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Visa woes
Increased fees, procedural hurdles and impending regulations
Scare around visa issues is not new for the Indian IT industry and the industry has
weathered multiple such bumps in the past decade. While we do not consider
protectionism a game changer for services outsourcing yet, incidents of the past
few months have us especially worried. Events are silently piling up, and perhaps a
keener look is warranted. Checks indicate that rejection rates for H-1/L-1 visas
have doubled over the last few months and increased hurdles in visa processing are
causing problems. While near-term impact for Indian Techs could be lost revenues
and higher sub-contracting costs, medium/long-term impact could be in the form of
higher onsite delivery costs and lower competitiveness in select cases. With the
external demand environment happily favourable for the industry and supply-side
worries in India also abating for now, the excitement is shifting towards visa
regulations in US, which could fundamentally alter the Indian IT Services business
model. TCS, Infosys and Wipro remain our favoured picks amid this storm.
Procedural hurdles in visa processing impacting Indian IT
We have always refrained from quantifying the risks of protectionism as historically,
Indian IT has always managed to find its way around protectionist measures in US
and most bills with restrictive visa provisions have failed to go through. The last bill
solely focused on H-1B and L-1 visas to break through was the L-1 Visa and H-1B
Visa Reform Act of 2004, which President George W. Bush signed into law. However
select events are piling up and need to be at least recognised, in our view. Visa
policy/procedure in US is increasingly veering towards greater oversight and
imposition and impacting Indian techs somewhat. Checks indicate that H-1B/L-1
visa rejection rates have doubled from 4% to 8% for larger companies with even
higher rejection rates for smaller companies. A CEO of an Indian Tech company
indicated that they lost up to 1%QQ growth in 2HCY10 due to visa issues.
Over the last 6-9 months, visa troubles for Indian Techs have ranged from
increased fees, higher rejection rates, difficulties in getting interview appointments,
deportation from port of entry, excessive RFEs (request for evidence) and
inconsistencies in the visa interview process.
Direction of visa regulation remains concerning
2010 marked the 20th anniversary of the H-1B visa and the US Government
Accountability Office has recently come up with certain recommendations to change
the structure of the H-1B visa program.
Discussion with industry and immigration experts indicates that a higher fee is just
the first step and stricter visa norms are likely in the pipeline. Current discussion
(Refer Figure 2) in US is centred around strengthening the visa process and
upholding the original objective of the H-1B visa program. While some of the
measures being discussed are beneficial to Indian techs, many of them will likely
hurt the competitiveness of offshore IT companies. While passing some of the
stricter norms by a standalone bill through the Senate and House of
Representatives will be tough, we fear that some of the measures could be pushed
through as part of a Comprehensive Immigration Reform Bill. This means a
watchful eye on the developing situation is imperative. A passage for some of these
measures could materially alter the Indian IT Services business model itself.
Discussion Point #1: Conversion into permanent residency
Besides addressing short term skill shortage, a key intent of the H-1B visa program
is to facilitate greater legal permanent residency. Current discussion in US is
focussed on one of the key objective of the H-1B not being upheld with special
focus. Barring Cognizant, none of the IT off-shoring companies have been
aggressive in conversion to permanent residency. Stricter norms for employers
where immigration yield is low is likely to impact Indian techs adversely.
Discussion Point #2: Increased regulation for L-1 visas
Another point which has been the subject of much recent debate has been the
arbitrage offered by the L-1 visa on the salary. Critics cite that a lack of salary floor
for the L-1 visa throws up opportunities for wage arbitrage and are arguing for
introduction of a wage floor to remove that arbitrage. Also, a lack of cap for L-1
visa and a blanket application procedure has made it attractive for IT companies.
Discussions are ongoing to increase the period of employment with the employer to
at least 2 years (from 1 year currently) and imposing caps on the number of visas
granted annually.
Discussion Point #3: Greater enforcement and oversight on H-1B
A key point which is dominating discussion is the better enforcement of the
condition that before an H-1B worker is hired; the employer should make an
attempt to hire an American worker. Employment and Training Administration could
develop and maintain a centralized Web site, accessible to the public, where
businesses must post notice of the intent to hire H-1B workers. Currently such
postings are non-centralised and critics argue that eligible American workers do not
get to know of such openings.
