Apple Downscales in India - Raising Doubts About Offshoring

Apple Computer (Nasdaq: AAPL) announced internally on May 29 that it is pulling back from plans to establish a customer support facility in Bangalore, India. The news regarding Apple's Indian subsidiary Apple Services India was released publicly on Saturday.

Apple has not announced plans to downscale its outsourcing operations in India or its marketing and distribution arrangements with Indian firms, only that it is downscaling its captive operations in India. Apple's outsourcing contract with Transworks for voice services from the Transworks facility in Bangalore is still in effect. The Transworks contract dates from 2004.

The distribution agreement for Apple products with the Indian firm HCL Infosystems is also continuing.

Apple inaugurated its own customer support operations in Bangalore with a ceremony there on April 17. Apple started with a staff of 30 and had floated plans to grow to as many as 600 employees by the end of 2006. Apple planned to have its new Bangalore operations team trained at Transworks before shifting them to Apple's captive facility there.

Apple's Marketing Staff to Remain

Apple's decision to continue with support operations at Indian outsourcing facilities rather than at its own Indian facility will not impact Apple's in-house sales and marketing operations in Bangalore, which reportedly has a head count of 25. Those personnel will continue to focus on market development in South Asia.

"We have reevaluated our plans and have decided to put our planned support center growth in other countries," said Apple spokesperson Steve Dowling. No alternative destination has yet been identified by Apple.

The reasons for Apple's decision have not been announced. Industry speculation has focused on Bangalore's tightening labor market and increases in prevailing wages for call center employees. Although India has experienced a tightening labor market for call center personnel, wages -- as reported in a recent salary survey -- have not risen rapidly enough to discourage significant new outsourcing business from being garnered by Indian-based commercial outsourcing operations. The IT-enabled outsourcing industry in India continues to enjoy double digit annual growth rates for customer support services.

At Genpact (formerly the GE subsidiary GECIS) entry level call center workers were paid 7,000 Indian Rupees (US$152.43) per month in 2001-2002. Their base rate is now 8,000 Rupees ($174.17) per month. At IBM's (NYSE: IBM) Indian-based call center subsidiary Daksh, entry-level rates were 8,000 Rupees ($174.17) per month in 2001-2002 and are now 9,000-9,500 Rupees ($196.95-$206.83).

These modest wage increases have placed India above the bottom rung of the global outsourcing price ladder, as indicated by recent price surveys. Despite price increases and occasional implementation setbacks, Rohit Shukla of the Los Angeles-based LARTA Institute argues that increasing industry sophistication and expanding support infrastructure are evidence that India's outsourcing boom is just starting.

Comparisons to Dell

Apple had recruited managers for its Bangalore facility who had previously worked at the Dell (Nasdaq: DELL) facility that was scaled back there in 2003. Apple's decision to limit its captive operations in India has invited comparisons with Dell's decision to temporarily scale back its Indian operations in late 2003. At that time, Dell's decision prompted public speculation that U.S. confidence in India as an outsourcing destination had been damaged.

Writing about Apple's comparison to Dell, the Indian blogger Shyamanuja observed:

"It reminds one of the November 2003 'celebrations' over Dell pulling back from India. Dell, barely [had] 6000 [employees] at that time, today it has close to 15,000 people supporting its products from India."

Conseco's decision to sell off its insurance service operations in Bangalore in 2002 was also hailed in some quarters as an outsourcing failure that would discourage other U.S. firms from using India as an outsourcing destination.

In a July 7, 2004, opinion piece, Debunking Myths of Offshoring Failures I stated: "The examples of Conseco and Dell are not proof that the offshore model does not work, only that it is a bad idea to rush into standalone operations in saturated areas and to go anywhere with inadequate support from the U.S. and a shortage of qualified overseas talent."