Monday, January 28, 2008

India Facing a Shortage of.... ?? .... Workers

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I remember reading about this about 6 months ago in some publication; maybe BusinessWeek itself but here is another article so I might as well bring it to the blog. How can a country with 1 billion souls be short of workers? Well it's a certain type of worker of course - and those type are in short supply. When I read the article (whenever it was) last year about how IBM and Accenture were expanding in very big ways and outbidding the Wipro's (WIT) and Infosys' (IFY) for talent, I knew this was not an area to be invested in (these were major darlings of the market in 04-06), even though there is a serious dearth of Indian ADRs to invest in, in the USA. Bidding wars for talent eat at the profit margins.

Now why do we care? Multiple reasons... one this is yet another brick in the mountain of "eventual" inflation. China (and to lesser degree India) has provided deflationary forces to the US economy (this is why products are so cheap in Walmart even compared to 10 years ago, adjusted for wages). But that tide is now turning in the "white collar" in India... and yes it will eventually turn in China too. Don't think so? Remember that "big sucking sound" Ross Perot talked about in the early 90s? Well that wasn't China ... that was Mexico. Mexico with its $1.05/hr labor. In the automotive industry for example, there was a huge migration of factories and supplier factories down to Mexico. But constant competition and the need to find cheaper and cheaper supply made Mexico too expensive for many products, and not within 7-8 years. Then Mexico heard a big sucking sound... from the East (Far). And many an old "booming factory" town now is quite desolate. This is the amazing flow of capital across this globe that I reference all the time. It has no feelings, and it has no compassion - it goes where the cheap labor is. Now automotive is a bit insulated because shipping costs (due to heavy product) are so onerous, but most other industry went East young man! And guess what? I am awaiting the Vietnam ETF because that's the next spot where this capital will go once China at $0.40/hour becomes too expensive of a labor pool. And so it will go to Vietnam. That should take us to 2016 or so. After that? Well I don't know yet... but I am sure there is some labor pool who will see an upgrade in living standard even getting to $.20/hour.

But that's the long run - in the near term... as Western countries deal with "the reason things are so cheap" (i.e. lack of safety, quality control issues, financial control issues - i.e. dogs dying, kids sucking on lead infested toys, et al), eventually the customer demands better. And when the customer demands better, costs must go up as you must hire more head count for the safety/financial/quality issues. And on the other end of things, when food inflation (which is the #1 cost for most) starts ramping to a point people will starve at going rates, well then the wage must rise. (even if a little). So costs go up. We discussed the first hints of this a few weeks ago in 'Another Myth Falls - Exports Will Save the Economy'

More worrisome is another theme I promoted in the fall, the export of inflation out of China. For a long time, the flood of products from China has been keeping a lid on prices. For the first time I have seen, we are now seeing costs rise (0.1%) out of China. 0.1% sounds like nothing but in years past it was a negative number and a large negative number at times. So as costs rise in China, its slowly going to begin to be passed on to the countries they export to. So yet another factor working against the US consumer.

But we'll worry about China down the road... for now let's see what's happening in India. Keep in mind this fits in very well with my "global wage arbitration" theme - which simply states for those in the bottom 60-80%, our wages will be falling to a mean, as those who can provide similar/same services throughout the globe rise... until eventually they (near) match. Sounds impossible eh? What if I told you I could get you a loan for 110% of the value of your home, with nothing down and I wouldn't check your income. You'd laugh... if this were 2001.

