Competitive Advantage of Bangalore and a New Phase of Evolution

“Bangalore, the Silicon Valley of India is crumbling and not able to cope up with the unprecedented growth” – this is the message anybody will get if he has been keeping track of the media in the last one year. Both, the corporates and the public is equally vocal on the state of crumbling infrastructure, traffic congestion, power shortage, inadequate airport facility and above all the government’s apathy towards acknowledging and solving these issues.

A strong sentiment of despair is clearly visible and it’s widely believed that if things don’t improve soon, Bangalore’s boom will be history. This might as well douse the enthusiasm of existing companies and drive them to take their expansion plans to other emerging cities in India.

Indeed, Bangalore has shot to the top of world IT map quickly. Bangalore has more than 1500 IT companies (In fact, it adds 4 new IT companies every week) which employ 2.85 lakh IT professionals and still growing at more than 30% annually. On top of it, there are 20,000 biotechnology workers in the city. The IT industry has a multiplier effect on the local economy and many more are employed in support industries (transport, catering, security etc) that thrived with the upsurge in IT and BPO. Bangalore is the choice destination for more than 450 MNCs, 66 global Fortune 500 companies apart from innumerable home grown companies. The city has grown over 11% per annum over the last decade to be seen as one of the top two IT destinations in the world and virtually become a global brand.

But what made all these tech giants choose Bangalore as their base? To analyze this, let’s look at what the factors are that make a particular city or cluster attractive for an industry. These are broadly as follows:

Source: neoIT India City Competitiveness Report

Bangalore had and still has an edge in most of the parameters vis-à-vis other Indian cities. Most of these advantages go beyond cost competitiveness. The most critical aspect of the knowledge based industry is availability of quality workforce. Karnataka is considered to be the knowledge capital of India as the education system is well tuned in for IT and BPO sector requirements. Karnataka has 135 engineering colleges, 103 R&D centers, 181 polytechnics, 600 ITI and 11 universities to see that enough talent pool is available locally. Karnataka state government also was the pioneer in the country to formulate IT industry specific regulations and provide lucrative financial and non-financial benefits to IT and ITES companies. And being the capital as well as commercial and political hub of the state, Bangalore was the beneficiary. The “air-conditioned” city’s climate was an added incentive for the MNCs and their foreign workers. In sum, the city provided excellent business environment and talent pool for the IT industry though the infrastructure was still lacking. The cost of living and real estate prices were still at par with most other cities in India. All these factors together created an extremely conducive ecosystem for the knowledge based industry and propelled Bangalore into the world IT services horizon.

But, perhaps the city was not ready for such a massive and uninterrupted growth. It’s infrastructure couldn’t keep pace with it and the administration did not have the foresight to take proactive action. Within a span of few years the city was bursting with people and vehicles causing a severe strain on the infrastructure. Immediately the cost of living & real estate prices shot up and the city’s attractiveness as an affordable destination was under threat.

A parallel development is taking place in other parts of the country which is threatening Bangalore’s dominance in IT and ITES sector. Buoyed by Bangalore’s success in attracting foreign investment and generating employment, other Indian states have started developing their own IT and ITES hubs. These emerging destinations go beyond traditional Tier I cities like Mumbai, Delhi, Hyderabad and Chennai and Bangalore is facing challenges from Tier II cities like Gurgaon, Pune, NOIDA, Chandigarh, Thiruvananthapuram, Kochi etc. The state governments of these cities not only provided similar financial incentives and support conditions, but also these Tier II cities are much cheaper locations. Companies (especially BPO) are finding better loyalty among the workforce in these Tier II cities which is significantly reducing their operating expenses. All these factors are narrowing down the attractiveness differential between Bangalore and other emerging cities.

Is the Bangalore party over? – Not yet probably. First let’s look at hard facts. The table below summarizes the growth of IT and ITES industry in Bangalore (except for Software exports)

* This data is for 2001-02 ** CAGR (01-02 to 02-03)

If looked at closely, one can see that Bangalore has almost maintained the momentum of growth of the few initial years. This is commendable considering that each passing year the base of comparison becomes bigger and maintaining the similar growth rate becomes a daunting task. Out of the total Software export of US$ 6270 M, Bangalore’s share is more than US$ 6000 M. The growth of BPO exports is also excellent considering that the industry is entering into a slightly mature phase now and has a higher base to be compared with. According to McKinsey, the number of people employed in the IT sector (excluding Hardware and Bio-technology) is expected to touch 525,000 in 2010 from a figure of 240,000 in 2004.

The IT industry in Bangalore is entering into a new and mature phase, which is characterized by a higher skill level and service maturity. Bangalore sees itself high on the learning curve and has acquired greater competencies and project management skills. It is high time organizations based out of Bangalore rationalize their service portfolio and develop competencies that fit the prevailing conditions in Bangalore. Bangalore is uniquely positioned as the city with highest availability of middle and top management talent, apart from abundance of entry level IT and general graduates. Thus companies based out of Bangalore have better project management capabilities and carry out complex projects which require higher project management and service delivery skills. Years of experience has also endowed Bangalore based companies with better process maturity. In fact, half of India’s CMM level 5 companies are based out of Bangalore.

Bangalore’s unique advantage also emanates from the mature and thriving ecosystem that supports the IT and ITES sector. Apart from strong education system that is a continuous source of quality manpower and industry friendly policies, the existence of complementary and supplementary industries also makes Bangalore the fourth largest IT cluster in the world. Other cities in India will have to go a long way before they could nurture a similar mature ecosystem.

In fact, Bangalore is increasingly preferred by companies who want to outsource high end jobs or R&D. Major global players like Motorola, Intel, Google, Philips, AMD, Microsoft, Texas Instruments, GE, SAP, Daimler Chrysler, Oracle etc have set up their R&D facilities in Bangalore. The reasons are spelt out before - greater skill set, project management skills and better supplier maturity.

On the other hand, Bangalore is not finding favors for the expansion plan of city based software giants (there are exceptions also e.g. Infosys) which fuel the apprehension about Bangalore's dimming attractiveness. But a closer look will reveal that Bangalore based facilities of these companies are actually performing higher end and complex works which require better delivery capability, project management skills and service maturity. Thus the IT industry in the city is upgrading and rationalizing its services portfolio. Even the expansion plans of these city based companies have a strong Bangalore centric approach. A lot of these companies are expanding to other areas in Karnataka (like Mysore, Mangalore, and Hubli etc) so as to keep their Bangalore facility as the hub.

neoIT's India City Competitiveness Index, which ranks various Indian cities in terms of their attractiveness for the IT industry, Bangalore continues to be the second most preferred destination.

From the customer's perspective, Bangalore will continue to find favors with first time offshoring firms - as it significantly mitigates risk because of the mature and established service delivery capabilities. This trend is seen with customers working with a third party supplier as well as firms setting up their own centers for IT. As these companies familiarize themselves with the Indian conditions and try to expand, they might as well be in the look out for other emerging locations.

Secondly Bangalore will continue to retain it's high attractiveness on the services globalization map, for more complex and higher end services outsourcing.

The Bangalore story is not over yet. Rather it is entering into a new phase of evolution, where it'll be a base for higher end work to justify it's higher supplier maturity and project management skill set. The emerging Tier II destinations have still a long way to go before they can develop a mature ecosystem like Bangalore. Bangalore still retains the attractiveness for new entrants due to its mature business environment.

Mr.Sambit Kumar Panda is an analyst at neoIT. Their website is www.neoit.com e-mail: sambit@businessgyan.com

Issue BG55 Oct05