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BusinessWeek Online, June 5, 2006

Apple Follows its Instincts Out of India

By Manjeet Kripalani, BusinessWeek's Bombay bureau chief and Peter Burrows, BusinessWeek's Computers editor in the Silicon Valley bureau

CEO Steve Jobs may have a soft spot for India, but the economic reality is, building a technical support center there doesn't make sense.

Apple Computer CEO Steve Jobs has always had a thing about India. While he was a young technician at game developer Atari in the mid-'70s, Jobs took a break and backpacked around India with a college friend in search of spiritual enlightenment. Not long after returning to the U.S., his more capitalistic instincts primed, he and Steve Wozniak launched Apple in 1976. Today, Jobs is known in India and through much of the rest of the world as an entrepreneur-turned-billionaire and one of the savviest marketing minds on the planet.

He is also a tough-minded executive who knows when to cut and run when the numbers don't add up. That's why Apple has shelved plans to build a sprawling offshore technical support center in Bangalore. Just months ago, there was talk of Apple employing 3,000 workers by 2007 who would handle technical and customer-service support for Macintosh computers and other Apple gear in India and elsewhere. There was even speculation that Jobs would travel to India in the fall to publicize Apple's commitment to the country.

It wasn't meant to be, and a small, newly hired staff of about 30 at Apple's subsidiary in Bangalore was let go recently. (The company will maintain a small sales and marketing arm in the city.) Apple spokesman Steve Dowling would only say the company had "reevaluated our plans" and decided to focus support center activities in other countries.

SOME QUESTIONS. However, another source familiar with the situation said the decision was mostly cost-driven. "India isn't as inexpensive as it used to be," the source said. "The turnover is high, and the competition for good people is strong." The company feels it "can do it more efficiently elsewhere."

Such talk comes amid concerns about the sustainability of India's fast-track economy. True, India's economy grew 9.3% last quarter, and it is still home to the world's largest, fasting-growing offshore outsourcing sector, which generates about $17.3 billion in revenues and employs nearly 700,000 people, according to the McKinsey Global Institute. And Indian outfits such as Infosys and Tata are among the best-managed companies in the emerging markets.

Yet India's benchmark stock Sensitive Index, or Sensex, experienced a mini-crash in late May as global investors fled from emerging market stocks (see BW Online, 5/23/06, "India's Market Turns Down the Heat").

INDIAN BRAINPOWER.  And India's fabled infrastructure headaches and surprisingly robust wage growth have also raised worries about India's undisputed leadership as a business outsourcing Mecca. Entry-level wages have climbed by as much as 13% annually from 2000 to 2004, while salaries for mid-level managers have registered increases of 30% annually during the same period, to a median of $31,131, according to McKinsey and Nasscom, India's software industry association.

However, while the Apple move certainly will generate plenty of media attention -- "Apple Software Logs Out of India," proclaimed a headline from the Times of India -- it may be a special case. Apple has certainly utilized Indian engineering brainpower in the past. Part of the electronic circuitry that powers the iPod was developed by a research outfit in Hyderabad, for instance.

Yet for the Bangalore operation, Jobs never had any intention of outsourcing any high-end software development and proprietary technology research away from the company's Cupertino headquarters or operations nearby, according to the source familiar with Apple's operations in India.

STRATEGIC TIE-UP.  Also, while wages for software engineers and IT project managers have soared, entry level wages for call-center employees are still an affordable $2,500 or so per year. Apple had only a staff about 30 at its Bangalore operation, but "you need economies of scale, say 500," to generate huge savings for a company, says Sunil Mehta, vice-president of Nasscom. Unlike rivals such as IBM-Lenovo, Dell, and Hewlett Packard that have a huge base of personal computer customers, Apple's Mac market share is far lower, undercutting the justification for a huge customer service center on the ground in India.

The Bangalore operation also seemed redundant given that on May 29 Apple announced a strategic tie-up with New Delhi-based HCL Infosystems to provide distribution and after-service care for Apple's phenomenally successful iPod line. HCL has a tremendous distribution and service footprint in the country and has worked successfully with Nokia, India's dominant mobile phone brand. "We will put Apple products through the same distribution network as we do with Nokia, and offer after sales service for all things related to the iPod including iTunes," says Saurav Adhikari, vice-president for strategy with HCL.

Given all that, the economic rationale to build out an Apple-run Bangalore customer service center looked flimsy. Jobs may have a soft spot for India given his youthful spiritual exploration of the country. But when it comes to running a $13.9 billion enterprise like Apple, his capitalistic instincts are likely to win out every time.

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