Concept Arbitrage: Manufacturing in China

Software Product Development Outsourcing & Offshoring in India is an equivalent trend, whereby ISVs use India-based companies like Persistent, Symphony, Aztech, Aspire and Impetus to build their products, soup to nuts. Everything except design is off-shored, and a select group of smaller Indian IT firms have capitalized on this niche. Open Silicon, funded by Sequoia and Norwest, also capitalizes on the same concept, but in chip design outsourcing.

I have been speaking with Anand Deshpande, Persistent’s CEO, for about 3 years now, and last December, Anand finally took venture funding from Promod Haque at Norwest. Symphony is close to $100M in revenues, and all these firms have very significant presence in the venture-funded startup business, as well as in the mid-market of software ISVs. The larger ISVs tend to have their own India operations, and do not outsource, although they too offshore abundantly.

The mainstream IT services outsourcing is an area dominated by the large players like Infosys, Wipro, Satyam, and other large players. The smaller companies have to find niches, and while Anand and others have found Outsourced Product Development (OPD) as their niche, it is not a very large niche. It will perhaps support 10 sizable players, before it exhausts. This is especially true because the mid-sized software company market is consolidating and being subsumed by the larger players. The VC-funded startup market, on the other hand, is a highly price-sensitive and volatile client base, as we found out in the dotcom boom.

My thesis, while I like the way Persistent, Symphony and a few others have positioned themselves, on the next generation of opportunities for smaller Indian IT services companies, is that they need to go after SMEs in US and Europe. The IT expertise availability in SMEs is very low, but they have significant buying power, and by all means, there remains still an opportunity to build a few more companies catering to that segment. It is, however, difficult to penetrate, and Telesales is essential because deal sizes are smaller. For Indian companies, though, this may be just fine, if they can tap into the call-center expertise for their own business development.

Finally, I am not very bullish on the chip design outsourcing business at the moment for India. There is a shortage of skilled resources, and the discipline is not one in which people can be trained en masse that easily. Whatever capacity exists in India today, I believe, is being absorbed by the MNCs, who are building capacity aggressively. I don’t think a startup would stand much of a chance.

This segment is a part in the series : Concept Arbitrage