VZCZCXRO3086
RR RUEHBI RUEHCI RUEHCN RUEHGH
DE RUEHGH #0572/01 3580636
ZNR UUUUU ZZH
R 230636Z DEC 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7467
INFO RUEHBJ/AMEMBASSY BEIJING 2389
RUEHHK/AMCONSUL HONG KONG 1806
RUEHSH/AMCONSUL SHENYANG 1629
RUEHCN/AMCONSUL CHENGDU 1637
RUEHGZ/AMCONSUL GUANGZHOU 0096
RUEHIN/AIT TAIPEI 1428
RUEHNE/AMEMBASSY NEW DELHI 0038
RUEHKO/AMEMBASSY TOKYO 0468
RUEHUL/AMEMBASSY SEOUL 0309
RUEHBI/AMCONSUL MUMBAI 0011
RUEHCG/AMCONSUL CHENNAI 0015
RUEHCI/AMCONSUL KOLKATA 0011
RUCPDOC/USDOC WASHINGTON DC
RUEHIL/AMEMBASSY ISLAMABAD 0027
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8081
UNCLAS SECTION 01 OF 03 SHANGHAI 000572
SENSITIVE
SIPDIS
STATE PASS EAP/CM
STATE PASS USTR FOR STRATFORD/WINTER/WINELAND/KATZ
DOC FOR ITA - DAS KASOFF, MELCHER, OCEA-SZYMANSKI
TREASURY FOR OASIA/INA CUSHMAN, WINSHIP
NSC FOR LOI, SHRIER
E.O. 12958: N/A
TAGS: ETRD EFIN EINV ELAB PGOV CH IN
SUBJECT: LEADING INDIAN IT COMPANIES IN SHANGHAI IMPACTED BY GLOBAL
ECONOMIC SLOWDOWN
REF: 07 SHANGHAI 785
1. (SBU) Summary: Major Indian IT outsourcing firms in Shanghai
said their China businesses have been hit hard by the global
economic downturn, as multinational and domestic clients cancel
or defer projects. The boom of recent years has come to a
screeching halt, with revenue growth falling short of
expectations, especially in the second half of 2008. The firms
have "no idea" what is in store for 2009. Although a couple of
interlocutors see a silver lining - declining attrition rates
and a potential pool of new clients forced to outsource in the
downturn - they are clearly disappointed by this year's results
and are taking a "wait and see" approach, much like their
clients, with no plans to expand operations in China in the near
future. End summary.
2. (U) In November and December 2008, Econoff spoke with top
Shanghai-based managers of three Indian IT firms about the
impact of the global economic downturn on their China
businesses. All three firms - Wipro, Satyam, and Tata
Consultancy Services (TCS) - provide business process
outsourcing (BPO) and IT services to multinational and Chinese
firms operating in China. This was a follow-up to discussions
in December 2007 to assess how the downturn has altered plans
and outlook from last year. (See reftel).
Sharp Slowdown in 2H 2008
-----------------------------------------
3. (SBU) The managers of all three firms said growth has been
slower than expected this year, particularly in the second half
of 2008. They attributed the slowdown to the global economic
downturn, which has impacted both their multinational and
Chinese domestic clients. Kevin Ho, General Manager of Wipro,
observed his clients have become "clearly more cost conscious"
in recent months, and his firm has had to adjust to this
increasingly "cost-sensitive environment." One of the ways his
company adjusted was by opening a new office this year in
Chengdu (the capital of Sichuan Province in Western China)
which, according to Ho, enjoys lower labor costs, a decent pool
of skilled labor, and good infrastructure. Wipro's Shanghai
office, its China headquarters, will remain an important sales
and marketing center, but many of its IT services will shift to
Chengdu, Ho said.
4. (SBU) Raghvendra Tripathi, China Head of Satyam, said his
firm experienced 60 percent growth from 2006 to 2007 but that
year-on-year (YOY) growth in 2008 will only be 20 percent. He
said Q1 2008 revenues were up YOY but that growth stalled in the
second and third quarters, calling the economic downturn
"obvious" and noting that business "clearly started going down"
after the collapse of Lehman Brothers in September. He observed
that multinationals and Chinese clients all began cutting costs
and canceling or deferring projects in the second half of 2008
in an attempt to conserve cash. According to Tripathi, SME
clients are especially struggling as "banks have money but are
not lending to smaller companies." Tripathi also mentioned that
Satyam's Hong Kong operations have been hit particularly hard,
as most of their clients are financial firms.
