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Tough to hit $10-b target by 2010: TCS

2009-02-06T03:20:00.000-08:00

Consumer confidence at its lowest in ‘peculiar’ downturn: Ramadorai.

Mr S. Ramadorai, CEO and MD, TCS

Will the country’s largest software exporter, Tata Consultancy Services, achieve its target of $10 billion in revenues by 2010 as targeted?

“Probably that would be difficult given the current economic environment,” Mr S. Ramadorai, Chief Executive Officer & Managing Director, said in an interaction with Business Line here on Friday. However, he did not give a restated timeframe (for becoming a $10-billion firm) as TCS does not give guidance.

The software major generated $5.7 billion revenues for the fiscal ended March 31 2008. Mr Ratan Tata, Chairman of the Tata Group, had unveiled his ‘Vision 2010’ for TCS at the annual general meeting of TCS’ shareholders in 2006.

Being a $10-billion company would place TCS in the envious league of the top-10 IT companies in the world.

Those were the days when TCS and other players in the IT industry were growing at around 28-30 per cent on a yearly basis, courtesy the increasing IT client spend across industries.

However, the global financial meltdown - that triggered the collapse of several larges institutions such as Lehman Brothers, Bear Stearns and Washington Mutual - has impacted the business of Indian IT companies which generate maximum revenues from the banking and financial services space.

Spend squeeze

And the downturn is not restricted only to the financial services space; even companies in sectors such as automobiles, telecom and manufacturing are clamping down on IT spend because of the financial mess they are in, according to Mr Ramadorai.

Mr Kris Gopalakrishnan, CEO and MD of Infosys Technologies, had said recently that the Indian IT sector would grow by only 15 per cent.

‘Very disturbing’

“This particular downturn is very disturbing as multiple sectors across the world have been impacted. It is a peculiar cycle where suddenly, on a global basis, consumer confidence is at the lowest.

Moreover, the number of jobless people, especially in countries such as the US, is very high,” Mr Ramadorai said.

And even geographies such as Europe, India and Asia Pacific are not immune to the global happenings.

According to a forecast from IDC, worldwide IT spending will grow only by 2.6 per cent year over year in 2009, down from IDC’s pre-crisis forecast of 5.9 per cent growth.

In the US, which is the largest market for Indian vendors, IT spending growth is expected to be 0.9 per cent in 2009, much lower than the 4.2 per cent growth forecast in August.

IT, BPO market in for ‘slowest’ growth

2009-02-06T03:17:00.000-08:00

New, innovative services to drive Phase 2 growth: IDC.

exports, there seems to be bad news in store for the domestic IT and BPO market.

According to market intelligence firm, IDC India, the local IT and BPO market is expected to grow at 13.4 per cent in 2009, the slowest since 2003. This will come largely on the back of slower IT consumption in some key verticals including retail and financial services.

In fact, the Indian domestic IT and BPO market is slated to see 16.4 per cent CAGR in the coming five years leading to 2013, compared with 24.3 per cent growth recorded between 2003 and 2008.

The forecast also suggests that key structural changes taking place on the back of a global economic slowdown would propel a new ‘market order’ in the domestic IT and BPO industry.

Phase 2

IDC said that the next phase of growth would be different from the earlier phase, in which the domestic market had witnessed unprecedented growth, nearly tripling the market size from Rs 34,000 crore in 2003 to Rs 1,01,031 crore in 2008, a CAGR of over 24 per cent.

The new growth Phase (2.0), expected to evolve from 2009 onwards, will be built on the back of new and innovative services sought by consumers and enterprises alike. The technology behind these services — infrastructure, applications and connectivity — would need to orchestrate and re-orient completely in order to support their mass adoption.

IDC said that the combined domestic IT and ITeS market grew by 17.3 per cent in 2008. The IT market grew at 15.4 per cent in 2008 to Rs 94,185 crore; and the BPO market grew 53.2 per cent in 2008 to report revenues of Rs 6,846 crore.

Revenue growth

However, the overall IT and ITeS revenue is expected to grow at a slower 13.4 per cent in 2009 to Rs 1,14,574 crore. While the IT market is projected to grow at 11.4 per cent, the BPO market is likely to notch 40.8 per cent growth.

“The issues in the short run, more pronounced throughout 2009, will be productivity, cost savings and customer retention. This would eventually pave way for innovative services (for both consumers as well as enterprises) by leveraging the existing infrastructure built so as to align with emerging opportunities,” Mr Kapil Dev Singh, Country Manager, IDC India, said.

product categories

The major product categories expected to grow at a rate higher than the industry average include collaborative applications (23 per cent), storage software (19 per cent), system and network management software (19 per cent).

Within the ambit of IT services, segments reporting higher than average growth include desktop management (22 per cent), information systems outsourcing (32 per cent), network management (23 per cent) and application management (20 per cent).

Within the IT solution categories, the faster growing ones would be virtualisation (28 per cent), unified communications (25 per cent) and business continuity services (20 per cent). All these categories point towards the need for better management of IT infrastructure for their most optimal deployment and use in achieving enterprise business goals, it said.

It’s a bumpy ride for BPO cos

Players in BFSI space have to contend with thinner margins, lower billing rates.

‘Cost reduction’ and ‘productivity improvement’ were two most commonly heard words in BPO circles this year.

The ride just got bumpier for Indian BPO companies in 2008. However, the smarter ones took this opportunity to diversify and tweak their business models.

The Indian BPO sector generates majority revenues from the banking and financial services space, which has been badly impacted courtesy the worldwide liquidity crunch.

In the last 10 months, several major financial services giants in the US, namely Bear Stearns, Lehman Brothers, Washington Mutual, filed for bankruptcy protection due to credit losses related to the US sub-prime mortgage crisis

As a result, there has been a slowdown in BPO spending globally, according to Mr Navin Joshua, Executive Director, vCustomer Corporation. New deals in the banking and financial services space are being put on the back burner for the time being. “There have been a delay in contract renewals and a temporary freeze in awarding new contracts,” said Mr Joshua.

Players in this space now have to contend with thinner margins and lower billing rates. “We have not seen any impact on existing contracts but rates of future contracts may be impacted,” said Mr Susir Kumar, CEO of Intelenet Global Services.

