Why the software sector in India is at an interesting inflection point
Fear mongering about machinery and automation has been prevalent since a couple of centuries now! There is a story about the introduction of spinning machines in 18th century England when it was feared that this would end livelihood of thousands of spinning-wheel turners and weavers. There was widespread protest and it had to be put down by force. About 25 years later after the introduction of the machines, a parliamentary committee found that the machines had actually increased jobs in the spinning industry by over 4000%. There are similar stories about fears during the introduction of rail-roads and also when computers made their way to office desks. You would be familiar with some of them. It has been found by numerous studies that machinery & automation has almost always (so far) had a very positive effect on the economy and on people’s lives. Henry Hazlitt’s excellent book Economics in One Lesson exposes more fully the fallacy that machines & automation create unemployment in the chapter titled ‘The Curse of Machinery’.
It is also true that with the coming of new technology, new jobs get created but the old ones will become irrelevant and those who don’t upgrade to new skills lose their jobs. This is more true in the software industry than anywhere else. After all, there were no web-based jobs about 20 years ago and today you have almost no job in the software sector if you don’t have web based skills! Similarly the cloud is less than a decade old but its really key to IT jobs today. There are a whole lot of new technologies that have shortage of skills today. For instance, the work that I do involves something called containers - an emerging hot area but less than 2 years in mainstream existence! Benedict Evans, a partner at Andreesen Horowitz explains very well the demise of the old & the emergence of the new in a post about the S-curve in innovation.
As regards artificial intelligence (AI), we are still at a very nascent stage of the technology. IMHO AI is also close to the peak of the hype cycle. Recently, there has been a lot of talk about chatbots and virtual assistants. They do represent a thin slice of the future of AI and even so we have very few useful intelligent though simple bots today. Mostly we have a very long way to go. MIT Technology Review has some excellent articles on the challenges ahead in AI.
In this sense, the intelligence we currently have in areas such as IT infrastructure is very shallow. One kind of example talked about is the automation involved in automatically expanding disk space when a program or OS is close to running out of space. In terms of AI complexity, this is somewhat akin to our cars having the turn indicator switch automatically come back to normal position after a turn has been taken. Its a far cry from having actual autonomous cars that will eliminate the need for human drivers.
Another important aspect of recent years is the realization of Marc Andreesen’s prescient view that software is eating the world.
If you think about it, so many sectors - retail (Amazon/Flipkart), transportation (Uber/Ola), travel desks (Cleartrip/TripAdvisor), hospitality (AirBnB in the west), automobiles (Tesla) and so many industries have already been subsumed by software. In a similar twist - the camera, the alarm clock, the music player, the gaming console have all been subsumed by the mobile phone. And there is still a whole lot left to be done. Plus newer technologies we have barely even started with, such as the Internet Of Things, Virtual and Augmented Reality and Blockchain.
From an Indian IT industry perspective, outsourcing is of many kinds - software development, software maintenance, data analytics, infrastructure setup, infrastructure support, etc. Of these, infrastructure work is the only one in which automation is catching up really fast. Even so the automation nearly always requires human effort to setup and keep it going. This has brought a ton of new tools, there is a lot of work and few well qualified people. In other words, there is opportunity. I was involved in an infrastructure automation project for a S&P500 company a couple of years back, so I’m deeply familiar with this space.
It could be that margins will go down for run-of-the-mill software development & maintenance work (adjusted for inflation they are already lower than 5 years ago). Its just a sign of the industry maturing and becoming more commoditized. But there will always be work that is highly valued and it is important that companies keep moving up the value chain. I also think that the time is ripe for large Indian tech companies to look at inorganic (M&A) growth which they have already started doing. For example just within the last few weeks, HCL acquired a US Aerospace engineering company and Wipro acquired a US based cloud services company. IMO these are signs of maturity because its hard for a company to think of growing via M&A if they are not already stable within the business they run. Of course, a lot of this would be driven by the need to have better skills and regain better margins.
Finally, the tech product startup space is also very hot today in India! To illustrate - you may have read - just within last few weeks there were multiple high profile M&A’s. Freshdesk (a Chennai based product company) acquired a startup that does AI, FirstCry (e-Commerce baby products store) acquired Mahindra’s BabyOye and MakeMyTrip is merging with Ibibo. Some of this is consolidation of market-share and some of it is technology. But there are many many others.
And today, startups in India are getting funded entirely just on the basis of their ideas. So you can almost just take a PPT to a place like this and get money for your company: http://tieisbconnect.in/ . I could not have imagined something like this some years ago.
Despite all this optimism however, there is one systemic risk that might impact the industry (especially export oriented industry) on account of the populist backlash in the west against globalization and against free movement of trade, capital and people. Brexit and the US election drama are the more visible examples but there are signs across EU. Irrespective of who wins the US elections, with both candidates pandering to the populist call, it remains to be seen how much they end up restricting or discouraging free trade & immigration. In the near-to-mid term, I suspect this will affect the outsourcing and software industry much more than any effect due to the nascent artificial intelligence or automation advancements.
So long story short: The software tech industry is far from dying. There is some consolidation happening, but there is also plenty of new tech, new startups and new M&A. Some old technologies and old skills will die, but there are way too many new ones calling out opportunity.
But don’t take my word for it. I’m a technology optimist and the glass is full.
