Wednesday, September 24, 2008

It's a topic that has been oft debated - that India's tech industry is a lot like the Chinese manufacturing phenomenon - Low cost, reasonable quality, minimal innovation. I was an employee of a huge IT company in India and have, in the two years in their employ, developed certain opinions and concerns about the direction of India's IT revolution.

Here's how Indian IT companies operate (Infy, TCS, wipro and the second string such as mastek, satyam, patni etc). Hire engineers in bulk, never mind that they are not computer scientists or electrical engineers - if they can write a few lines of code in C/C++ and are academically decent, they're hired . After all, they dont need brilliant engineers - just people who will do as they are told and reasonably intelligent enough to get the client's work done, and bullshit their way out of it if they don't. They'll rarely make CAD software for Electrical engineering or mechanical engineering. Instead they will develop "end to end solutions" for banking, finance, inventory management, website development, etc. By develop I mean code, not design - there is a huge difference between the two, something which I will touch upon shortly. One important thing to note is that the HR in most IT companies dont give a damn about individual interests. They will put you wherever they need someone to slog for them. I've had one HR person tells me that they will put me in a project where they get maximum money, regar
dless if I am interested or not. And they wonder why so many people leave!!!

What is the nature of the work? At least 70% of the international projects in most indian IT companies is maintenence - i.e someone else has already developed an application. All you need to do is add more features/change behaviour as per client's request . Then there's production support, which is worse. It is almost call-center work - ensure that the application runs normally and if it fails, get it up and running ASAP. Take calls from the client, update on the status. In a sense, like a car mechanic - I didnt get an engineering degree to be a car mechanic - I got it to design the car! Finally, if you are lucky you get development - write code. But then, writing code is easy - it is like manufacturing a car. What is not, is designing a system that works efficiently. Typically, foreign clients get the design done by the likes of Accenture, IBM, etc. The designs are then sent to desi companies, who actually do the coding at a cost much cheaper than IBM or accenture. Thus, all we do is donkey work. It is not technology - it is programming. Technology is a new idea, paradigm or design - programming is implementing that design. Thus, most of the people in IT waste their engineering degrees, doing mundane programming, until they are made project managers - after which they spend their lives approving timesheets, conducting appraisals and sucking up to the client . Wait a second - shouldnt an experienced IT professional be doing advanced stuff and leave the
bullshitting to MBAs?

Why is it so hard for desi companies to do design? The've not tried hard enough (yet) to get into this space. They just dont have the competence to get the job done. Desi companies are amazing at procedure oriented projects - if there is a procedure in place telling us what to do, we can do it. They dont have the experience (and therefore the brand equity) to attract IT consulting projects. Consulting is largely a reputation driven business. In order to build such a reputation, desi companies need to hire high-flying consulants - they dont come cheap. Even after all this, there is no guarantee of results!
(Lately, Infy is trying to get into this space, I'm told, so good luck to them. I dont think TCS is though :-)) How many software products come out of Indian cos? IFlex is the only company to have a product successful worldwide. Making products is expensive and again, there is no guarantee of success - why risk it when services give me an assured income?

Why do we need to get into high end IT - consulting and products? Simply because the algorithm of low cost, low margin services will run it's course in the future. As payscales rise in india and the rupee appreciating with the dollar, margins become more and more slim. In time, India may not be as competitive as say Brasil or Russia - the American cos will take their projects out there! U can see trends in the manufacturing sector - earlier Taiwan was the manufacturing base for American cos, then SouthKorea and then these days, China For too long have we been stuck in the procedure oriented IT services. It is time to invest in consulting and products, and take Indian IT to the next level, or else I fear we will remain stuck in this low end nonsense.
. Indian companies thus have 2 choices - identify and set shop in countries where the low cost, low margin algorithm can be applied (TCS seems to be taking this route) or enter into high end IT, which is independent of geography (Which Infy is trying). I believe the latter is the better route - it is a high margin business and reasonably high tech. What is even better, is coming up with technology - like Java, efficient databases, advanced operating systems (Like Sun, Oracle or Microsoft). That is real tech. It's not that we can't do it. It's just that we dont want to risk it. But, nothing venture, nothing have! Desi companies’ dont even do proper R&D!