Telemarketing biz

Within the BFSI space itself, the telemarketing business – which involves telephonic marketing of credit cards and other financial products – has been impacted the most.

Recently, the city-based ITeS firm Silverline Technologies had said that it would put its Canada-based BPO outfit (which specialises in outbound calls) on the block as the business of outsourcing to this unit has been impacted.

However, companies that invested in innovative billing models such as ‘outcome-based pricing’ or ‘pay per transaction’ witnessed a spike in revenues.

High customer anxiety (due to the sub-prime crisis) leads to an increase in the customers’ telephonic interaction with the bank, thereby increasing call volumes. And this spike in volumes benefits companies that bill on ‘per transaction’ basis.

In spite of the turmoil in the BFSI space, Indian companies seemed to be keen to increase their overall exposure to this sector through inorganic growth play.

Acquisitions

In October 2008, TCS acquired 96.3 per cent stake in Citigroup’sBPO outfit (Citigroup Global Services Ltd) for $505 million in cash. This deal also ensured the company of assured business of $2.5 billion from Citigroup over a nine-and-a-half-year period. In order to ensure that its $2.5-billion deal is protected given the international financial situation, TCS protected itself contractually.

“If somebody buys Citigroup, it will be binding on them to pursue our contracts,” Mr N Chandrasekaran, Chief Operating Officer & Executive Director, TCS, had told Business Line.

In July 2008, WNS (Holdings) Ltd acquired the UK insurance major Aviva’s BPO business Aviva Global Services (AGS) for around $228 million (Rs 980 crore).

‘Cost reduction’ and ‘productivity improvement’ were two most commonly heard words in BPO circles this year.

As Mr Pawan Sharma, President, KPIT Cummins Global Business Solutions, says: “If my turnaround time was 24 hours before, focus now is whether I can make my turnaround time 22 hours. If one employee used to process 10 invoices in day, then can he process 12 invoices?”

Thankfully, the financial crisis has not yet impacted BPO players in the Indian domestic market. Genpact announced its foray into this space early this year. “The rural areas present a dynamic scope for growth and the intelligent BPO companies will be amongst the pioneers in settling bases in the remotest corners of the country,” said Mr Kumar of Intelenet.

Attrition rate

Moreover, all companies in this space have reported a fall in attrition levels because of the uncertain economic environment. For WNS, attrition rate in 2008 reduced by 10 per cent, said Mr Neeraj Bhargava, Group Chief Executive Officer, WNS Global Services. Intelenet`s attrition rate has dropped to 37 per cent in the second quarter of the current fiscal from 45 per cent in the third quarter of fiscal 2008.

Healthcare, telecom and legal outsourcing are some of the sectors that have not been impacted by the current slowdown. In fact, all legal process outsourcing firms have witnessed at least 50 per cent growth in the second half of the calendar year, due to increased outsourcing of legal work related to the M&A activity in the US. Recessions and depressions reduce the tolerance for high legal fees which means more business for other markets, according to Mr Bhaskar Bagchi – Country Head of LPO firm CPA India.

Global law firms with more than 25 per cent of their lawyers based oversees have suffered less because their international presence is more diversified, he said.

Mr Bhargava said that WNS’s LPO business has grown by over 50 per cent year on year, in terms of headcount. In the last 5 months (July till date), CPA has added 156 employees and expects to employ about 2,000 people by 2010.

Slowdown forces Nasscom to lower export growth target this fiscal

2009-02-06T03:16:00.001-08:00

Slowdown forces Nasscom to lower export growth target this fiscal

Mr Som Mittal

India’s IT and BPO export revenue would grow only 16-17 per cent during FY09 to $47 billion as against close to $50 billion estimated at the beginning of the fiscal. The cut in annual forecast by Nasscom comes on the back of global economic turmoil and tighter IT spends. The export revenue stood at $40.4 billion during FY08.

Nasscom had stated earlier that total software and service revenue (domestic and exports combined) will grow by 21-24 per cent in FY09. Now with the financial meltdown taking its toll, the software and services revenue outlook has been revised downwards – it is expected to touch $60 billion, as opposed to $62-64 billion anticipated earlier.

More importantly, the much-touted target that the industry had set for itself – of touching $60 billion exports by FY10 – too has been pushed back. IT and BPO exports are slated to hit $60-62 billion mark in FY11.

Commenting on the revised numbers, Mr Som Mittal, President of Nasscom, said, “India offers the best solution to manage resources and IT budgets and improve competitiveness, even in today’s difficult environment.

“However, factoring the impact of the global economic crisis in the second half of 2008-09, the industry is expected to grow by 16-17 per cent by March 2009. Also, the cross-currency fluctuation – dollar’s appreciation against the pound and euro – has shaved-off nearly 2.2 per cent growth from the export growth figures.”

Hirings

Nasscom denied that there were any large-scale lay-offs in the IT and BPO sector, and emphasised that the industry remained a “net hirer”. The direct employment in Indian IT and BPO industry is estimated to touch 2.23 million employees (2 million in FY08); indirect job creation is estimated at nearly 8 million.

“The net addition will continue to take place and campus offers have already been made. In fact, the industry would do one lakh in net hiring in the next one year,” Nasscom Chairman, Mr Ganesh Natarajan, said, adding even in case of poor performance by certain employees, companies were offering outplacement services or retaining employees on training albeit with lower wages.

Nasscom said after recording a 24 per cent growth in the first half of 2008-09, the second half performance was impacted by the global economic downturn. Additional headwinds included cross-currency fluctuations, terror attacks and issues on corporate governance (in the aftermath of Satyam incident) and US elections.

It said that the domestic IT and BPO in FY2009 are expected to grow at nearly 20 per centand over 40 per cent respectively.

The BPO export is estimated to grow 17.5 per cent to $12.8 billion in FY09; IT services export 16.5 per cent to $26.9 billion; and Software products and engineering services at 14.4 per cent to $7.3 billion.

“BPO will be the driving engine as the end to end requirements which are non-discretionary in nature ill need to be serviced even in a downturn,” Mr Pramod Bhasin, Vice-Chairman of Nasscom and President and CEO of Genpact said.

