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 -------------- -------------- HIGH COSTS CAUSE COMPANIES TO LOG OUT OF BANGALORE -------------- -------------- ¶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. -------------- -- EXPERIENCED BANGALORE TECHIES DEMAND HIGH WAGES -------------- -- ¶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. -------------- -------------- REAL ESTATE PRICES AND POWER OVERHEAD ADD TO COSTS -------------- -------------- ¶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. -------------- A PLACE OF THEIR OWN? -------------- ¶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. -------------- SHOW ME THE SAVINGS -------------- 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 HOPPER