Discussion Point #4: Eligibility changes for H-1B
While there is no concrete data to prove correlation between unemployment in US
and granting of H-1B visas, there is much discussion on tightening the qualifications
required for workers eligible under H-1B program. The contention here is that
technology companies seek to replace older, American IT workers with cheaper and
younger workers supplied through the H-1B program in order to lower costs. IT
companies thus have no incentive to retain and retrain older workers with the latest
skills, since the H-1B program provides ready access to young workers. A
tightening of qualifications would thus limit this impact.
Impact points for Indian IT
H-1B/L-1 visas remain core to Indian IT’s onsite-offshore business model and
procedural or regulatory hurdles here are bound to impact Indian Techs. Large lobby
groups exist in favour of outsourcing, including Fortune 100/500 corporations who
have actively outsourced. These lobbies favour benign visa policies. That said,
unfolding events on the visa front over the last few months have been
disconcerting. Procedural hurdles on the visa front have already impacted revenue
growth at the margins in the past two quarters. Moreover, sub-contracting costs
could remain elevated in the near term.
With 90-95% of employees in US already on L-1/H-1B visas, stricter visa regulations
could force Indian Techs to hire more locals at a pace faster than they are doing right
now (voluntary attempts already in progress), impacting margins and operational
flexibility. Greater local hiring would not only impact the cost structure adversely, it
will also reduce flexibility in managing onsite utilisation.
While locals and H-1B workers in similar age group have comparable salaries, local IT
workers in US are on an average much older (See Figure 7) and that warrants a
salary premium. They are also geographically immobile and that could further impact
utilisation. This situation could be made worse by the fact that despite the greater
unemployment levels, there is a shortage of trained technical manpower in US. It is
difficult to get as many engineers as in India at short notice. Companies could be
forced to do just-in-time hiring with higher salary pay-outs.
Most Indian companies have been cognizant of the likely backlash from the antioutsourcing
hawks and have been taking baby steps to create employment locally.
Wipro and TCS have been hiring for their Atlanta and Cincinnati centres and Infosys
aims to hire over 1,000 people directly from US engineering campuses over the
next year. In our view, more needs to be done to counter the protectionist rhetoric.
Amid the increased difficulties in the H-1B/L-1 visa process, the Infosys visa
controversy (where an employee has sued the company alleging visa fraud) was an
avoidable event. Merits/de-merits of the case notwithstanding, this will likely give
ammunition to protectionist hawks to pursue stricter visa legislation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Visa woes
Increased fees, procedural hurdles and impending regulations
Scare around visa issues is not new for the Indian IT industry and the industry has
weathered multiple such bumps in the past decade. While we do not consider
protectionism a game changer for services outsourcing yet, incidents of the past
few months have us especially worried. Events are silently piling up, and perhaps a
keener look is warranted. Checks indicate that rejection rates for H-1/L-1 visas
have doubled over the last few months and increased hurdles in visa processing are
causing problems. While near-term impact for Indian Techs could be lost revenues
and higher sub-contracting costs, medium/long-term impact could be in the form of
higher onsite delivery costs and lower competitiveness in select cases. With the
external demand environment happily favourable for the industry and supply-side
worries in India also abating for now, the excitement is shifting towards visa
regulations in US, which could fundamentally alter the Indian IT Services business
model. TCS, Infosys and Wipro remain our favoured picks amid this storm.
Procedural hurdles in visa processing impacting Indian IT
We have always refrained from quantifying the risks of protectionism as historically,
Indian IT has always managed to find its way around protectionist measures in US
and most bills with restrictive visa provisions have failed to go through. The last bill
solely focused on H-1B and L-1 visas to break through was the L-1 Visa and H-1B
Visa Reform Act of 2004, which President George W. Bush signed into law. However
select events are piling up and need to be at least recognised, in our view. Visa
policy/procedure in US is increasingly veering towards greater oversight and
imposition and impacting Indian techs somewhat. Checks indicate that H-1B/L-1
visa rejection rates have doubled from 4% to 8% for larger companies with even
higher rejection rates for smaller companies. A CEO of an Indian Tech company
indicated that they lost up to 1%QQ growth in 2HCY10 due to visa issues.
Over the last 6-9 months, visa troubles for Indian Techs have ranged from
increased fees, higher rejection rates, difficulties in getting interview appointments,
deportation from port of entry, excessive RFEs (request for evidence) and
inconsistencies in the visa interview process.
Direction of visa regulation remains concerning
2010 marked the 20th anniversary of the H-1B visa and the US Government
Accountability Office has recently come up with certain recommendations to change
the structure of the H-1B visa program.