Economic uncertainty: Pointing at the uncertain demand environment, Nasscom said that the worldwide IT spending growth is expected to come down in 2009, and that the wait and watch stance of buyers was delaying decision-making. “The industry is taking measures such as enhancing productivity levels and higher utilisation of resources for greater cost efficiency,” Nasscom added.

economic crisis in 2009. "how deep it is"

2009-02-06T03:03:00.000-08:00

LETS START WITH ASIA

Asia Economic Crisis: Spotlight on Japan, China, Korea, Vietnam. Decoupling, an idea that never made any sense, is talking another beating. Bad news is coming from multiple places in Asia, with Japan and China leading the way. Let's take a look starting with Japan's Recession Deepens as Factory Output Plummets .

Japan's recession deepened in November as companies cut production at the fastest pace in 55 years and rising unemployment prompted households to pare spending.

Factory output plunged 8.1 percent from October, the Trade Ministry said today in Tokyo, more than the 6.8 percent estimated by economists. The jobless rate climbed to 3.9 percent from 3.7 percent. Household spending slid 0.5 percent, a ninth drop.

Simultaneous recessions in the U.S. and Europe have weakened demand for Japan's exports, prompting companies from Toyota Motor Corp. to Sony Corp. to idle plants and fire workers. The Bank of Japan has little room to spur the economy after cutting interest rates close to zero last week, and Prime Minister Taro Aso has yet to implement two stimulus packages.

“Data clearly indicate the problem for Japan is deflation, not inflation,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

Bank of Japan Considers Extraordinary Steps

With export demand plunging and the Yen soaring, the BOJ May Consider ‘Extraordinary Steps,' Kamezaki Says

“The Bank of Japan is committed to doing its utmost to contribute to stabilizing financial markets,” Kamezaki, 65, [policy board member] said today at a business meeting in Takamatsu, western Japan. “Extraordinary times demand extraordinary steps.”

Central bank officials are examining the feasibility of buying a wider range of securities, including corporate bonds and stocks, and the policy board will make a decision based on their findings, Kamezaki said at today's press conference.

Japan PM announces record budget

The Prime minister of Japan, Taro Aso announces record budget .

Taro Aso, Japan's prime minister, tried to put a rocket under the stricken economy on Wednesday, announcing the country's biggest ever annual budget, as fear mounts that Japan faces a long recession.

The budget for the fiscal year starting next April, along with two other extra budgets for the current year, will finance Aso's Y12,000bn in fiscal stimulus programmes, which amounts to more than 2 per cent of Japan's gross domestic product.

Ministers said the stimulus was as large as or even larger than steps adopted in other major economies. But it also meant Japan's primary budget deficit will nearly triple, making Tokyo's target of a surplus in two years almost impossible.

”Japan cannot avoid the tsunami of the world recession, but it can try to find a way out,” Mr Aso told a news conference, in which he illustrated the government's stimulus plans with a diagram of a three-stage rocket.

”The world economy is in a once-in-a-hundred-years recession. We need extraordinary measures to deal with an extraordinary situation,” he said.

Japan's Extraordinary Measures Have Blown Up Already.

Extraordinary measures are a way of life for Japan. From currency intervention to building bridges to nowhere, Japan has taken extraordinary measures for decades. In that timeframe, Japan went from being the largest creditor nation to a nation deep in debt.

As of November 17th 2008, BusinessMirror notes " Japan's public debt that exceeds 180 percent of the GDP, limiting the government's ability to stimulate growth ".

It takes pretty extraordinary measures to achieve public debt of 180% of GDP, and although that feat did not produce anything worthwhile, Aso wants to try it again. Keynesian clowns should take note, but they don't.

China Needs More Policies to Spur Consumption

Peoples Bank of China's Zhou Says China Needs Policies to Spur Consumption .

China needs to devise more policies to boost consumption among the nation's 1.3 billion people to counter the impact of falling exports on economic growth, central bank Governor Zhou Xiaochuan said.

“Although the government has pledged to boost consumption to sustain growth, we still face difficulties in identifying which areas and which measures we should take to spur spending,” Zhou told a conference in Beijing today. Economic policies have failed to rebalance growth away from trade and investment, with the share of consumption in gross domestic product falling to less than 50 percent from 60 percent a decade ago, he said.

Premier Wen Jiabao may unveil a second stimulus package as early as next month aimed at spurring consumer spending as the economy is set for its slowest growth in two decades. The government has already increased subsidies for farmers to buy household electronics, cut taxes on property and is preparing policies to revive slumping car sales in the world's second- biggest auto market.

China's household consumption rate “is among the lowest in Asia as households still hold large precautionary saving balances,” said Ben Simpfendorfer, a Hong Kong-based economist with Royal Bank of Scotland. He estimates household consumption growth slowed to 5 percent in 2008 after rising at double that pace the previous year.

The U.S. economy faces the opposite problem, Zhou said today, with consumption too high and the savings rate too low. The policies now being pursued by the Bush administration to revive growth by boosting consumption aren't the solution to the country's long-term structural economic problem, he said.

Consumer spending represents more than two-thirds of the U.S. economy while household consumption's share of China's gross domestic product slumped to slightly more than 35 percent last year from 45 percent a decade ago, according to Chinese government data.

“This shows there is huge potential to boost consumer credit and encourage people to buy homes and cars,” Yi said.

No Savings Glut

Statements from Yi, Zhou, and Ben Simpfendorfer promote the silly idea there is some sort of savings glut in China. There isn't. Please see Global Savings Glut Exposed and Bernanke Blames Saving Glut For Housing Bubble for counter arguments.

“ This shows there is huge potential to boost consumer credit and encourage people to buy homes and cars,” Yi said . Does anyone learn? Credit bubbles caused the great depression, and the great recession that we are in. One might think that someone in authority would learn something from this. But they never do. China wants to follow the US to ruin.

Besides from a simple Austrian economic standpoint it it not possible to have too much savings. It is possible however to have too much debt and that is where the US is right now.

China Currency Reserves Drop For First Time In 5 Years

Market New is reporting China Currency Reserves Post First Fall Since 2003

China's foreign-exchange reserves dropped for the first time in five years as a result of the global financial crisis, Market News International reported, citing Cai Qiusheng, head of the investment management bureau under the State Administration of Foreign Exchange.

The current figure must be lower than the peak of about $1.9 trillion, Cai told a trade forum in Beijing over the weekend, the English-language wire service said. He didn't specify which period he was referring to or give a figure.

