The Issues Faced by Infosys in China - Essay Example

Infosys in China Abstract Infosys technology Ltd is the second largest outsourcing company. Infosys being the first company to be listed in Nasdaq Stock market, New York. Infosys planned to invest 65millions by 2010, in Hangzhou and Shanghai. These countries were to employ about 6000 employees. Infosys went with these locations keeping in mind the infrastructure and the availability of talented manpower. These centers would look after new projects on software, IT and ITES (ICMR, 2006, p.9). The report deals with some of the issues faced by Infosys in China on its way to expansion and also the role of Global Delivery Model. It suggests measures for a better development in China and also other emerging countries. Background Infosys was started by a group of seven members in the year 1981. It incorporated with the name Infosys Consultant Private Ltd. From the very beginning Infosys was depended on the overseas business. The founder of Infosys, Narayana Murthy operated its business in India while the other seven went to US and started working for their corporate clients. Reebok was Infosys first US based client. The company earned revenue of Rs 1.2 million in 1981. 1981 was a period when India did not experience the growth of computers, so licensing of computers would take a longer period. Infosys did not have the space needed to install a computer, thus it hired a premise of a customer where the new employees would be provided training. It also concentrated in the fields like retailing, distribution, finance and telecommunications. Infosys has entered into a joint venture with Kurt Salmon Associate (ICMR, 2006, p.2). Infosys being the first company to get listed on NASDAQ stock exchange. It accounted a net profit of $US 152.1 million at the end of the quarterly result. USA is its main source of revenue; it is planning to expand in Europe and Asia. Infosys in china is merely focusing on its local clients. It has been recognized as one of the fastest growing company (IBEF, n.d., p.1). In the year 2000, 78% of revenue came from North America, 14.8% from Europe and only 1.4% from India. By 2005, Infosys mode of operation was proximity development, which consisted of 9 and off shore software development about 17, mainly operating in India. Infosys is also facing a tough competition from other It giants because of the liberalization that has effected India and its economy (ICMR, 2006, p.3). An important achievement for the company came its way when it pioneered the Global Delivery Model. With the help of this model work can be done at places where it suited the most, its economical and least risk of acceptance. The company is using level 5 of CMM and PCMM. It has been awarded Asia’s Most Admirable Knowledge Enterprise in the year 2002. Infosys operates mostly in Bangalore, being the head quarter in India (Kochikar & Suresh, 2004, p.3). Issue Statement Factors that led to enter the Chinese Market In the year 2006, Infosys reported that it has achieved a milestone of US $ 2billion. Thus its revenue increased at a high rate by 33.5% in the financial year 2005-2006. But the subsidiary in China had suffered a loss of 83.9 million. The projected employee rate in China was in between 800-1000 but the China office had only 500 employees. Thus Infosys decided to enter the china market. In the year 2004, Infosys entered China as a part of its global extension plan. The reason behind Infosys entering China was the high demand of the employees due to globalization. Since the demand is rising there prevails a shortage of manpower. NASSCOM estimated that there would be a shortage of 250000 employees in the IT sector. Thus china was the option for Infosys as it’s comparable with India in terms of salary and quality of manpower. As stated by Nandan Nilekan, China, a low cost center like India was a good alternative (ICMR, 2006, p.2). Another reason was the growth in the Chinese economy. The market is expected to grow at around $27 billion by 2007. China has got the potential of attracting foreign players and Infosys did not want to miss the opportunity in that market. Infosys was familiar with the standards, procedure of china and the players entering into China needed a giant like Infosys which accounted for 40% of the market (ICMR-a, 2006, p.3). Global Delivery Model Infosys has adopted the GDM in 1990s. It pioneered this model because it was suffering a stiff completion from the other IT companies like IBM, Wipro etc. The model was adopted so that work can be done from places where it would deliver the best result in a most economical manner and at a minimum risk. Some of the industry felt that the model would not be competitive enough for the company. Other IT companies had also adopted the GD Model, and thus Infosys came out with a new version of GDM-GDM 2.0. This model was used as an out sourcing tool. With the use of this tool Infosys was able to live up to the expectation of delivering the quality standard, minimizing the quality, cost and skill set of employees in around the world. With the help of this application it was able to achieve high revenue. GDM would be added in the new locations globally (ICMR-b, 2006, p.2). GDM consisted of three different categories. First was the category where the task would be done at the location of the clients. Secondly, was too performed at a place closer to the client and last was the task which could be carried out in remote areas. In locations where the company did not have their office, employees would visit the clients and get the requirements. Analyst stated that GDM was the main reason for the growth of Infosys and its revenue. Its revenue grew at almost four times. Infosys took this as an advantage and worked more using this model. Infosys used this model in China. The relevance of this model in china was that it could out source in nearby countries like