Opportunity or threat? Indiana businesses brace for growing global competition Next month, President Bush will make his first official visit to India. To most of the American media, it'll be just one more round of global terrorism discussions with a distant foreign nation, perhaps worthy of a brief.
The Indian press knows better. Six weeks ahead of Bush's trip, banner headlines about it ran in every newspaper.
Al Hubbard knows better, too. Friends with Bush since their days at Harvard Business School, the president of Indianapolis-based E&A Industries is now Bush's chief international economic adviser.
Hubbard said that building democracy and military cooperation are certainly motivating factors for the journey. But Bush is just as keen to strengthen U.S. economic relations with up-and-coming India.
"As with penetration into any new market, U.S. businesses will need to establish a strong global presence [there] so they can reach potential new customers before their competitors," Hubbard said. "There is no doubt that successful expansion of U.S. companies-both large and small-into new markets is an important contributor to our current econom- ic strength."
India is fast becoming a global high-tech hub, and some of Indiana's largest companies-from Cummins Inc. to Eli Lilly and Co. to Brightpoint Inc.-already have begun to capitalize. So have a handful of the state's most innovative startups.
But Hoosier entrepreneurs and business leaders say the sprawling nation, with its booming population and low-cost technology work force, also could be a threat to the state.
As firms around the world take advantage of India's potential, pressure will increase on nearly every Indiana business. Rivals will boost profit by selling products and services on the subcontinent. Simultaneously, they'll radically reduce costs by tapping India's inexpensive technology talent.
Unless local companies establish response strategies, Hoosier business leaders say, emerging India could imperil Indiana's own promising IT and life sciences efforts.
"There's 6 million people in this state; 5.9 million of them don't have a freaking clue what's going on over there," said Scott Jones, Indiana's best-known technology entrepreneur.
"It's going to be a real shock that China and India have far more engineers than we have. Between them, they're producing 10 times more per year than we do. Over time, they're going to eclipse us so far that we won't be able to compete."
India's size makes it both an alluring market and a formidable competitor. Its population of 1.1 billion represents 15 percent of the world's total. Its rising middle class, now 300 million strong, for the first time has disposable income to spend on consumer products. India's growing companies, meanwhile, are ravenous for heavy equipment to improve the nation's crumbling infrastructure.
And thanks to its swelling ranks of highly educated engineers, scientists and computer programmers, India is an attractive source of low-cost brainpower for multinational corporations of every kind. A recent graduate who'd command $69,000 a year here might earn just $5,000 in India.
Rather than sticking to business as usual, Jones said, Hoosier companies must harness India's strengths. For example, he recently conceived an idea for an IT startup that would use inexpensive Indian programmers for some of the development work.
So far, the state has done little to foster such ties.
Gov. Mitch Daniels, who led an entourage on a trade mission to Asia last year, has no plans this year for a similar trip to India, said Stephen Akard, the Indiana Economic Development Corp.'s director of international development.
This week, the IEDC will host a delegation of 15 Indian business leaders. The Indians had planned to visit only Oregon, Washington and Idaho, before IEDC persuaded them to add a stop here.
The event will mark Indiana's first formal effort to engage India in three years. And there wasn't much more going on before that.
From 2001 to 2003, Indiana employed the Indianapolis-based consulting firm DC Ltd. to promote Indiana in India. DC Ltd. earned no direct payment from the state-it simply collected consulting fees when it helped Indian companies who wanted to sell products here.
Indiana maintains 10 international offices around the world. Even though each costs less than $100,000 annually to operate, the state doesn't have one in India. The closest are in Beijing, Jerusalem and Taiwan-all nearly 3,000 miles away.
Akard said the Daniels administration is most interested in showcasing Indiana as a place for Indians to invest surplus cash. As a nation, India holds foreign exchange reserves topping $150 billion.
"We have nothing to fear from what other countries that are advancing bring to the table," Akard said. "We'll be able to remain on the cutting edge as long as we remain focused on what our opportunities are."
Private investor Robert Compton, a former managing partner of Indianapolisbased CID Equity Partners, said the state's not doing enough.
