This time it’s different. The immigration bill issue is a battle that Indian IT
will have to fight largely by itself – something that it did not have to do in the
past when the stakes were high. Whenever interventions pertaining to highskilled visa restrictions (H1B) were attempted in the past, the US tech industry,
led by companies such as Microsoft, would oppose any such moves. Now that
the H1B visa limit has been increased to 180,000, and much more liberal views
are proposed towards green-card holders (or in-process green-card applicants),
US tech companies’ issues seem to be largely taken care of. When it
specifically comes to the US Tech IT Services group (e.g. IBM, Accenture,
Deloitte) who have lobbying clout, higher cost provisions (visa/wages) apply to
them as well, but outplacement does not. They are thus unlikely to lead in
opposing the bill, in our view, leaving Indian IT to fight it largely on its own.
Strong, explicit support from influential clients (e.g. large BFS clients) cannot be taken as a given. They might have larger issues (from their perspective)
to battle/mediate with the administration/law-makers. For example, regulatory
and risk issues are likely far more important for banks than lobbying against visa
provisions in the immigration bill, especially when their incremental outsourcing
requirement could be met (to some extent) through the likes of Accenture, IBM.
Shouldn’t the government of India (GOI) intervene more forcefully? We
think so, given the importance of IT exports to India’s GDP (~5% of the total, or
7-8% on an incremental basis) and, equally importantly, the multiplier effect
that this sector exerts via consumption and growth of ancillary industries (e.g.
real estate, travel/transportation, hospitability). With the Indian economy
projected to grow by 5.8% in FY14 (GDP), even a 0.3-0.4% downward impact
due to this bill is likely to be a significant issue for the GOI.
The bill seems to have some inconsistencies, and may have unintended
consequences. If clients are forced to adopt more offshoring in a bid to offset
higher costs, this would probably defeat the purpose of creating more local jobs
(at least in IT Services). Also, we believe large third-party Indian IT firms
(including Cognizant) are not the main H1B visa-guzzlers (contrary to common
perception); they consumed less than 25% of total H1B visas in 2012.
Why are we not turning more negative on the sector? Why are we just
putting it “on watch” despite our view that Indian IT will have to lobby
much more intensively and effectively than it has had to in the past or is
doing now? The bill is not a done deal – there is a fair distance to go before this
can be written into law. The process could take the rest of this year, which gives
Indian IT firms, with strong intervention from the GOI, some time to lobby for
the retraction of key clauses.
But this has an attendant cost – client behavior could change with respect to
long-term engagements (more so, if the “outplacement” clause is not
removed early enough). So far, client behavior is unchanged, but it’s too early
to conclude that it will remain so throughout 2013. This remains the primary risk
to our thesis that the overall demand environment will remain healthy and that
2013 will be a better year for growth than 2012. However, we still see our thesis
as a low-risk one – what may happen is redistribution of market share away
from offshore IT Services vendors towards MNCs (e.g. Accenture) and captives
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will have to fight largely by itself – something that it did not have to do in the
past when the stakes were high. Whenever interventions pertaining to highskilled visa restrictions (H1B) were attempted in the past, the US tech industry,
led by companies such as Microsoft, would oppose any such moves. Now that
the H1B visa limit has been increased to 180,000, and much more liberal views
are proposed towards green-card holders (or in-process green-card applicants),
US tech companies’ issues seem to be largely taken care of. When it
specifically comes to the US Tech IT Services group (e.g. IBM, Accenture,
Deloitte) who have lobbying clout, higher cost provisions (visa/wages) apply to
them as well, but outplacement does not. They are thus unlikely to lead in
opposing the bill, in our view, leaving Indian IT to fight it largely on its own.
Strong, explicit support from influential clients (e.g. large BFS clients) cannot be taken as a given. They might have larger issues (from their perspective)
to battle/mediate with the administration/law-makers. For example, regulatory
and risk issues are likely far more important for banks than lobbying against visa
provisions in the immigration bill, especially when their incremental outsourcing
requirement could be met (to some extent) through the likes of Accenture, IBM.
