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Indian tech was on the brink even before Trump’s push

Indian tech was on the brink even before Trump’s push

Indian tech was on the brink even before Trump's push

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India’s tech outsourcing industry faced a spike in pessimism even before Donald Trump. But if the new president issues a draft executive order aimed at tightening the US guest worker regime, the timing of the settling of accounts for companies like Tata Consultancy Services Ltd. and Infosys Ltd. could happen much sooner than shareholders expect.

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Since investors know very little about how the Trump order would change the granting of H-1B visas, they are looking at the more concrete proposals in the House bill introduced by the Silicon Valley Democrat Zoe Lofgren.

H1B visa: what it is, visa reform proposals and more

Even if the Highly Qualified Persons Integrity and Fairness Act 2017 does not pass, it could set the tone for future legislation. Lofgren’s bill sets the compensation requirement for short-term work visas at $130,000, or the 85 percentile of systems analyst salaries in the United States. That’s a jump from the current minimum of $60,000, which is close to the median salary.

There is more. Currently, the annual quota of 65,000 visas — plus another 20,000 for employees with advanced US degrees — is assigned by lottery. If the process becomes market-based, with the highest-paying employers taking priority, Apple Inc., Alphabet Inc., Amazon.com Inc. and Microsoft Corp. could end up hiring more Indian, Irish or Chinese engineers.

Infosys and TCS, historically among the top three visa sponsors, are expected to either increase salaries or settle for a much reduced scale of activity in their most important market.

Minimum H-1B proposed

$130,000

Suppose they do the first. Infosys paid an average of $81,000 (around Rs. 55 lakhs) to the 25,375 candidates it sponsored last year. If the Bangalore-based company were to increase the salary to $130,000 (about Rs 88 lakhs) for the same number of US visas, $1.2 billion (about Rs 8,079 crore) would be added to its labor bill. -work. If Infosys cannot pass this cost on to its customers, nearly half of its annual operating profit would disappear.

In reality, things will not be so serious. Outsourcing companies will hire more local workers in the United States, especially in places where it is cheaper to live. Costs for full-time employees are 20% lower in Dallas than in San Francisco, for example. Additionally, Indian salespeople will persuade customers to send more work overseas to India, where labor costs are one-sixth of Denver.

To the extent that US clients in the outsourcing industry are themselves global companies, some of the work currently done in America could shift to Europe. For every US visa that Infosys and TCS are forced to take at high salary cost, they might be able to reap productivity benefits they can’t get from cheaper technicians.

Even so, the 10 percentage point operating margin advantage that Indian companies have traditionally enjoyed over International Business Machines Corp. and Accenture Plc will begin to erode. The tougher the new US immigration policies are, the faster this gap could close.

He could have shrunk, whatever. As customers spend more on AI, analytics, mobile, and cloud, the budget for legacy IT services, such as application maintenance, is shrinking. Indian companies have been late waking up to this new opportunity. As a result, they had to invest at a significantly higher rate to gain market share.

Or at least play catch-up. The four major digital ad agencies are Accenture Interactive, IBM Interactive, Deloitte Digital and Epsilon, all of which, as Bloomberg Intelligence’s Alex Wisch notes, were all started by consulting firms. IBM, meanwhile, predicts that analytics alone will represent a $315 billion market by next year, roughly triple the size of India’s IT exports.

Investors fear any sacrifice in margin that a battle for new technologies would entail. TCS is trading below 16 times expected earnings, the lowest since the 2008 financial crisis. Infosys is faring even worse. Trump did not bring the Indian outsourcing industry to the brink; but his anti-immigration stance may tip him over.

© 2017 Bloomberg L.P.

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