China's foreign exchange reserves $1.9 trillion at the end of September, according to Bloomberg date.

Please see Strange Case of Falling International Reserves Explored for more on reserves.

Korean Economy Faces Contraction

South Korea president Lee Lee Myung Bak Warns Korean Economy May Shrink in First Half

South Korea's economy may shrink in the first and second quarters of next year, affected by a global economic slowdown, President Lee Myung Bak said today.

“The world economy is difficult and South Korea is heavily dependent on the external side,” Lee said at a meeting at the presidential house in Seoul today, according to his office Web site. “Even though we may post positive annual growth, we're in danger of negative growth in the first and second quarters.”

“Negative growth is unavoidable,” said Chun Chong Woo, senior economist at SC First Bank Korea Ltd. “We're bound to be affected by the global slump, and the government will have to think of more aggressive policies to help spur the economy.”

The Bank of Korea has cut its key rate by 2.25 percentage points since October, the most aggressive easing since it first set a benchmark in 1999. The bank most recently cut the benchmark rate by 1 percentage point to a record low 3 percent on Dec. 11.

South Korea is also pumping funds into banks, cutting taxes and boosting public spending to limit the fallout from the global credit crisis, which sent the Korean won down more than 28 percent and the stock index tumbling 41 percent this year.

“We see the first and second quarters to be the bottom,” Lee said. “There's hardly any country posting economic growth from the fourth quarter to the first quarter. “There is an end to this agony,” he said. “It won't last 10 or 20 years.”

An End To Agony, When?

Where do people get the idea this is all going to be over in a couple quarters? Somehow Bak makes the magic leap of faith the recession will be over soon just because it will not last 10 years. I suggest it lasts another year or longer. Even when the recover comes it will be anemic as the US consumer is tapped out and will be devastated by the stock market and housing carnage. Frugality will be the new reality for quite some time.

Vietnam's Weak Dong Policy

Struggling to boost exports, Vietnam Devalues The Dong .

Vietnam's central bank devalued the dong by 3 percent to help exporters after the Southeast Asian economy expanded at the slowest pace in nine years and the trade deficit widened.

“The devaluation is necessary as the government is trying to increase exports,” said Do Ngoc Quynh, chairman of the Vietnam Bond Forum in Hanoi and head of currency and debt trading at Bank for Investment & Development of Vietnam, the nation's second-biggest lender by assets. “Other currencies in the region have considerably declined against the dollar, but the dong hasn't dropped that much.”

“The Vietnamese dong is facing downward pressure due to the current-account deficit,” said Yuichi Izumi, an economist at Nomura Securities Co. in Tokyo. “The State Bank wants to guide the dong lower to support the export sector.”

Slower gains in consumer prices may have also provided more room for the central bank to weaken the dong. Inflation cooled for a fourth month in December to the slowest pace in nine months, with consumer prices rising 19.9 percent from a year earlier, the government said today. The rate touched 28.3 percent in August, the highest since at least 1992.

Fiscal insanity is everywhere you look. Inflation is running at 19% yet Vietnam wants a weaker dong. And with serious downward pressure, it's wrong to be long the dong.

The recession that started in January 2008 looks to be four phased. The first phase, The housing collapse, actually started in August 2007. The financial meltdown hit in September 2008, and likely will continue through to March 2009 or so. The business firestorm is really just getting underway now, and will be the dominant theme for the next 8-12 months whlie the final phase, currency collapse, will (if it occurs at all) likely not happen for another 12-18 months.

The business collapse itself is taking place in a number of different verticals, which differentiates it from a traditional oversupply recession. In an oversupply recession, the market produces too much of a good or service for the available demand, which usually means that either companies have to cut back on producing goods (and consequently reduce their own profitability) or they fail and fall out of the market. In time, demand rises to meet supply, and the industry in question recovers.

The housing collapse was a classic oversupply recession - too many houses on the market at too high a price, and eventually demand couldn't meet supply. Had the housing market not been fueled by low interest rates when they weren't needed, had the financial industry not done a dice-o-matic on the resulting mortgages, and so on, chances are pretty good that we would be about 2/3 of the way through this by now, IT, except for the specific housing IT vertical, would be relatively unscathed.

The problem now is that risk became baked into the very core of the global financial system like a series of fault lines, and the collapse of the mortgage business was like a deeply buried mortar going off in that mess. This in turn exposed the very ugly truth about finance - that prices are psychological, and when no one knows the value of things, the ability to plan for the future ends.

This fear has manifested in the credit crunch, when banks are terrified of lending money out because they know that the assets that the carry are far below what they should carry in order to stay solvent - and that if they loan out money, they won't have it when the next wave of credit defaults occur (either credit cards or commercial real estate, take your pick - they'll hit about the same time). There's currently an effort to reliquidate the banks by most of the world's governments, though with at best limited success (more on that in future articles).

The business collapse is occurring because of two factors. First companies that had depended upon having readily available lines of credit are finding these lines being cut or dramatically reduced, which makes them much more vulnerable to the variability of incoming contracts ... at a time when everyone else is facing the same problem.

The second is that this has put significant downward pressure on household incomes, as these same lines of credit (in the form of second mortgage refinancing, credit cards and so forth) are now becoming scarce at the consumer level (along with financial investments having plummetted in the last few months). This has resulted in a consumer strike, as people save rather than spend.

For those businesses with a direct consumer face (or those that IT companies who supply services to these businesses) this translates into reduced revenues and shrinking demand, which in turn has a direct impact upon both those people that produce retail hardware and has an indirect effect upon IT companies that produce software to support these retailers. It also means that companies that had projects in the work for FY 2009 are scaling these back or putting them on indefinite hold until they get a clearer read of the economic situation.

One of the problems with recessions is that while there is an underlying economic aspect to most of them (many people just don't have the money in the first place), there is also a psychological aspect. People stop spending (and start saving), in anticipation of two things - first, that when they need the money, they may not have it, and second, that when the economy is receding, the overall price of both goods and services drop. It makes little sense to take on new purchases (whether new projects or new goods) when demand is dropping and the possibility is fairly strong that they can get those things for cheaper in a year or two.

