Infosys’s Global Dreams: Diagnosing its Achilles Heel
The Rediff site carried a very interesting article (Can Infosys do a Toyota?) a couple of days back – the article makes a comparison between Infosys and Toyota and tries to reckon whether Infosys can do to the Global IT services space, what Toyota did to the world of passenger cars in the 1970s.
The author argues that Japanese automobiles, which today set the default global standard in terms of quality, innovation and efficiency, were not always like that. The Japanese car industry boomed mainly due to exports - this was possible because Japanese labour rates in the 70s were about 60-70% lower than in the western economies and the fact that they had developed smaller, more fuel efficient cars which seemed to be the flavour of the market, after the oil shocks of 1973. This is analogous to the current IT industry scenario where manpower costs in India are much lower than in the developed economies.
However the point to be noted is that today, Toyota is know as much for its lower end, mass market Corollas as it is for its luxury segment sedan, Lexus or for its ubiquitous SUV, Land Cruiser. It has products that straddle the entire passenger car segment. So while mass market (low margin) products contribute to bulk up the bottom-line, allowing it to achieve global economies of scale, the high end (high margin) products add to its topline; this is useful in warding off the risks of competition, cyclicity or profit erosion in any particular segment. A diversified risk profile in terms of product segments or geographical markets helps to mitigate business risk and is a must-have when you have global ambitions.
And this is exactly where the Achilles heel for Infosys could be; consider this -
1. The main competitive advantage that the Indian IT industry (including Infosys) enjoys at this point in time i.e. price competiveness due to labour costs differential, is time-barred and come with a limited shelf life; (you don’t need a PhD in economics to understand this - pick up any high school level economics textbook and the first chapter will describe how price arbitrage will eventually force the imperfections in markets to converge towards a price equilibrium).
2. Look at the product profile of Infosys; you will be surprised (somewhat shocked) to see that for a company aiming at a 2 billion USD turnover by next year, the contribution of software products to the company’s overall turnover is a measly 3 % …the share of high end consulting is 15 % and the rest is regular maintenance, software development, BPO etc (Infosys 1$ bn & counting). Therefore, the bulk of its turnover is coming from segments that are the equivalents of “commodities” in the IT business …these “commodities” are highly price sensitive..customers are coming to you not because you have great products/services but because you are the cheapest. On the other hand, products are a measure of your innovativeness, your marketing prowess and your entrepreneurial outlook, all of which are essential for any company to be recognized as a global leader.
For Infosys to emerge as a global leader in the field of IT, it has to shake off the tag of being a supplier of low cost IT services/BPO/software development, all of which are “commoditized” businesses, a stereotype which is associated with the Indian IT industry in general. The contribution of high-end services and products etc must rise dramatically from its current levels (Innovate to lead in IT- Sabeer Bhatia).
Going back to the Infosys v/s Toyota comparison, the dangers of a time-barred competitive advantage notwithstanding, Infosys has a lot of positives going for it. At the heart of Toyota’s (for that matter, Japan’s) manufacturing success was the Kanban system of inventory management and control, which was pioneered by Toyota. Infosys, on similar lines, has pioneered what it calls its Global Delivery Model - it regards this to be its main source of its competitive advantage in the IT services sector.
The other factor in favour of Infosys is the overall acceptance of India as a key global supplier of software engineers and scientists in the coming decades, at a time when western education systems are facing a rapid decline in the scientific and IT field.
3 comments
Found a great article on the comparison of Infosys and IBM and the main product segmentation which contribute to profit. http://www.rediff.com/money/2004/may/26perfin.htm
This should show as to how the other software and hardware giants are doing and which segements are contributing to profit.
Infosys’ Achilles Heel
Indian IT Firms must climb up the value chain. There is no doubt about that.
The points that you have mentioned about Infosys as its ‘achilles heel’ have been quoted by experts worldwide for the last half a decade.
Infosys revenues have consistently grown by 50% and profits soared. A recent listing of the best stock returns since 1995 puts the returns of Infosys even above the returns of Microsoft since 1994.
Now I counter your points one by one:
1. Indian IT industry’s main weapon is wage arbitrage. Economics does say that this is not sustainable in the long run. But economics does not define the ‘long run’. This long run for all that you know could last a couple of decades.
2. If you look at the balance sheets and income statements of product companies, you will find that a huge chunk of the revenue of product companies comes from the services that they provide like maintenenance, implementation, training & support.
Also, Infosys is much more profitable than many product firms. Look at the financials of IFlex and Infosys. Infosys enjoys higher margins than IFlex
You can enjoy high margins in a commoditized business and Infosys has proven that in the last half a decade. Infosys revenues as I speak have already crossed $2 billion.
3. Another main advantage of Indian IT is the availability of technical talent. In US, recent demographic studies have shown that parents encourage their kids to pursue non-IT careers as the IT entry level jobs anyway go to India. The factor conditions in India (Technical skill availability) is another economic weapon that will be sustainable for atleast a decade and a half if not a decade.
It is not just enough to have cost arbitrage. YOu need processes that ensure operational efficiency. Infosys has that - Look at its 14000 + training facility in Mysore, it has the infrastructure, it has the geographic breadth that have allowed it to scale far rapidly than competition.
5. Infosys is aiming to be a consulting + implementation firm. Being vendor neutral is very essential while suggesting solutions to customers. Vendor partnerships even more so. Building its own products could put Infosys into conflicts with its business models
6. Infosys is a publicly listed company. One things that the MBA analysts (like you and Me) ask for is predictability. Infosys earnings are predictable with their services contracts and that is why it is the darling of the stock market.
Infosys has it to be the Toyota of the Indian IT industry.
FYI, I myself dream of working in a web products startup/web products firm….
Thanks for this article Mr. Ranjan,
I am doing a research assignment about Infosys. Your write up helped me gain an insight about the competitive advantage of Infosys.
Regards
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