Discussion with industry and immigration experts indicates that a higher fee is just
the first step and stricter visa norms are likely in the pipeline. Current discussion
(Refer Figure 2) in US is centred around strengthening the visa process and
upholding the original objective of the H-1B visa program. While some of the
measures being discussed are beneficial to Indian techs, many of them will likely
hurt the competitiveness of offshore IT companies. While passing some of the
stricter norms by a standalone bill through the Senate and House of
Representatives will be tough, we fear that some of the measures could be pushed
through as part of a Comprehensive Immigration Reform Bill. This means a
watchful eye on the developing situation is imperative. A passage for some of these
measures could materially alter the Indian IT Services business model itself.
Discussion Point #1: Conversion into permanent residency
Besides addressing short term skill shortage, a key intent of the H-1B visa program
is to facilitate greater legal permanent residency. Current discussion in US is
focussed on one of the key objective of the H-1B not being upheld with special
focus. Barring Cognizant, none of the IT off-shoring companies have been
aggressive in conversion to permanent residency. Stricter norms for employers
where immigration yield is low is likely to impact Indian techs adversely.
Discussion Point #2: Increased regulation for L-1 visas
Another point which has been the subject of much recent debate has been the
arbitrage offered by the L-1 visa on the salary. Critics cite that a lack of salary floor
for the L-1 visa throws up opportunities for wage arbitrage and are arguing for
introduction of a wage floor to remove that arbitrage. Also, a lack of cap for L-1
visa and a blanket application procedure has made it attractive for IT companies.
Discussions are ongoing to increase the period of employment with the employer to
at least 2 years (from 1 year currently) and imposing caps on the number of visas
granted annually.
Discussion Point #3: Greater enforcement and oversight on H-1B
A key point which is dominating discussion is the better enforcement of the
condition that before an H-1B worker is hired; the employer should make an
attempt to hire an American worker. Employment and Training Administration could
develop and maintain a centralized Web site, accessible to the public, where
businesses must post notice of the intent to hire H-1B workers. Currently such
postings are non-centralised and critics argue that eligible American workers do not
get to know of such openings.
Discussion Point #4: Eligibility changes for H-1B
While there is no concrete data to prove correlation between unemployment in US
and granting of H-1B visas, there is much discussion on tightening the qualifications
required for workers eligible under H-1B program. The contention here is that
technology companies seek to replace older, American IT workers with cheaper and
younger workers supplied through the H-1B program in order to lower costs. IT
companies thus have no incentive to retain and retrain older workers with the latest
skills, since the H-1B program provides ready access to young workers. A
tightening of qualifications would thus limit this impact.
Impact points for Indian IT
H-1B/L-1 visas remain core to Indian IT’s onsite-offshore business model and
procedural or regulatory hurdles here are bound to impact Indian Techs. Large lobby
groups exist in favour of outsourcing, including Fortune 100/500 corporations who
have actively outsourced. These lobbies favour benign visa policies. That said,
unfolding events on the visa front over the last few months have been
disconcerting. Procedural hurdles on the visa front have already impacted revenue
growth at the margins in the past two quarters. Moreover, sub-contracting costs
could remain elevated in the near term.
With 90-95% of employees in US already on L-1/H-1B visas, stricter visa regulations
could force Indian Techs to hire more locals at a pace faster than they are doing right
now (voluntary attempts already in progress), impacting margins and operational
flexibility. Greater local hiring would not only impact the cost structure adversely, it
will also reduce flexibility in managing onsite utilisation.
While locals and H-1B workers in similar age group have comparable salaries, local IT
workers in US are on an average much older (See Figure 7) and that warrants a
salary premium. They are also geographically immobile and that could further impact
utilisation. This situation could be made worse by the fact that despite the greater
unemployment levels, there is a shortage of trained technical manpower in US. It is
difficult to get as many engineers as in India at short notice. Companies could be
forced to do just-in-time hiring with higher salary pay-outs.
Most Indian companies have been cognizant of the likely backlash from the antioutsourcing
hawks and have been taking baby steps to create employment locally.
Wipro and TCS have been hiring for their Atlanta and Cincinnati centres and Infosys
aims to hire over 1,000 people directly from US engineering campuses over the
next year. In our view, more needs to be done to counter the protectionist rhetoric.
Amid the increased difficulties in the H-1B/L-1 visa process, the Infosys visa
controversy (where an employee has sued the company alleging visa fraud) was an
avoidable event. Merits/de-merits of the case notwithstanding, this will likely give
ammunition to protectionist hawks to pursue stricter visa legislation.
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