At an individual level, this is a rational response. The problem comes when everyone does it. At that point, demand dries up, companies go out of business, reducing the overall stock of those same goods and services. This happens with all goods. The problem that we face right now is that the goods that are at the root of the problem - houses - tend to have a comparatively long shelf life compared to Tickle-me Elmo dolls or iPods. They can't be inventoried or written off, which means that it will take considerably longer for demand to meet supply, and as capital investments destroying houses and restoring the property to a usable state can be painful at best.

Unfortunately, this means that the psychological aspects of businesses far removed from housing will be very much held hostage to the housing cycle. Eventually (for a number of reasons) housing prices will stabilize at a new level of equilibrium (which, if reversion to the mean is any indication, should be about 15% below where most prices are now), though it is also likely that any markets will overshoot this level to about 25% or so below current levels before eventually returning to this mean. While estimates vary as to how long it will take, most economists feel that it will be at least another nine to eighteen months, putting the "bottom" of the recession at or around late 2009 or early 2010.

Yet even that won't necessarily be the end of the troubles. A deep financial depression is a lot like a deep cyclonic depression (a.k.a, a hurricane). In a hurricane, a great deal of damage is done by the winds, as windows break, cars go flying and in some cases houses go sliding into the depths or get turned into kindling. Yet the real damage comes from factors such as storm surges, where large amounts of water start moving quickly in areas not designed for water. Hurricanes knock out power, making recovery efforts difficult, and paradoxically, raises the possibility that fires will start that can't be reached or put out, causing even more damage.

The same thing is happening now - we are within the eye of the financial hurricane, a kind of false calm where the winds and pressures are at an unstable equilibrium, but this only has the effect of relaxing things that had bent in response to the hurricane force winds. Unfortunately, once we enter the eyewall on the other side the forces are just as strong, but going in the other direction (one of the reason hurricanes are so destructive).

When this plays out, many retail companies (and not a few medium to large sized malls) will be out of business, their buildings sitting vacant and often poorly maintained. There will be a significant exurban flight as people are forced to sell their properties (typically at a loss) because of unmaintainable mortgages and either rent closer in to population cores or move to higher density housing (this trend will be exacerbated by the number of baby boomers who are reaching retirement age and are staring at fixed incomes with oversized mortgages and reduced bank accounts), a trend which will result in many "bedroom communities" becoming squalid slums or just abandoned altogether.

Suppliers to these retailers are already starting to disappear as retailers cut back on their inventories, and in areas such as automotive manufacturing the tremors as these highly centralized, monolithic conglomerates continue to shutter plants are causing the extensive supply chains to fragment as companies that weren't sufficiently diversified lose their primary customers and go out of business.

As this happens, it also makes it harder for these same companies to continue to pay their leases, which are typically financed at a much higher rate than consumer mortgages are as most are fifteen year rather than thirty year paper. This will be the next major pressure that a lot of companies, even those outside of the retail sector, will be facing, and software companies in particular are vulnerable to this particular threat, especially as VC financing continues to decline. Expect by the end of 2009 that office buildings will be even more vacant than they were in 2003 at the bottom of the tech recession.

Venture capital, by the way, is also drying up for much the same reason as credit in general - VCs are investors, and they do not in general want to take a loss on a company, even one with a brilliant idea, if they are concerned that economic pressures will never let it get off the ground. Moreover, those same investors already have extant commitments that they are in many cases having to serve as the primary bank for, and this in turn is reducing their willingness to take on new businesses (and will for some time).

A further process that will accelerate is the disaggregation of conglomerates, as companies shed or spin-off divisions that are not profit centers. It's likely that this will hit the big services companies such as IBM, Fujitsu, Siemens and so forth disproportionately, though it might also affect companies such as Microsoft or Oracle. Many of the newly created spin-offs may not make it once cut off from the sheltering effect of the mothership, but others (most notably those that were already successful companies in their own rights) may very well come out stronger in the process.

The next year will be a poor one for mergers, unless they happen to be pure stock exchange mergers (where the two companies agree to on a common stock conversion rate with little actual money changing hands). Acquisition mergers typically require not only cash on hand, but also require access to bonds or other equities that can be used to leverage this cash on hand. With so much uncertainty right now in terms of equity prices, however, raising such funds becomes difficult, even as it seems like we are awash in a sea of junk bonds.

Toward the end of 2009, expect this trend to reverse. Companies with strong cash positions going into this storm will have a much clearer understanding of the shape of the market by the end of the year, and will be able to buy technically sound but financially distressed software companies at bargain rates. If you're vested in a startup, now is probably a good time to discuss acquisition strategies, though probably not at the premium values that many startups tend to value themselves, with an eye towards that sweet spot in the Q4 2009.

There's currently a running debate among economists about what happens when the recession ends. Some, primarily Keynesians, feel that economic stimulus is a necessity to get us out of the current liquidity trap, and that for the most part the debt that most countries are taking on now will restore us back to a period of economic stability with perhaps at worst only modest inflation (in the 3-4% rate) for a few years thereafter.

Others, especially those of the Austrian school of economics, expect that all of the money being created in order to finance the stimulus will, once the credit crunch eases, result in significant inflation, possibly above 10% per annum, leading to a similar situation (stagflation) that caused the 70s to be so hard (well, that and disco).

My money is on the Austrians, as they were surprisingly accurate in their predictions of the present economic crisis, and as a central part of the problem facing the economy right now is that real interest rates (those charged by banks to their primary customers) continues to remain far higher than the nominal 0.25% percent rate that the current Fed has set the prime lending rate.

In short, even after the storm abates, money may continue to be in short supply for many months (or even years) to come. Expect that government stimulus packages and government works programs may in fact have to substitute for the private economy for some time (more on that in the next section).

TEACHING AI TO BE SOCIABLE

2008-07-31T11:49:00.000-07:00

Teaching ai to be sociable

Humans can already form social bonds with robots, but the real trick may be getting AI equally interested in us

In the recent superhero film Iron Man, there’s a scene where Robert Downey Jr.’s character struggles to reach a device to power his failing heart. He stretches an arm up to the device, but collapses before he can grab it. Lucky for him, his trusty robot is nearby—it manages to anticipate what he wants and hand him the device just in time.