Shouldn’t the government of India (GOI) intervene more forcefully? We
think so, given the importance of IT exports to India’s GDP (~5% of the total, or
7-8% on an incremental basis) and, equally importantly, the multiplier effect
that this sector exerts via consumption and growth of ancillary industries (e.g.
real estate, travel/transportation, hospitability). With the Indian economy
projected to grow by 5.8% in FY14 (GDP), even a 0.3-0.4% downward impact
due to this bill is likely to be a significant issue for the GOI.
The bill seems to have some inconsistencies, and may have unintended
consequences. If clients are forced to adopt more offshoring in a bid to offset
higher costs, this would probably defeat the purpose of creating more local jobs
(at least in IT Services). Also, we believe large third-party Indian IT firms
(including Cognizant) are not the main H1B visa-guzzlers (contrary to common
perception); they consumed less than 25% of total H1B visas in 2012.
Why are we not turning more negative on the sector? Why are we just
putting it “on watch” despite our view that Indian IT will have to lobby
much more intensively and effectively than it has had to in the past or is
doing now? The bill is not a done deal – there is a fair distance to go before this
can be written into law. The process could take the rest of this year, which gives
Indian IT firms, with strong intervention from the GOI, some time to lobby for
the retraction of key clauses.
But this has an attendant cost – client behavior could change with respect to
long-term engagements (more so, if the “outplacement” clause is not
removed early enough). So far, client behavior is unchanged, but it’s too early
to conclude that it will remain so throughout 2013. This remains the primary risk
to our thesis that the overall demand environment will remain healthy and that
2013 will be a better year for growth than 2012. However, we still see our thesis
as a low-risk one – what may happen is redistribution of market share away
from offshore IT Services vendors towards MNCs (e.g. Accenture) and captives
Summary
We think that the Indian IT sector needs to mount much more intensive and
effective lobbying in Washington DC against the immigration bill. As we have
said before (See our note “Disconnect between Asian & US investors' perception of
the proposed immigration bill; can information asymmetry stay?” dated April 25th
,
2013), we believe that this time things are different, as the bipartisanship in this area
is probably gathering momentum and India IT Services cannot count on the support
of the US tech industry. Also, there is the risk that the specific visa proposals that
hurt India tech get buried within the larger immigration bill; therefore, there might be
a particular need for the lobbying to segregate the visa issues affecting Indian IT
from the much larger and, presumably, more complicated immigration bill.
We note that the Senate Judiciary Committee has cleared the immigration bill
(retaining almost all provisions relating to visas), not unexpectedly, but there is some
hope seen in the early proposal brought out by a member of the House of
Representatives, which makes no mention of the “outplacement” clause. That said,
we fear that from a situation of maximum roll-back (or being able to extract
maximum pull-back), Indian IT could increasingly find itself being boxed into a
situation in which it can extract only minimum pull-backs (most notably, the
"outplacement” clause). Higher costs (visa costs/onsite wages) might be here to stay
(almost a fait accompli, in our view), although the quantum/extent of the cost
escalation is debatable.
Factors to keep in mind
Tech unemployment at just 3-4% is much lower than the
overall unemployment rate in the US
The primary rationale given for the restrictive immigration bill is that tech employees
from India (coming to the US on visas) are taking away local jobs. The stricter visa
regime is intended to increase employment opportunities for US workers and reduce
unemployment in the US.
Notably, the tech unemployment rate in the US is much lower than the overall
unemployment rate. Currently, the tech unemployment rate is just 3.5%, which is
less than half of the total unemployment rate of 7.7%. Therefore, there is limited
room to reduce tech unemployment further, as a certain level of unemployment is
inevitable, for multiple natural reasons, including skills obsolescence/mismatch, and
reluctance to move geographically.
The consequence of this is that it is hard to find the necessary talent. This shortage
is quite significant and pronounced in many areas of the US (the Bay area is a
notable exception).
This shortage itself fuels location-specific wage inflation, depending on the
demand-supply mismatch in that location. Wage inflation in some areas, such as
Phoenix and Milwaukee is running in double-digit percentage terms, well ahead of
that in India
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