"It's nice that an India delegation is coming to Indianapolis. I'd feel a lot better if a delegation was going to India to look for a market," said Compton, who in January led his own private group to India.
"A delegation from India coming to Indiana only tells me that the Indians are the smart ones. They're obviously coming here to learn more, find customers and development partners. Why aren't we getting on a plane and going over there?"
After half a century under socialism, India began to unleash its potential in 1991. A campaign of market reforms since then has torn down tariffs, modernized banks and opened entire industries for foreign ownership.
According to the U.S. Department of State, American businesses now invest $3.8 billion annually in Indian companies, or 17 percent of all investments in India. The United States is also India's largest trading partner. Exports and imports between the two nations are worth $27.1 billion a year.
Even so, Hubbard said, India has many obstacles to development. Particularly concerning are its inadequate infrastructure, rising inflation and huge impoverished population-35 percent of Indians still live on less than $1 per day.
"India's economic reforms have yielded impressive growth in recent years," Hubbard said. "But the government will need to continue to make progress on structural problems that can threaten future economic performance."
It will take a long time before India improves its infrastructure enough to boast a concentration of research universities and advanced life sciences corporations rivaling Indiana's, business leaders say. Established assets might protect Hoosiers for years, perhaps even a few decades, from India's emerging high-tech startups.
Then again, India may evolve more quickly than anybody expects. Bush isn't the only leader who wants to see the revolutionary transformation firsthand. Jones just returned from his own tour of northern India.
"It's the first time I've been, and it was a real eye-opener. I knew it would be," Jones said. "I'll never look at this planet the same way again."
The man who helped invent voice mail said he was shocked by the hordes of people, cows and monkeys all living together in abject poverty, stunned by the opulent contrast of the maharajas' luxurious palaces, and awed by the majesty of the Himalayas.
The way Jones sees it, infrastructure problems in a rising Indian economy mean opportunities for manufacturing-heavy states like Indiana to sell heavy equipment.
Jones was already aware of India's business potential thanks to his Emeryville, Calif.-based company Gracenote, which helps provide the software that drives iPods. For two years, Gracenote has had an operation in a suburb of Mumbai that handles repetitive lower-level functions, such as data entry.
But somewhere during two weeks of tourism, Jones had an epiphany. India is on the cusp of a completely new era.
"As I stayed in various hotels and had to connect on my wireless devices, they'd invariably send an IT person to my room. And he was invariably better than anyone I've had in the U.S.," Jones said. "I was just blown away by how talented they were. And I'm sure they don't get paid very much."
It was during the trip that Jones conceived the idea of hiring Indians for his IT startup. He declined to divulge what he has in mind. But before the end of the year, he plans another trip to India-this time with business at the top of his agenda.
Not everyone is so enamored with India.
Don Brown, CEO of Indiana's largest public software company, Interactive Intelligence Inc., said he knows he's paying more for local software developers than he would in India. But he said the extra expense is justified because they're so much more creative, and their productivity is high.
"We've been able to find extraordinary talent in the Midwest. In balance, we feel we get a better bang for our buck with people here in Indiana," Brown said. "What it does mean is our people can't be just average. The cost differential puts a lot of pressure on developers. They have to work very hard to be extraordinary."
Carmel-based insurer Conseco Inc. has experienced firsthand that setting up Indian operations spawns myriad logistical challenges.
In 2001, then-CEO Gary Wendt moved 1,000 back-office and call center jobs to New Delhi. He thought the move would generate steep cost savings and improve customer service.
But turnover among Indian workers was higher than expected. The cost savings were smaller. And some policyholders who phoned the call center complained they had trouble understanding Indian workers.
After succeeding Wendt as CEO in late 2002, William Shea reversed course. Today, the company's call center work is handled out of Carmel, Chicago and Philadelphia, spokesman Jim Rosensteele said.
Conseco still has about 70 people providing back office support through an Indian partner. Another 150 work for an IT operation called Conseco India. The jobs are there mostly to capitalize on the fact that it's daytime in India when it's nighttime here.
"We're processing data basically 24 hours a day, because the folks there are working while we're in bed, and vice versa," Rosensteele said. "It stretches out the work day. You're accomplishing more in a 24-hour period."