In the real world, we’ve yet to create artificial intelligences that can respond so intuitively to our needs. The quest to do so has pushed two groups of researchers in nearly opposite directions. One group, at Rensselaer Polytechnic Institute (RPI), in Troy, N.Y., has built Eddie, an AI that resides in the virtual world of Second Life and harnesses the power of a supercomputer to analyze a library of rules about human thinking. The other, MIT Media Lab’s Personal Robots Group, has built Leonardo, a furry, animatronic robot that learns as a child does, by interacting with people in the physical world. Within the last two years both Eddie and Leonardo have demonstrated a basic social ability that is the first step toward AI that understands how humans think.

“We’re not there yet, but a major turning point for AI is working out logic that can do justice to your views of another person’s mind,” says Selmer Bringsjord, an AI expert who heads the cognitive science department at RPI. For an artificial intelligence to fully interact and cooperate with people, it has to understand the concept of a mind separate from its own, he explains. Bringsjord and his team created Eddie with this goal in mind, and in March 2008, showed off some of its social skills in Second Life.

Eddie’s avatar met two other avatars, CrispyNoodle and BinDistrib, both controlled by humans. A red briefcase and a green briefcase lay open on a table, with the red briefcase containing a gun. While Eddie watched, CrispyNoodle asked BinDistrib to leave, then moved the gun from the red briefcase to the green one, and closed them both. When BinDistrib returned, CrispyNoodle asked Eddie to predict where BinDistrib would look for the gun. Eddie was able to correctly predict that BinDistrib would look for the gun in the red briefcase, even though it was no longer there.

The correct answer may seem obvious, but most children under 5 years old get it wrong, because they don’t understand how the other person can believe something that is untrue. Cognitive scientists use such false-belief tests to determine if a child can understand another person’s point of view—the beginning of social awareness.

Bringsjord’s team helps Eddie understand other people by translating human mental states into logic-based rules and theorems—“If Bob appears happy at a particular time, and nothing happens to change that, then he will still be happy at a later time”—in what researchers refer to as a top-down approach. This type of AI can only reason about human mental states insofar as Bringsjord’s team has included them in its knowledge database.

At MIT, Cynthia Breazeal’s Personal Robots Group has created social AI through the opposite approach—nurturing robotic intelligence through bottom-up learning, where simple imitation behaviors lead to social interaction. In a 2007 demonstration, Leonardo—which can’t walk but has 32 degrees of freedom in his expressive face alone—watched Matt Berlin, a MIT researcher, struggling to open a box that he mistakenly believed contained potato chips (it was really full of cookies). The robot responded by pulling a lever that opened the box that actually held chips.

Unlike Eddie, Leonardo has no preprogrammed knowledge of human thoughts. The robot started with a set of basic learning abilities and built-in social skills, and gradually, through imitation, learned to map certain human facial expressions or gestures to rudimentary intentions and goals. “The core systems and learning algorithms are very well known and nothing fancy, but then we get more bang for your buck,” said Berlin. Leonardo requires relatively simple programming and little computing power to perform the same tasks compared with Eddie.

But the RPI group has ambitious plans—in the fall they want to attempt the holy grail of AI research: a Turing test. Right now, Bringsjord believes that his team has created AI capable of second- and third-order beliefs about other minds—in other words the AI can consider what a second intelligence believes about a third mind’s beliefs. Bringsjord’s team plans to combine Eddie’s AI program with the biographical background of a grad student and the power of IBM’s Blue Gene supercomputer to carry on a conversation with a human avatar. If a human judge can’t tell the difference between another human and the AI through online conversation, then the system will have passed the test.

Futurologist predicts brain to computer transfer by mid 21st century

British futurologist Ian Pearson, head of the futurology unit at BT, predicts humans will be able to download the contents of their brain into computers by the mid 21st century. Pearson also believes machines will also be capable of feeling emotion in the future, and that the next computing goal is replicating consciousness.

"If you draw the timelines, realistically by 2050 we would expect to be able to download your mind into a machine, so when you die it's not a major career problem," Pearson told the Observer newspaper in an interview.

"If you're rich enough then by 2050 it's feasible. If you're poor you'll probably have to wait until 2075 or 2080 when it's routine.

"We are very serious about it. That's how fast this technology is moving: 45 years is a hell of a long time in IT."

Extrapolating computing power is not a difficult task: transistor density on semiconductors has increased at the rate predicted by Intel co-founder Gordon Moo

When the United States sneezes, the world catches a cold

2008-07-26T11:59:00.000-07:00

India most affected by US economic slowdown

news analysis When the United States sneezes, the world catches a cold--so the adage goes. That could prove particularly true for India's IT and IT-enabled services (IT-ITES) industry, where the United States accounts for the largest share--at over 50 percent--of the Indian software and outsourcing market.

"The U.S. slowdown will impact the smaller IT-ITES firms more," Hari Rajagopalachari, executive director at PricewaterhouseCoopers India, told ZDNet Asia in an e-mail interview. In fact, he added, it may lead to increased consolidation in the small and midsize industry segment.

According to Milan Sheth, Ernst & Young India's partner of business advisory services and leader of technology and telecom verticals, the economic slowdown will most affect midsize IT-ITES companies.

"Most small firms have very strong niches. It's the midsize firms that will be badly hit in the event of a portfolio rationalization by the American clients," Sheth told ZDNetAsia in a phone interview.

The economic slowdown in the United States has already had some impact on the Indian market. The rupee has been strengthening against the dollar for over a year now, causing worries for Indian exporters.

The Indian stock markets also crashed due to the downturn, with the BSE Sensex dipping by nearly 13 per cent in just two trading sessions in January this year. It bounced back after the U.S. Federal Reserve cut interest rates. The BSE Sensex, or Bombay Stock Exchange Sensitive Index, comprises 30 of BSE's largest and most actively traded stocks.

"The U.S. slowdown is a long and protracted one," Rajagopalachari said. He explained that the U.S. slowdown is due to structural readjustments in the country, while the global economic scenario is caused by changing fundamentals in the currency, energy and financial markets.

"The implications for all of India's externally linked sectors are significant," he said. "The strongest and most immediate impact will be on the IT-ITES sector."

The weak will fall
Sheth noted that while the budgets of the U.S.-based companies will undoubtedly be cut, the services of Indian companies that are adding value will be retained.

"Those companies that haven't performed may lose out," he said. "For instance, if an American telecom company today has 18 vendors, out of which 12 are in India, it may want to reduce that number to 14 or 16. So, the less efficient ones may be weeded out first."

