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Don’t worry about Obama’s rhetoric

It is a question that gives Americans hope and fills Indians with apprehension: can a mid-tier US city like Buffalo in New York state replace Bangalore as a key hub for infotech outsourcing and R&D? Mark Scheffler and John Aloysius Farrell report.

world Updated: May 13, 2009 00:56 IST

It is a question that gives Americans hope and fills Indians with apprehension: can a mid-tier US city like Buffalo in New York state replace Bangalore as a key hub for infotech outsourcing and R&D?

The debate was stirred on May 4 when US President Barack Obama announced a proposal to change policies that give tax breaks to US companies that create jobs overseas.

Under the current system, these firms are allowed to defer paying taxes on profits generated abroad if they reinvest them back into their foreign entities.

“It’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York,” the president said.

So what is behind the statement?

Obama’s Buffalo-Bangalore match-up echoes a Democratic applause line that has been used by the party’s presidential candidates in the last two elections at least, with earlier versions referencing Japan or China instead of India. The comparison is trotted out to show working class American voters that politicos understand their fears.

It is a great crowd pleaser in America’s industrial Midwest, and it continues to be used despite evidence from economists who say jobs go overseas because they serve foreign markets and solve many language and transportation problems for US firms, and they serve the bottom line.

“There is a popular antipathy to outsourcing,” says Eric Toder, an expert at the Tax Policy Center, Washington. “People are scared their jobs are going to go to some guy in India. But basically [firms] are using India because IT people there cost much less.”

The Obama comment set off some hand wringing in Bangalore, a city buzzing with 750,000 workers developing technologies and supporting IT networks for colossal American MNCs like GE and Google.

“The US president’s suggestion that firms should scale back outsourcing to Bangalore for the sake of Buffalo is very disturbing,” says Sushant Singh, 27, an employee of a call center firm in Bangalore that services Western customers.

Meanwhile, Buffalo business advocates embraced the nod.

“The tax changes help level the playing field,” said Andrew J. Rudnick, CEO of the Buffalo-Niagara Partnership, a trade association. “Anything that levels it can’t be bad. It makes us smile.”

“The Obama statement was great,” said Mark Musone, the chief technical officer at Shatter I.T., a data-monitoring company in Buffalo. “I got a tingle in my spine. That’s what Buffalo needs: companies turning around and looking at the US.”

The head-to-head matchup

Whether Obama’s statement was a case of sound policy, political pandering or merely a speechwriter’s alliterative flourish, the reality is that when it comes to competing with Bangalore, Buffalo is bringing a knife to a gunfight.

Notwithstanding the obvious disparities — Bangalore’s population is 7 million, the Buffalo metro area’s is 1.2 million — these two cities’ profiles and infrastructures look dramatically different in the context of the global economy.

Though Bangalore’s GDP — $45 billion (Rs 225,000 crore) in 2005 — is just slightly larger than that of the Buffalo area ($40 billion in 2006), Bangalore is ascending and Buffalo is playing catch-up.

Buffalo was built on two 20th-century industries that can no longer compete from a cost standpoint: auto manufacturing and steel works. Modern-day Bangalore, on the other hand, began as a research nexus for India’s defence industry. Fuelled by many science and technological institutes, it has since evolved into a tech epicentre that plays host to a potent mix of higher education and relatively lower wages.

On wages, computer programmers with several years of experience in Buffalo can make about $55,000, while their counterparts in Bangalore might make $12,000 — an amount approaching middle-class salary by India standards.

Not that it stops Buffalo from making its case.

“We’re sort of like our own little third-world country because the cost of living is so low: $100,000 (Rs 50 lakh) buys you a mansion here,” says Jeff Ross, executive director of InfoTech Niagara, a tech-industry trade association in the Buffalo region. “I know that the service industry in India has been coming up in cost, so that’s making Buffalo more competitive. What you’re getting here are educated people that can speak the language. They aren’t working in sort of a cut-rate environment.”

Still, Bangalore should not worry too much about Buffalo. Despite the Obama administration’s tax code proposal — which, at any rate, would face a tough fight in Washington and is therefore likely to be watered down — the disparity in wages between Bangalore and Buffalo still far exceeds the amount of money that would be gained through any potential tax breaks.

The next battle ground?

Locals in Buffalo argue that wage disparity has not stopped companies such as Geico, Citicorp and HSBC from setting up call centres and business processing branches, all backed by a well-developed tech infrastructure and workforce: some 25,000 people work in 53 different companies in the Buffalo area’s financial and IT services arena.

That said, Buffalo business leaders ultimately recognise they cannot compete on price with places like Bangalore. To address this they are trying to reinvent their city as an innovation cluster for life sciences and renewable energy.

But even in the life sciences and innovation space, Bangalore is a rising power. The Indian city plays host to some 50 per cent of India’s biotechnology companies — global giant Biocon is headquartered there.

Meanwhile, Bangalore has also been doing more for big US companies. At about the same time Obama was proposing the tax code changes, engineering giant Honeywell International was opening a $50 million (Rs 250 crore) R&D facility in Bangalore that will house 3,000 workers. Honeywell employs 10,000 people in India.

And in April, Chicago-based Boeing — one of America’s largest exporters — announced the opening of a research and technology centre in Bangalore staffed by 1,500 researchers, scientists and engineers

Back in Buffalo, there is one irony that seems to illustrate these shifting winds: Tata Consulting Services, the information technology branch of India’s homegrown mega company, opened a 75-person office in Buffalo in 2003 with the goal, according to a press release at the time, of providing “the best technology and strategy consulting services to help New York’s industries and government streamline their business operations and compete successfully in the digital economy.”

Still, people like Dan Gigante, a VP at Buffalo-based internet-solutions company Clevermethod Inc., believe Obama’s proclamation may spur US companies to look homeward.

He says his company recently lost an account at a large toy manufacturer outside Buffalo when it decided to outsource the work to India. But he believes that situation is reversible.

“They’ll find out that it costs less per hour, but that the work’s not as good.”