Cummins was one of the first major Hoosier companies to develop a foothold in India. It's been there since the early 1960s, selling engines, power generators and other heavy equipment. The Columbus-based company now has 5,000 employees at its Indian headquarters outside the city of Pune.
Last year was the best ever for Cummins, overall and in India. Indian sales were $700 million, about 7 percent of the company's total.
But Cummins has been tapping India for more than its sales potential.
Two years ago, the company opened a technical center in Pune for cutting-edge design, engineering and product development. With 75 employees, it is one of the company's 12 global technical centers.
"The quality of engineers coming out of India is very high," Cummins spokesman Mark Land said. "And given the size of India, there's a lot of them. It is less expensive, obviously, to hire engineers in India. But we wouldn't hire them if the skill level wasn't there."
Indianapolis-based Eli Lilly and Co. entered India in 1993 through a joint venture to sell injectable antibiotics.
Indian hospitals now also buy Lilly's other drugs. According to Lilly India's Web site, the company rang up sales of $34 million in 2003, the most recent year posted.
Lilly spokesman Phil Belt said the company's 550-employee Indian subsidiary is primarily a sales-and-marketing operation. He said obstacles remain to doing business in the country. For example, the Indian government is involved in setting most drug prices.
Lilly doesn't do drug development in India. Instead, the company conducts most research at one of its five global research centers, with the largest in Indianapolis.
"There is a small number of these places in the Lilly model because we've got a belief that in producing innovation at its earliest stages, there is benefit to an almost academic or campus-like setting where thoughts and ideas can be shared readily," Belt said.
"A few high-density concentrations of scientists is better than having true discovery spread around the world."
Lilly does conduct some clinical trials there. Belt said many people in India are "treatment-naÃ¯ve," or not under the influence of any medication. This makes them especially attractive for medical studies.
Plainfield-based cell phone distributor Brightpoint Inc. calls India its fastest-growing market.
Brightpoint has invested more than $10 million in the territory since entering it in 2003, Brightpoint CEO Bob Laikin said. It now has eight distribution hubs, 140 franchised repair centers and 400 employees.
Today, just 75 million Indians have cell phones, Laikin said. Over the next five years, that penetration will grow to 300 million-or roughly the size of the whole U.S. market. And by that time, early purchasers will have begun buying replacement phones, driving even more demand.
To get a telephone, Indians used to wait months or years for installation of copper lines. No wonder they're excited about cell phones.
"When you have a population of close to a billion people and [less than] 10 percent have these devices, you say, 'Wow, there's a big opportunity,'" Laikin said.
"When wireless went in, it was a service that worked better, and you could get it in real time. People stood in line for 10 hours for the opportunity to get a wireless device. When it's your first device, you're just happy to communicate."
Three years ago, Indianapolis-based Semafore Pharmaceuticals, a startup cancer-research firm, needed to buy synthetic compounds for its lab. Seeking to shave costs, Semafore found an Indian partner.
"Their quote and timing for delivering the compound we needed was vastly superior to what else we could find," Semafore co-founder Joe Garlich said. "There wasn't anybody in Indiana [who could provide it]. It was a factor of three better than anybody in the U.S."
Since then, that sales relationship has grown into a full-blown research association. As Semafore grows, so does the partnership.
Like many Indiana business leaders, BioCrossroads President David Johnson views the rise of India and other developing nations as more of an opportunity than a threat.
He said Indiana remains well-positioned to create the concepts that lead to new industries-thanks to its concentration of educated professionals and research institutions.
Pioneering universities, along with a flexible regulatory environment, have long allowed the United States to remain ahead of European competition, Johnson said. If Hoosiers play to their strengths, he said, they have a bright future.
But this is no time for complacency. He said Indiana must continue to innovate. Otherwise, India could evolve from potential partner into an overwhelming competitor.
"We need to be worried about everything in all of this. We should take nothing for granted," he said. "[Indiana needs] a constant push to do things better and smarter. For us to continue to have the leadership role, we're going to have to continue to work really hard to maintain it."