And then ask, if you in the role of "working for the man" got a 14-16% raise this year? (outside of promotion). And think how quickly a major gap can close among countries when one sees 15% annual raises, and another 2-3%. There is no blame or finger to point here - this is the reality of the truly flat, global economy we are now in stage 1 of. Eventually it will reach the point jobs are outsourced back to the US ..... No wait, that is already happening 'Indian Call Center Lands in Ohio - CNNMoney.com' but luckily we still get a premium in salary (for now).
  • In a country with over 1 billion people, a worker shortage shouldn't be high on the list of concerns for corporate executives. But India, with the world's second-largest population, has a labor shortage in many industries.
  • According to a recent report from London human resources firm ECA International, average wages at multinationals in India are likely to jump 14% this year, putting India at the top of a ranking of 47 countries worldwide for the second year in a row. "Salaries in India are catching up to developed nations at a faster rate [than in many other Asian countries]"
  • According to another recent survey, by human capital firm Watson Wyatt Worldwide (WW), sectors such as manufacturing and pharmaceuticals will boost salaries this year. Manufacturing salaries are likely to grow 16%, with pharma rising 15.7%, Watson Wyatt reports. In 2007 these two sectors saw increases of 12.5% and 12% respectively. Overall, the firm projects average salaries across sectors this year to increase 14.8%.
  • The pay hikes are also pronounced in other fast-growing sectors such as retail, infrastructure and engineering, aviation, health care, technology, and real estate, where the demand-supply gap is huge. (that pretty much covers every white collar industry out there)
  • The paucity of people isn't the only factor affecting salaries. "It's also to do with the expanding ambitions of existing companies, and new entrants to the sectors. For instance, there are just four listed health-care companies in India today, but over 50 more are keen to enter the sector. And some of those already in the health-care business have major expansion plans that call for hiring of many more workers. Fortis Healthcare, the operator of a dozen Indian hospitals and a subsidiary of India's leading pharmaceutical company, Ranbaxy Laboratories, began with one hospital three years ago. Now it hopes to operate 100 more in three to five years.
  • Such ambitions are evident across sectors. Almost every big Indian conglomerate is entering retail, infrastructure, and real estate. At India's leading engineering and construction company Larsen & Toubro, the wage bill is up 50%, from $202 million in 2006 to $304 million in fiscal 2008. With an order book of $12.6 billion, L&T needs engineers and project managers. India needs over 150,000 engineers in infrastructure alone, and L&T hires 2,500 engineers and diploma-holders every year. It wants to double that. (hmm, funny I keep hearing how the infrastructure bull market is just about done....)
  • Now employing 500 project managers with annual salaries ranging from $64,000 to $177,000, L&T needs over 500 managers in the next two years. (those salaries would be appreciates even here in good ole USA, no?)
  • How will the company manage? M.S. Krishnamurthy, senior vice-president for human resources, says the plan is to lure people with employee stock options and pay a 20% salary premium to poach workers from rivals. "With senior management, the volume of value goes up," he says.
  • The airline industry also has to pay out more to attract workers. India is one of the world's fastest growing aviation markets. The country's airlines have only 400 planes in operation, but they are likely to double that number by the end of the decade. With almost every Indian airline in serious expansion mode, India must increase the number of people employed as cabin-crew members by more than 300%—from 6,000 to 20,000—in the next two years. Even though a lot of cabin-crew training schools are sprouting in India, people still need to be trained, claims Ajay Singh, a director at low-cost airline SpiceJet. With salaries up around 20%, "recruitment is still an area of concern."
  • To fly all those new planes, Gurgaon-based SpiceJet must go on a hiring spree and add 1,000 more pilots. However, there's a dearth of airline pilots in India already. So local airlines have been hiring retired foreign pilots—and that just pushes the wage bill higher. At SpiceJet, pilots now account for 50% of total wages, according to Singh.
  • Even the most powerful name in corporate India is feeling the pinch. Reliance Retail, the Mumbai retail arm of mighty Reliance Industries, with 500 stores sprawled over 2 million square feet of retail space in India, has ambitious plans to increase its 17,000 head count to 70,000 in the near future. Such rapid expansion "does put pressure on resources," says Raghu Pillai, president and chief executive officer for operations and strategy at Reliance Retail. With attrition rates in the sector at nearly 40%, Pillai says salaries at Reliance Retail are up 20% to 50%.

Remember, there is a whole wide world out there, racing ahead. While we deal with our "financial innovations" and destroy our currency to bail out the engineers of the madness. This is why I keep repeating don't get fixated on the mess we've created here. Yes, India and China cannot continue at this breakneck pace and there will be periods of 1-2 years with some major swoons as excesses happen (as they do in every country, but especially ours). But the long term trend is very firm. And in the modernizing Middle East. And Brazil. Turkey. Etc.


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