And while the economic slowdown implies added pressure to cut costs through further offshoring, which brings good news for Indian service providers, this sweetener would take some time to materialize.

Rajagopalachari said: "In the long term, low-cost offshoring trend will increase. But in the short term, between 12 and 18 months, there will be a demand contraction due to management changes and a paralysis in decision-making in the U.S. corporate sector."

During a recent media briefing, Kemal Dervis, administrator at the United Nations Development Program (UNDP), said the U.S. slowdown might make it difficult for India to sustain its economic growth rate of 8 percent.

Rajagopalachari concurred: "The U.S. economic crisis is structural and hence long-term. It is not a cyclical phenomenon alone. India will be impacted significantly," he said. "About 50 percent of India's economic growth is structural and the rest is affected by cyclical factors."

"Over the next three to five years, it is difficult to see Indian growth rates outside the 5- to 8 percent range. The U.S. contraction in consumption will hit exports across sectors, not just in the IT-ITES sectors," he said.

India's way out of the downturn cycle, Rajagopalachari said, is to step up domestic consumption in the face of rising inflation.

According to Sheth, the challenge Indian companies face is to demonstrate their ability to value-add.

Over the last 12 months, Indian companies have been diversifying their risks by increasing their focus on the non-US markets, such as Europe.

However, Rajagopalachari said, given the preponderance of U.S. revenues in the portfolios of India's IT-ITES sector, the positive impact on revenues and margins as a result of revenue diversification away from the US markets, is "marginal".

Indian IT-ITES companies have also undertaken labor-cost rationalization by getting rid of non-performing workforce and by tightening recruitment policies. There has been a sharper focus on increasing offshore leverage in projects to improve profitability.

Companies have also reduced the average age of the workforce in order to reduce cost and improve overall profitability. Sheth said: "Companies may not be adding the kind of people that they were last year, but they are definitely getting better yield from existing employees."

There is, however, silver lining amid the gloom. For instance, the pressure on American companies to increase offshoring activities in order to combat cost pressure, will increase in due course.

Reports also highlight that despite the U.S. slowdown, the number of acquisitions by Indian IT-ITES companies in the United States during the first two months of 2008, increased by nearly 75 percent.

Sheth added: "One must not forget that India's domestic demand is booming."

In addition, the slowdown has accelerated the desire of India-born professionals based in the United States to return to their home soil. While such IT professionals previously returned in hopes of being part of the India growth story, today, the sub-prime crisis, slowing economy and fear of layoffs in the United States are prompting these workers to look for opportunities in India.

As a result, India's talent pool is getting richer and it could only be a matter of time before the Indian IT-ITES industry overcomes the U.S. slowdown hiccup.

arun sunny.

What will happen to India when American economy collapses due to fiscal mismanagement

2008-07-26T11:54:00.001-07:00

India may suffer unnecessarily if and when American economy collapses. The downward spiral may have started with nasty stagflation. The stagnation in America comes from lack of pricing power, excessive borrowing, sky rocketing fiscal deficit, war expenses and Federal Reserve Bank’s mismanagement of fiscal affairs.

How will that impact India? When you finish reading this article, you will feel bad. India had an underdeveloped but self-sustaining economy with very little borrowing from the ordinary citizens. Something went wrong in early 1990s. In the name of liberalization, India imported all the bad stuff from American economy. The freely available credit, ballooning budget deficit, trade deficit accompanied imported outsourced jobs. Americans are eager to use Indian brains but wants to pay only five cents for dollar worth of job. India’s local Governments opened the doors thinking several Bill Gates will make them rich over night. In the process India bought billions of dollars from these Americans and hardware is useless anyway by this time. Buildings and cities have been built with overcapacity looming everywhere. Young kids have been told to learn only computers because Americans are going to sell oil from Iraq, make a lot of money and bring truckload of jobs into India. If American economy is ok, there is no problem.

Problem is that the American economy is tailing spinning into a major depression and that is going to drag India down to the mud. The overcapacity in India with young generation ready to work for TCSs, IBMs and Microsofts will never be used due to depression in US economy. US fiscal mismanagement actually started in mid eighties. Ronald Reagan did win the cold war but at the cost of sacrificing the best thing US had – Social Security. Things changed in Clinton days due to Internet boom and Year 2000 Computer scare which never really materialized. In the mean time, Bush Jr. came to power, 9/11 terrorism happened and US economy started moving downwards. At this stage, Bush and Federal Reserves Green Span converted America into a welfare country. When Air lines could not run their business, Bush gave them billions to survive and move on. Interest rates were lowered to almost zero. Cars were offered to public with no interest installment loans. People could buy homes with interest only loans. Income tax was reduced so that rich can spend more and pay less tax. Every American company today depends primarily on Government contracts to pay their bills. America went into Iraq so that American companies can make a lot of money from Iraqi oil money contracts. But nothing finally is working. Americans borrowed in billions from their home equities and now does not know how to pay them off. People are making less money, losing good jobs and taking low quality jobs with one third pay and no benefits.
People are still ecstatic about America and the economy. These are signs of a major topping of an economy for a long run scenario. This depression may go on for as long as thirty years with dow reaching as low as 1000 or even less.
India has positioned itself to shoot in the foot as American economy collapses. Two thins are going to happen. First, American companies will not have money to pay Indians. Secondly, America will change and outsourcing and free trade as we know it today will come to a halt. Inter country bartering system will eventually start that will eliminate all trade deficits and trade surpluses. America will enforce patent laws and India will have to follow the same. This will cause a lot of problem for those Indians dancing today thinking heaven is waiting for them in the planet of outsourcing.

Outsourcing is good for US economy: Microsoft CEO

November 09, 2006

Favouring large-scale outsourcing of software services and R&D works to countries such as India, Steve Ballmer, chief executive officer of Microsoft said the US stands to benefit out of this.

"We will have to increasingly bank on India for scaling up our operations to rise on the next wave of innovation. So, outsourcing is here to stay. I have always stated that the so-called outsourcing is good for the US economy," he said while delivering the Fifth Madhav Rao Scindia Memorial lecture on Wednesday.

"With the US government making it more difficult for people to come into the US from outside, it puts pressure on companies like ours to relatively grow our talent pool in India even faster. About 18 per cent of our engineers in Seattle are Indians," he said. Ballmer, however, felt the attitude (against outsourcing) has improved over the last year.

