Obsessed with chips, US overlooks its dependence on India

While Western democracies are committed to chip independence, they’re also growing increasingly reliant on cheap IT services from a single country. While this benefits both sides, it also poses risks as critical IT infrastructure moves offshore. Soon to be the world’s third-largest economy, India is poised to reap dividends from its already strong IT sector and capital exodus from China.

Sure, most tech is produced in China. But hardware does nothing by itself (at least yet). So where does most of the software and support come from?

How much outsourcing is done in India?

While it is hard to grasp the true extent, a lot of Indian companies, such as Tata Consultancy Services, Infosys, and HCL Technologies, are powering everyday services worldwide, including banking and ecommerce. Those three Indian IT services companies alone are comparable to a small nation, with headcounts of more than 600,000, almost 350,000, and 225,000, respectively.

IT services companies from other countries are also increasingly relying on employees from India.

The largest professional services company in the world, Accenture, is located in Ireland and has over 700,000 employees worldwide. Of those, more than 300,000 are located in India.

According to indiantimes.com, Cognizant has over 200,000 employees in India, Capgemini over 150,000, IBM over 100,000, and DXC Technology 40,000. And American tech behemoths are no exception, with Amazon and Apple employing 100,000 people there each.

Why is India good for outsourcing?

A skilled workforce, English proficiency, and lower compensation have already created a success story. And there may be much more to come if the country takes advantage of opportunities provided by the current geopolitical landscape and addresses some existing issues.

A recent meeting between Prime Minister Modi and President Biden resulted in a significant technology transfer agreement intended to promote technology cooperation in several key areas. The specifics of that transfer are yet to be fully determined.

However, there are also worries that US companies have become overly dependent on services from India.

Massive IT sector

As the fifth-largest global economy, India currently employs a massive IT sector. The share of the IT-BPM (Information Technology and Business Process Management) sector in the country’s GDP was 7.4% in the financial year of 2022.

“India is eager to embrace the incoming Western and other international companies, as the recent meeting between Prime Minister Narendra Modi and President Joe Biden has shown,” says Irina Tsukerman, a geopolitical analyst, national security lawyer, and President of Scarab Rising advisory.

Out of $245 billion in expected revenues this year, an increase of 8.4% YoY, $194 billion will come from exports, mainly IT services. That makes India the largest exporter of IT.

“80% of European and US outsourcing corporations selected India as the number one location for outsourced IT services. This is due to lower costs, big markets that help scale up company and sector growth, and the availability of desired expertise,” Tsukerman explained.

The number of so-called Global Capability Centers used as back offices, support, and contact centers reached more than 1570, with 1.4 million talents working there. In total, the IT-BPM sector employs 5.4 million people in India.

“India provides various IT services to American businesses, including software development, IT support, and BPO services. While this dependency is beneficial in terms of cost and scalability, it also comes with potential risks like data security and privacy issues, geopolitical instability, and cultural and communication differences that can sometimes impede smooth operations,” said Ravi Gupta, SEO expert from India.

“Well worth it”

It is not hard to figure out why India became the number one destination for outsourcing. A skilled developer from the US could cost a company between $50 and $80 per hour. Compare that to the estimated Indian average, which can be as low as $15 per hour, according to one of India's global business process outsourcing companies. With Deloitte’s Global Outsourcing survey reporting that 57% of executives believe the primary driver for traditional outsourcing is cost reduction, it’s a no-brainer.

And those costs are not fixed. Variable pricing models are offered, resulting in better control over operational costs. There is no longer a need to comply with government requirements such as medical and social benefits or incur administrative and training charges.

India claims to be the world’s second-largest English-speaking country after the US.

“Any concern about intellectual property disputes could be addressed through contracts, and India, for its part, does not wish to get a bad reputation as a place where business failed over opaqueness and dispute, and still is advantageous in that regard over China notorious for precisely this form of violation,” Tsukerman said.

“Overall, and particularly for experienced companies with access to cross-cultural expertise, the outsourcing to India is well worth it.”

Firms already feeling over-reliant

Geopolitical considerations are also coming into play as India is considered a safer haven for investment than China. Many experts see India becoming a regional and global IT leader, competing and attracting companies away from China.

