fair amount of free enterprise until you need approvals or some kind of sanction to get something done," Mr. Tata said during an interview at the Tata-owned Taj Mahal hotel in New Delhi. "Then you still have problems, and maybe more acute then you did before."

He cited an attempt to get back in the airline business after his airline was nationalized to form Air India.  His joint venture with Singapore Airlines was held up for seven years of bureaucratic inaction; he finally gave up.  He recalls a conversation with a fellow businessman:

"He said, 'I don't understand. You people are very stupid.... Why don't you just pay?'"

Mr. Tata says paying bribes isn't his style. "Maybe I'm stupid or old fashioned, but I really want to go to bed at night saying I haven't succumbed to this," he says.

Mr. Tata isn't the only businessman to find that it's hard to do business in India.  Foreign investment in India has dropped 22% in 2010 compared with 2009.  Part of this could be due to the Obama depression, but if that was the main reason, one wouldn't expect 2009 to be as good as it was.

Labor Isn't Everything

The bottom line for Mr. Tata is that low-cost labor isn't everything - government regulations and crooked bureaucrats keep him from expanding in India.  He's built a thriving international business which includes Jaguar, the Pierre Hotel in New York, the Tetley Tea Company, Tata Consultancy Services, and what's left of British Steel.

Most companies he bought were hamstrung by union agreements and were close to bankruptcy.  Having decades of experience coping with recalcitrant laborers, Mr. Tata was able to secure agreements which made these companies profitable again.

The significant points are:

• It would have been more convenient for Mr. Tata to grow in India but the bureaucracy wouldn't let him.
• In all but lowest-tech industries, sensible government regulations matter more than labor costs.
• The threat of going bankrupt persuades recalcitrant unions to behave reasonably unless they know they'll be bailed out.
• The countries where Mr. Tata invested have benefited enormously - he saved a number of businesses which would have gone under and his business smarts made them grow.

Globalization cuts both ways.  Having gained a great many jobs and much tax revenue through globalization, India has assembled their very own job-killing machine which is sending jobs to higher-cost countries.  95% of Tata's revenue came from India when he took over in 1991; now more than half his much larger sales come from elsewhere.

Does this sound like what we've seen from once-all-American international businesses that are now global multinationals with no particular loyalty to any nation?

Far more than half of Tata's growth since 1991 has been driven out of the country, but the bureaucracy hums right along as if nothing had happened.  As Indian salaries rise and their army of bureaucratic leeches grows to match ours, the giant sucking sound of jobs moving offshore will diminish to a low whisper and then cease entirely.

We've shown India the path to wealth and the path back to regulatory poverty again.  They're moving along both paths far faster than we did.