Japan. Since it’s cost effective and the risk is low, the chances of loss incurred with this would be less. China is exploring a boom in its economy many foreign players are entering into the market. With the help of GDM it would be easier to cater to the needs of the client at a much effective rate (ICMR, 2006, p.3). Analysis of the Problems A problem that may be faced by Infosys is in the process of exporting. With the development of GDM the company could produce in China itself as exporting would be much costly affair. Production is cheaper in home grounds thus Infosys might produce in china itself. Transportation is costly when it comes to exporting. Another reason would be buyer wants product from his own country (Daniels, Radebaugh, Sullivan, & Salwan 2009, p.543). Another problem faced by Infosys is the manpower capacity. Due to inflation and rapid growth, china is facing a problem in the human resource sector. Thus Infosys can outsource some of its employee in china. Again big players like IBM; Wipro TCS has also started the use of GDM. If they also expand globally, it could become a threat to Infosys. China being an emerging country with a lot of potential it may give chances to these companies to establish itself in the global economy. But this problem is solved with the new GDM version developed again by Infosys. The private sector is facing new challenges this is merely because of the mismatch of supply and demand and the policies of trading by the government. After the liberalization of economy private sectors feared to take risk and invested only in those sectors which were profitable. Even Infosys had done the same. It entered into china market when china had a remarkable growth rate. Due to trade deficit, the companies are importing huge technologies to fair enough in the global competition. Infosys is one of the companies. With the urge of doing well in the Chinese market, Infosys has widened the trade deficit (Fernando, 2011, p.239). Poor intellectual property of China forced some of the clients of Infosys not to involve in any kind of business with the company. But Narayana Murthy was very much confident about the market potential of China and he emphasis that Chinese is the best market. Alternative analysis and selection criteria An alternative would be open up in other the emerging countries like Brazil, Indonesia, Mexico turkey etc (Hawksworth, 2006, p.3). An alternate country would be Indonesia as it GDP rate is expected to grow at 7.3% by 2050 next only to India. The current GDP rate is 4.8%. Indonesia along with Mexico would grow rapidly then Germany and UK. Two methods used in comparing the size of the companies are the GDP at market Exchange rate and GDP at PPP i.e. Purchasing Power Rate (Hawksworth, 2006, p.4). Therefore it is suggested that Indonesia would be a profitable country for Infosys. Recommendation Infosys must very closely analysis the new market and the emerging markets trends before it launches in the markets like Indonesia. According to Pricewaterhouse Coopers, Indonesia is projected to grow at a rate of 7.3% in US term, 4.8% in the domestic currency, the population being 0.6% and GDP per capita is 4.2% next only to India and followed by China. China provides a good global exposure not only from Japan but also from Asian countries. It is advisable to Infosys to concentrate more on the China market as it allows global exposure and one of the emerging countries (Srinivasan, n.d., p.1). It is estimated that about 40% of growth will come from China and India from a total world growth of 70%. Infosys recommendation for its clients is totally toward the betterment of its client. Infosys with the help of Global Delivery Model is working towards the betterment of its clients and thus producing quality results. The software industry in china is at its best with a good salary and a competitive advantage. Action and Implementation Plan Infosys has come out with a model GDM. This helps in the out sourcing of talent. Infosys was facing a tough competition from its competitors like Wipro, TCS, IBM etc. All of the IT giants have also started using the GDM. So in order to stay at par, Infosys has come up with a modified version of GDM 2.0 and named it Collaborative Distributed Delivery Model (CDDM). In order to excel, it had setup off shore development globally. Thus Infosys is acquiring more companies in order to succeed in GDM. Software services are out sourced through this model (Bhattacharya , 2006). Reference Bhattacharya, S. & N, A. (2006). The Implementation of an Improved Global Delivery Model in Infosys: Will it succeed. Retrieved September 26, 2011 from http://www.ibscdc.org/Case_Studies/Strategy/Business%20Models/BSM0057B.htm Daniels, J.D., Radebaugh, L.H., Sullivan, D.P. & Salwan, P. (2009). International Business: Environments and Operations. Pearson Education India. Fernando, A.C. (2011). Business Environment. Pearson Education India. IBEF. (No.Date). Infosys. Retrieved September 26, 2011 from http://www.ibef.org/download/Infosys.pdf ICMR. (2006). Infosys' Global Delivery Model. Retrieved September 26, 2011 from http://www.icmrindia.org/casestudies/catalogue/Operations/Infosys%20Global%20Delivery%20Model-Operations%20Management%20Case%20Study.htm ICMR. (2006). Infosys. Retrieved September 26, 2011 from http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR221.htm ICMR. (2006). Infosys. Retrieved September 26, 2011 from http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/Infosys%20Business%20Strategy%20Case%20Study.htm Kochikar & Suresh. (2004). Towards a Knowledge-Sharing Organization: some Challenges faced on the Infosys journey. Retrieved September 26, 2011 from http://www.irma-international.org/viewtitle/44580/ Srinivasan, S.(No Date). Infosys to Put $65 Million into China. Retrieved September 26, 2011 from http://www.cwalocal4250.org/outsourcing/binarydata/Infosys-China.pdf Read More