“There is tremendous geopolitical risk in China, and there likely will be for the foreseeable future, so you can expect India to remain a haven for companies interested in an Asian footprint with more stability,” Richard Gardner, CEO of Modulus, commented.

China and Russia have used adversarial steps against Western allies, benefited from intellectual property thefts in the West, and used the ill-begotten gains for dubious innovation and conditional trade practices.

“The geopolitical tension-induced exodus from China could further cement India's position as a global IT services titan. India's sturdy democratic structure, combined with a predominantly English-speaking workforce, make it a more favorable IT outsourcing destination for Western businesses,” Hyzaifa Haroon, a tech analyst and a managing editor at Appuals.com, believes.

While India remains the top outsourcing destination, it is not a lone player in the market. Firms already feel over-reliant on India, and conversations with executives show that change is coming, Deloitte’s newest survey revealed in 2022.

“Firms are increasingly looking towards Europe (particularly Eastern Europe), Latin America, Asia-Pacific nations apart from India, and even North America as viable options for their outsourcing efforts. A common theme in our conversations was the rise of Latin America as the up-and-coming region today. The region offers business and technology talent, enhanced infrastructure, and the benefit of substantial time zone and cultural overlap with North America, making it ideal for same-time-zone operations,” Deloitte writes.

Should the US be worried about associated security risks?

Some critical IT infrastructure is already in India. “Yes, companies do move critical functions and expertise to India,” said Akash Hekare, Senior Software Engineer at Thinkitive.

“Dependence on a single country for critical services could expose companies to geopolitical risks, regulatory changes, and potential service disruptions,” argues Kacper Rafalski, Demand Generation Team Leader at Netguru.com.

Tsukerman agrees. This process will only ramp up as India's knowledge base grows and the US-qualified IT base shrinks.

“In some respects, this dependency is inevitable due to the shortage of competitive economies with comparable numbers of qualified English speakers and broad specialization in IT. Moreover, on the US domestic side, there are growing IT demands, including AI-related matters and qualified personnel,” she explains.

Only 52% of executives believe they’re prepared to meet cybersecurity challenges. But they’re willing to rely on third parties to deliver, a Deloitte survey showed. 81% of executives reported they support their cybersecurity function with a third-party delivery model.

There are no concerns as long as IT services are working correctly and they are cheaper. Economic nationalism cannot compete with the reality that the US could not effectively replace outsourced functions domestically. Not many would be willing to pay for the higher cost.

“Unless the US is able to optimize the cost of IT domestically and train a substantial number of local operators to join the stream immediately, which is very unlikely for many economic, political, and cultural reasons, the US IT sector will collapse if it is not outsourced,” Tsukerman summarized.

India is not the most accessible market to enter

India still has much to do to combat excessive regulation and red tape that has caused extreme bureaucratic obstacles to opening new companies, entering foreign entities, and business operations in general. It still needs to create an effective business climate, Tsukerman believes.

“Some have complained that what takes a few weeks or months to set up in China may take many years in India. To become truly competitive and a friendly place for international IT companies of any background, this issue needs to resolve,” she said.

Among other business worries in India are a lack of primary resources, a slow integration rate, and unfriendly regulatory and tariff policies. General economic sentiments also reduce the demand for IT services.

AI poses a threat to outsourcing revenues

AI development changes the landscape for outsourcing as technology threatens to reduce the need for human work.

“In the short term, training new AI systems will likely continue to produce a series of tasks that at the moment can only be performed by humans, such as data labeling and fine-tuning. These tasks are already and will continue to be increasingly outsourced to countries with cheaper labor. However, in the longer term, as better unsupervised training techniques and models get developed, even those tasks may disappear, having a negative effect on countries that now rely on providing these services,” Jacopo Pantaleoni, former Principal Engineer at NVIDIA and author of “The Quickest Revolution: An Insider's Guide to Sweeping Technological Change And Its Largest Threats” argues.

He expects “digital humans” and generative AI to begin taking over many of the jobs, including customer care and support, that were traditionally outsourced to developing countries.

And so far, the battle for market dominance in the AI industry seems to be led almost entirely by the US, both financially and technologically.