Finally, a true story. Taiwan Semiconductor Manufacturing Corporation (TSMC) was huge in the chip manufacturing industry, making almost 60% profit. T
hey could have got into chip design, and potentially, designed low cost chips. However, design is a risky business - what if the chip bombs? TSMC chose to stick to it's core competence - fabrication. In time, TSMC's profits have declined to 20% or so... they're still number one, but don’t make as much money as they used to... Are we learning yet?

Friday, September 19, 2008

US mortgage crisis: A subprimer

Subprime Crisis: Nice explanation

Q: What is a sub-prime loan?
A:
In the US, borrowers are rated either as 'prime' - indicating that they have a good credit rating based on their track record - or as 'sub-prime', meaning their track record in repaying loans has been below par. Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorized as sub-prime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers.


Q: Why loans were given?
A:
In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses.
With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment.


Q: What was the interest rate on sub-prime loans?
A:
Since the risk of default on such loans was higher, the interest rate charged on sub-prime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of sub-prime borrowers defaulting. The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default. Further, lenders devised new instruments to reach out to more sub-prime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised, they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years.


Q: How did this turn into a crisis? A:
The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value. Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.


Q: How did this become a systemic crisis?
A:
One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on.
As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down. Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed more than half of the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant that they too had to suffer losses — $14 billion combined in the last four quarters - because of declining prices for their collateral and increased default rates.
The forced retreat of these two mortgage giants from the market, of course, only adds to every other player's woes.


Q: What has been the impact of the crisis?
A:
Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn). A little more than half of these losses, or $260 bn, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 bn by Asian ones. Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world's largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed.
The crisis has also seen Lehman Brothers - the fourth largest investment bank in the US - file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalized to prevent them from going under.
Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 bn bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector.


Q: How is the rest of the world affected?
A:
Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities.
Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.

Thursday, September 18, 2008

Tips: Reduce Global Warming

This is a Forward I received from one of my friends, thought it will be worth if I can share this here

Quote:
v Save 2000 kg of carbon dioxide. Buying products with less packaging and recycle paper, plastic and glass.

v Save more than 100 kg of carbon dioxide and $ 150 annually. Unplug unused electronics.

v Save 100 pounds of carbon dioxide and $ 40 per year. Run your dishwasher only with a full load.

v Turn off your light when you leave the room for more than a minute. It is a myth that the lights turn off and uses more energy

v Red or green on your VCR, TV, DVD, stereo each computer or add $ 70 to your electric bill and create 190 pounds of greenhouse gases by annum.

v Laptops use significantly less energy than desktop computers!

v Recycled paper uses 90% less water and 50% less energy to produce. It also produces 36% less carbon dioxide. Buy Recycled!

v Keep cell phones, laptops, PDAs, MP3' s and digital cameras plugged into chargers ways these devices are drawing energy all the time. Unplug when not in use!

v Out, and stop! The average computer off than ever produced more than 2000 kg of carbon dioxide per year, compared to 500 for computers that are turned off when not in use.

v 132 gallons of water are needed to produce one pound of potatoes. Beef 26400 gallons.. Agriculture is the main source of carbon dioxide emissions after the energy sector. Ear more grains and fruits and vegetables.

v The car of the average family generates 11800 tones of carbon dioxide per year, amounting to more than $ 2500.

v Walk, bike, carpool, and save 1.3 kilograms of greenhouse gases for each gallon of gas you don 'use!

v Using Transport! Over one year, ten thousand daily use of public transport will save 4000 kg of carbon dioxide.

Do not pump full tank of petrol

Many of us are not aware that the petrol kiosk pump has a return pipe-line (in Pink ). When the petrol tank (in the car) reaches full level, there is a mechanism to trigger off the pump latch and at the same time a return-valve is opened (at the top of the pump station) to allow excess petrol to flow back into the sump. But the return petrol has already pass through the meter, meaning you are donating the petrol back to SHELL.

If you are tooooo generous, fill full tank of petrol Razz