Smart Money's On India

Teeming with technically trained graduates, touting low labor costs, and trying desperately to modernize, India has gained a reputation as the place where computer and software companies can do business on the cheap.

But lately, it seems IT bigwigs can't set foot in the country without dropping $1 billion or more. Microsoft chairman Bill Gates and Intel chairman Craig Barrett became the latest, revealing plans for company investments of $1.7 billion and $1.05 billion, respectively, last week. They follow Cisco Systems CEO John Chambers, who in October flew in to pledge $1.1 billion in subcontinent spending and plans to almost triple the networking company's Indian workforce from 1,400 to 4,000 in three years. Which raises the question: Is India's price of entry going up?

During a speech in New Delhi, Gates told Indian government leaders that salaries for top IT workers there are "going up very, very substantially" and could nearly reach U.S. levels over time. And U.S. tech companies' thirst for India's computer-science and engineering grads means turnover is becoming a problem. "People are getting a lot of opportunities," Intel Capital VP Sriram Viswanathan says.

Members of the new India billion-dollar-investors club also could help accelerate a trend toward more high-value intellectual property and custom-designed products coming out of Indian research and development teams, built for Indian markets and export. That could provide even better returns on companies' investments there than the legions of low-cost programmers and technical-support personnel that Western companies have hired for outsourced development and services. Oracle, which employs 7,000 workers in Bangalore and Hyderabad, makes no distinction between development teams in the United States and India that work jointly on the company's core products, including its database and E-Business Suite applications, a spokeswoman says.

India will become an increasingly vital part of Microsoft's R&D, according to Gates. The company already employs 4,000 workers there, mainly in its Hyderabad development center. Half of its new investment will go toward expanding its R&D in India by adding 3,000 workers and opening a development center next month in the tech hub of Bangalore, where it already has a research lab that opened in January. "The growth in employment for Microsoft will be more in India than in the United States," Gates said at a news conference.

A big part of the new spending will go toward creating a version of Windows designed for India, available in nine local languages, to counter the popularity of the open-source Linux operating system. The Indian government last year stopped requiring companies that do business with it to use Windows, and it set up an open-source development center in the southern city of Chennai. In a country of 1 billion people and just 17 million installed computers, according to market-research firm Gartner, Microsoft needs a Windows version that can take root.

Unique Needs
But PC operating systems are only part of the opportunity Microsoft sees in India. The company also wants to design products tailored for Indians' "unique needs," Gates said. In about a year, Microsoft plans to release software for cell phones that lets users send text messages mainly by speaking, using the keypad only to correct errors. Microsoft's Bangalore lab is investigating software for language translation, speech-driven user interfaces, and computers that can be used collectively by whole villages. Internet TV could also play well in a country where laying traditional cable is too expensive. "India is a place where breakthroughs like this are necessary and will take place," Gates said.

IT spending by companies in India is forecast to grow 20.8% during the next four years, Gartner predicted in a report last week. Fueling growth: the migration of consumer technologies such as instant messaging, 3-D graphics developed for video games, and Ajax-powered Web sites into business computing. The trend line is moving from "sold in Asia, to made in Asia, to designed in Asia," Gartner analyst Dion Wiggins writes.

Intel, too, is developing products tuned to the Indian market. Over the summer, the company demonstrated at a technology conference a "community computer" that runs on a car battery, protects itself from dust and bugs, and can use the wide area WiMax broadband protocol to provide wireless Internet access to groups of people.

Last week, on a visit to India, Barrett said Intel will spend $800 million to expand its R&D center in Bangalore and launch a $250 million venture-capital fund to buy stakes in Indian startups that could help build new markets, especially for cell phones and mobile PCs. Intel has made $100 million in Indian venture investments since 1998 and reaped enough return to equal the cost of a chip plant--about $3 billion or $4 billion.

Narrow View
Viswanathan points to companies like NIIT Ltd., a technology training company, and Sasken Communications Technologies Ltd., which writes protocol stacks for cell phones, as ventures Intel has invested in that helped shape the direction of Indian technology markets. Companies that tap into India only for low-cost coders, or its faster-growing neighbor China as a factory floor, are missing opportunities. "That's a narrow way of looking at what these two markets represent," Viswanathan says. "That by itself is not enough for us."

IBM is trying to shape the Indian market as well, particularly the use of open standards there. Last week in Delhi, the company said it would invest $1.2 million with the Centre for Development of Advanced Computing in Pune and the Indian Institute of Technology in Mumbai to establish the Open Source Software Resource Center.

But India isn't an easy place for U.S. technology companies to make money, so R&D spending toward that market is risky. India's vast but mostly poor population forces companies to sell their products at cut-rate prices, or even at a loss in order to seed the market with their technologies.

Another key question is whether India can supply enough high-quality labor to meet soaring demand without pushing the price of wages up too quickly. But India graduated 200,000 engineers last year, according to a National Academy of Sciences Study, compared with 70,000 in the United States. And U.S. companies are contributing to the brain supply: Microsoft and Satyam Computer Services Ltd. last week disclosed an initiative to train up to 3,000 Satyam engineers a year on Microsoft technologies.

Will India's markets for consumer and business technology and its labor pool grow fast enough to make these billion-dollar gambles pay off? India surely will be one of the countries at the center of IT's future, but even a billion dollars doesn't guarantee U.S. companies will be at the center of India's IT future.

-- with Charles Babcock, Paul McDougall, and Laurie Sullivan