HIGH COSTS HIT BANGALORE'S HIGH

UNCLAS SECTION 01 OF 02 CHENNAI 001421

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV PGOV IN
SUBJECT: HIGH COSTS HIT BANGALORE'S HIGH
TECH INDUSTRY



1. (U) SUMMARY: Escalating labor and fixed costs have
prompted two U.S. high technology companies, Apple
Computer and Pervasive Software, to close their recently
opened Bangalore operations. A shortage of qualified
talent at a reasonable cost is cited as the principal
reason for the closures. Sky rocketing real estate
prices and infrastructure overhead have also pushed up
costs for the two companies, each of which employed fewer
than fifty workers. END SUMMARY

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HIGH COSTS CAUSE COMPANIES TO LOG OUT OF BANGALORE
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2. (U) Apple Computer announced the closure of Apple
India Services Limited, its wholly-owned, Bangalore-based
subsidiary on May 29, 2006. Close on the heels of
Apple's announcement, Austin, Texas based Pervasive
Software, which specializes in developing data
infrastructure solutions, said on June 21, 2006 that it
was closing its Indian subsidiary, also based in
Bangalore. Both companies cited high labor costs as the
primary reason for their departure. Each of the
operations was relatively new. Pervasive Software had
operated in Bangalore for a little over a year and Apple
Computer for only a few months.

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EXPERIENCED BANGALORE TECHIES DEMAND HIGH WAGES
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3. (U) Sharp increases in labor costs, especially in the
past two years, have blunted Bangalore's edge in hosting
low cost, high quality information technology companies.
According to the National Association for Software and
Service Companies, salaries at the entry level have grown
between 11 percent and 15 percent in the last two years,
while at the senior levels wages have risen by 30
percent. In fact, at senior levels salaries in some
cases are actually higher in Bangalore than in the U.S.
Indian business press reports quote a study produced by
Stanton Chase International, a human resource consulting
firm, as saying that a U.S. manager with 10 to 15 years
of experience earns between $100,000 and $150,000 as
compared with $200,000 paid to their Bangalore-based
counterparts. U.S. firms like Cisco and Motorola are
finding it cheaper to relocate a U.S.-based manager to
India rather than recruit a manager from Bangalore.
Recruiting in Bangalore is more focused on entry level
engineers who earn an average salary of $9,000 annually
in the city. That is one-seventh of what their U.S.
counterparts receive. Companies are required to make
additional training investments in these entry level,
India-recruited engineers, however, to impart the
necessary knowledge and skills. With competitors always
ready to head-hunt for trained staff, most companies
report an attrition of 10 to 15 percent.

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REAL ESTATE PRICES AND POWER OVERHEAD ADD TO COSTS
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4. (U) Skyrocketing real estate prices which range
anywhere between $200 and $300 a square foot in prime
business locations as well as infrastructure overhead
such as 100 percent power backup, add significantly to
costs. Small operations like those of Apple and
Pervasive which employed fewer than fifty people each are
particularly hard hit as their fixed costs have soared.
Interestingly, both companies plan to continue their
outsource relationships with third parties located in
Bangalore.

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A PLACE OF THEIR OWN?
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5. (U) Senior executives at Mindtree Consulting, a mid-
sized Indian software company, told Post that the company
decided to move to its present campus outside the
Bangalore city limits after the cost of acquiring real
estate in the area began shooting upward. Because the
company headcount is more than 3,000, a separate company
campus made economic sense but IT executives suggest that
an owned campus is rarely feasible for companies with
fewer than 1,000 employees.

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SHOW ME THE SAVINGS
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CHENNAI 00001421 002 OF 002




6. (U)COMMENT: A long list of U.S. companies in the
information technology business have invested or plan to
invest in Bangalore to leverage the city's reputedly low
cost, high quality Indian labor. But with Indian
software companies as well as others from all around the
world planning massive expansion of their operations,
hoped for savings may be harder to find than in the past.
It may be increasingly difficult in the future for U.S.
IT managers with operations in Bangalore to answer
executive requests to "show me the savings." END COMMENT

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