High Tech India: A Minefield of Challenges

Make no mistake about it; India is hot. The country recorded its second-fastest annual growth rate since gaining independence in 1947 by expanding at a near double-digit percentage pace of 9.4%.

The Indian stock market also has been red hot. Investors who have stuck with it through Mumbai's occasional hiccups have more than doubled their money over the last two years.

And that return doesn't even reflect the extra gains that U.S. dollar investors have enjoyed in currency appreciation. Thanks to a 9% rise in the rupee against the dollar over the past two months, India just joined the list of countries with trillion-dollar stock markets.

India's capitals are booming. Bang & Olufsen, Escada and Brioni have recently opened shops in New Delhi and Mumbai, joining the likes of Chanel, Louis Vuitton, Versace, Fendi and Valentino. Ermenegildo Zegna recently opened a 3,000-square-foot shop in Mumbai's Taj Mahal Palace and Tower Hotel.

In addition, India has the most billionaires of any Asian country -- with 36 collectively worth $191 billion. Fourteen Indians were new to this year's Forbes' annual list of the world's wealthiest people. Lakshmi Mittal -- #5 on the Forbes list -- purchased a property in London during 2004 for $105.7 million, which is still reputed to be the highest price ever paid for a house.

High Tech India: An Insider's Perspective

Last week I got an insider's perspective on India when I went to see Prof. Arogyaswami Paulraj speak at a Stanford Alumni Association gathering at the East India Club in London. Professor Paulraj is considered the father of Wimax -- a wireless technology that is emerging as the successor to Wi-Fi. His perspective is unusually valuable for several reasons. He is not only a native Indian, working on the cutting edge of technology at a top global research university, but he's also an entrepreneur who owns and runs a high tech company in Bangalore -- India's answer to Silicon Valley.

Few Westerners appreciate India's rich, intellectual tradition. While much of Europe was lost in the Dark Ages, India boasted the world's leading university -- centuries before ancient Oxford and Cambridge were even founded. In 1700, India's per capita GDP was the equal of Europe's. However, Europe's Industrial Revolution changed all that, and India -- along with China -- quickly was left behind in the ladder of economic development.

Despite its recent eye-popping economic growth rates, India is a country of huge contrasts. On the one hand, India has an emerging middle class of 300 million. On the other hand, over 200 million Indians live on less than a dollar a day. But today it is change that characterizes India. Over six million cell phone users -- equivalent to the population of Manhattan -- are being added every month, making India the fastest-growing cell phone market in the world. This, Paulraj argues, has been a key to kick-starting India's economic growth.

High Tech India: A Successful Re-branding

India is also a marketer's case study in successful re-branding. If India was once associated with "poverty," today it is associated with "high tech." Contrast the image of Mahatma Gandhi sitting with his loom in the 1940s alongside that of a Bangalore high tech worker sitting in front of a flat screen today.

But perhaps India's re-branding has gotten ahead of itself. It turns out much of Indian "high tech" isn't really high tech at all. India's technology industry consists largely of service industries such as business process outsourcing. Consider that India has yet to produce a single, world class technology company. Contrast that with Israel, a tiny country of seven million people and over 75 NASDAQ-listed companies that include many boasting cutting-edge technologies.

Although every Silicon Valley venture capital firm along Sand Hill Road now has an office in India, few have done deals of any size or note. Nor are top-notch Indians returning to their homeland with particular vigor. A revealing fact: Paulraj says that not a single one of his Stanford Ph.D. advisees has returned to India. Like Hungarian physicists and mathematicians, Indians seem to do their world class work outside their home country.

High Tech India: A Minefield of Challenges

Nor is India's educational system all that it's cracked up to be. Although India produces 500,000 engineers a year, only a small handful are qualified to work in multinationals. Paulraj, himself a graduate of one of India's elite Indian Institutes of Technology [IIT], admits that India's universities are also-rans on the global playing field. And without world class institutions to support the cutting edge of innovation, India cannot spawn companies the way Stanford alumni have in founding global giants such as Google (GOOG) (nicknamed "Stanford with options"), Yahoo! (YHOO), eBay (EBAY), and Hewlett-Packard (HPQ).

India has much to do before the reality lives up to the hype. First on the list is its infrastructure. In Bangalore, Paulraj's company has to truck in fresh water everyday for its workers. The country's bureaucracy is crushing. Permits that take a week to be issued in the United States take 18 months in India. Corruption at the lower levels is rampant. Vestiges of the caste system mean social mobility is weak in India. Although Lakshmi Mittal spent his youth sleeping on concrete floors, there are few rags to riches stories in India.

India also has to change its mindset -- perhaps the toughest task of all. The way you get ahead in India is not to make a mistake. That perfectionism is an enemy of innovation. The result? The culture has extreme risk aversion. Paulraj jokes that his most successful students are the ones who dropped out to start their own companies. That could never happen in India.

Finally, cheap Indian labor is rapidly becoming a thing of the past. Paulraj says that the cost of hiring Indian engineers now approaches 70% of what it costs to higher someone in Silicon Valley. In fact, Paulraj's company no longer intends to hire in India. It just costs too much.

Overall, kudos to Professor Paulraj for his enthusiastic but balanced perspective on India. The reality for India is much more complex and challenging than the screaming headlines of magazine covers would suggest.

Now, if I could only find Paulraj's equivalent from China...

Comments

[sacsharma]

I think India's biggest challenge is developing world class infrastructure.
Everybody talks of Bangalore but no one has seen the state of infrastructure in the city. It is already beginning to crumble. I don't believe the city can sustain such growth.
Indian people are entrepreneurial but feel challenged by the growing corruption and lack of adequate infrastructure.
India's biggest asset is its young population which forms a large chunk of its population. The biggest driver of growth in India has been the IT and ITES industry which has generated a few million jobs. As long this industry remains robust, young Indians will continue to earn and spend,hence driving the growth.
In terms of stock market the biggest opportunity in India lies in the areas of capital goods, telecom and retail.As far as IT is concerned I feel it is past its prime in terms of growth