5. (SBU) Anantha Murthy, General Manager of Tata Consultancy
Services (TCS), said his company's revenue in China had grown
100 percent annually the past few years. However, he expects
growth to be 40 percent in 2008, saying it is "still okay, but
much less than expected." (Note: Murthy told Econoff in
December 2007 that he expected 100 percent revenue growth in
2008. See reftel. End note.) Like Tripathi, Murthy said
several big projects were deferred or canceled in the latter
part of this year, many by U.S. firms which constitute 60
percent of his clients. The loss of some financial clients,
like Lehman, also hurt TCS's bottom line, said Murthy.
SHANGHAI 00000572 002 OF 003
"No Idea" What 2009 Will Bring
------------------------------------------
6. (SBU) Tripathi and Murthy said they have "no idea" what is
in store for 2009, as most of their clients are in a
"wait-and-see mode." Only Ho of Wipro ventured to forecast 30
percent YOY revenue growth in 2009, though he admitted this is
far from certain. None of the interlocutors expressed any plans
to expand their China operations. They do not plan to open new
offices in the foreseeable future, and the hiring of new
employees has slowed, they said. In conversations with Econoff
in late 2007, Tripathi had said Satyam planned to have 2000
employees by 2010, up from 700 in 2007 (Ref). Satyam currently
has 900 employees in China, and Tripathi projects that only
100-200 more positions will be added to their new Nanjing
office, which was originally scheduled to open in early 2008
but, for various "technical" reasons, did not open until late
2008. He does not know if there will be any further hiring
after that. Murthy of TCS also said his company's original plan
(as of late 2007) was to have 1700 employees throughout China by
2008 and 3500 by 2009. However, the economic downturn has
derailed these plans: TCS now has 1300 employees and expects to
grow to 2500 by the end of next year, well short of original
plans.
Not All Gloom and Doom
----------------------------------
7. (SBU) The interlocutors offered varying assessments of their
future business in China. Tripathi of Satyam was the most
pessimistic, saying he has a "cautious" outlook on China. He
sees greater opportunity for growth in the Middle East and other
relatively untapped regions. Ho of Wipro, on the other hand, is
more bullish on the China market. Aside from his optimistic
forecast for growth next year, he thinks China offers the most
long-term growth potential of any developing region, as long as
companies can take advantage of lower costs in the inner
provinces without sacrificing quality of service. He also sees
a silver lining in the economic downturn. He thinks the market
slowdown has created a fear of unemployment, even among skilled
workers in Shanghai, leading to a decline in the rate of
attrition. "More people are staying in their jobs and are not
moving around as much as before," he said. (Note: In
discussions in late 2007, one of the chief complaints from
Indian IT firms was the high rate of attrition among skilled
workers, especially in Shanghai, who were in high demand and
could easily bounce from company to company in search of higher
pay. See reftel. End note).
8. (SBU) Murthy of TCS said the economic downturn, though
painful in the short-run, is also an opportunity to lure new
clients who are looking to cut costs through outsourcing. He
said TCS is specifically targeting Japanese firms which, in the
past, were reluctant to outsource services but are now faced
with cost-cutting demands. According to Murthy, TCS set up an
office with 500 employees in Tianjin this year, mainly to
service Japanese firms operating in China. Murthy is optimistic
that TCS's strong brand name and reputation will allow it to
retain major clients and win new clients even in the current
downturn.
Comment
------------
9. (SBU) The negative sentiment among our interlocutors is
similar to what we have heard from other contacts in the IT
services and manufacturing sectors about the impact of the
global economic downturn. Although Ho and Murthy tried to put a
positive spin on the current situation, all the interlocutors
were clearly disappointed by their companies' performance in
China in 2008. With no end in sight to the current economic
SHANGHAI 00000572 003 OF 003
downturn, these companies are struggling to formulate
projections for the years ahead. Like their clients, they are
adopting a "wait-and-see" approach until the dust settles.
CAMP