Based on a Global Delivery Centre model, the $23-billion Indian software services industry thrives on the offshore business. But this has led to a backlash in many countries, including the US, as a result of local job loss. Ballmer also stressed on Indian engineering talent to redefine the software industry.

"Thirty per cent of all computer science graduates in the world are passing out of Indian universities. That puts a special responsibility on this country. The world is counting on the talent of this country to lead the next wave of innovation," he said, adding harnessing that talent, required companies to work with a big bold goal.

The Redmond-based software giant also wants to ramp up its operations in India but said newly graduated IT engineers from Indian universities need more practical training.

Ballmer said to ensure IT engineers are employable upon graduation 'requires a little bit of training' they don't receive while in school. Between 25 per cent and 30 per cent of engineers graduate from colleges and universities in India.

Microsoft, Ballmer said, is working to boost engineer graduates' real-life experience through its training program at its New Delhi facility. The company said it hopes hands-on experience will help increase the number of readily employable and trained engineers worldwide.

Microsoft`s research and development facility in India is the company's second largest R&D plant after its Redmond R&D centre. In 2006, Microsoft announced plans to invest $1.7 billion and increase the headcount to more than 7,000 in its Indian operations over the next several years.

President A P J Abdul Kalam (R) talks to N R Narayana Murthy, chairman Infosys Technologies [Get Quote] as chief executive officer of Microsoft, Steve Ballmer, looks on during a Microsoft conference in New Delhi. Microsoft hosted a conference titled 'Bridging the two Indias' which was inaugurated by Kalam.

India’s Information Technology Industry

2008-07-26T10:47:00.000-07:00

The Indian software industry has grown from a mere US $ 150 million in 1991-92 to a staggering US $ 5.7 billion (including over $4 billion worth of software exports) in 1999-2000. No other Indian industry has performed so well against the global competition.

The annual growth rate of India’s software exports has been consistently over 50 percent since 1991. As per the projections made by the National Association of Software and Services Companies (NASSCOM) for 2000-2001 (April 1, 2000 - March 31, 2001), India’s software exports would be around $ 6.3 billion, in addition to $ 2.5 billion in domestic sale.

Indian Software Industry 1995-2000
(US $ million)

Type	1995-96	1996-97	1997-98	1998-99	1999-2000	2000-01*
Domestic software Market	490	670	920	1250	1700	2450
Software Exports	734	1085	1750	2650	4000	6300
Indian Software Industry	1224	1755	2670	3900	5700	8750

(* Source: NASSCOM Report)

Today, India exports software and services to nearly 95 countries around the world. The share of North America (U.S. & Canada) in India’s software exports is about 61 per cent. In 1999-2000, more than a third of Fortune 500 companies outsourced their software requirements to India.

NASSCOM’s survey during 1999-2000 indicates a reversal in the mode of services offered by India. In 1991-92, offshore services accounted 5 per cent and on-site services 95 % of the total exports. However, during 1999-2000 offshore services contributed over 40 percent of the total exports.

The NASSCOM - McKinsey report on India's IT industry

According to a NASSCOM-McKinsey report, annual revenue projections for India’s IT industry in 2008 are US $ 87 billion and market openings are emerging across four broad sectors, IT services, software products, IT enabled services, and e-businesses thus creating a number of opportunities for Indian companies. In addition to the export market, all of these segments have a domestic market component as well.

Other key findings of this report are:

Software & Services will contribute over 7.5 % of the overall GDP growth of India
IT Exports will account for 35% of the total exports from India
Potential for 2.2 million jobs in IT by 2008
IT industry will attract Foreign Direct Investment (FDI) of U.S. $ 4-5 billion
Market capitalization of IT shares will be around U.S. $ 225 billion

Projected Revenues - 2008
($ US billion)

	India Based	India Centric	Sub total (International)	Domestic	Total	1998
IT Services	23	7*	30	8.5	38.5	2.1
Software Products	8	2	10	9.5**	19.5	0.6
IT-enabled Service	15	2	17	2	19	0.4
E-business	4	1	5	5	10	0.2
Total	50	12	62	25	87	3.3

Exports of $50 billion in 2008

* Legacy/client server, ERP and package work and Internet all have different proportions of work outside India where revenues are not export revenues.
** Resale of imported products included.

Promotion of IT - governmental incentives:

With the formation of a new ministry for IT, Government of India (GOI) has taken a major step towards promoting the domestic industry and achieving the full potential of the Indian IT entrepreneurs. Constraints have been comprehensively identified and steps taken to overcome them and also to provide incentives. Thus for example, venture capital has been the main source of finance for software industry around the world. However, majority of the software units in India is in the small and medium enterprise sector and there is a critical shortage of venture capital kind of support. In order to alleviate this situation and to promote Indian IT industry, the Government of India has set up a National Task Force on IT and Software Development to examine the feasibility of strengthening the industry. The Task Force has already submitted its recommendations, which are under active consideration. Norms for the operations of venture capital funds have also been liberalized to boost the industry. The Government of India is also actively providing fiscal incentives and liberalizing norms for FDI and raising capital abroad.

Recently, an IT committee was set up by the Ministry of Information Technology, Government of India, comprising Non Resident Indian (NRI) professionals from the United States to seek expertise and advice and also to step up U.S. investments in India's IT sector. The committee is chaired by Minister of Information Technology, Government of India, and the members include Secretary, Ministry of Information Technology and a large number of important Indian American IT entrepreneurs.

The group will:

Monitor global IT developments and refine Indian IT policy to meet global requirements. Specifically, this will help angel investors, venture creators and incubation;

Promote the growth of human resource development in the IT sector with the aim of creating quality-based education;

Promote R&D in the sector by identifying thrust areas and drawing up a blueprint for action.

India’s most prized resource in in today’s knowledge economy is its readily available technical work force. India has the second largest English-speaking scientific professionals in the world, second only to the U.S. It is estimated that India has over 4 million technical workers, over 1,832 educational institutions and polytechnics, which train more than 67,785 computer software professionals every year. Government of India is stepping up the number and quality of training facilities in the country to capitalize on this extraordinary human resource. It is the knowledge industry that will help take the Indian economy to a sustained higher rate of growth and the policy makers are fully aware of this.