Capstone Project - Infosys China - Strategic Analysis

For my capstone project, I chose Infosys Technologies Limited, and did a strategic analysis of Infosys' decision to expand in China. The strategic analysis includes a background of Infosys Ltd, customer segments, geographic scope, timeline of the decision to expand in China, Macro-environment as well as Internal environment of the company in terms of its vision, mission, financial position and competitive advantage. 

Executive Summary

Infosys Technologies Limited, is adopting an aggressive expansion strategy in China, with a proposed investment of $125-150 million to set up its own state-of-the-art campus in Shanghai to build up service delivery capabilities and serve the local market. Infosys has traditionally been averse to acquisitions, held its premium pricing strategy and focused on its core IT enabled services business. However, the recent changes in the corporate leadership in 2011 and slowdown in growth, have prompted a strategic shift towards global expansion and moving up the value chain with consulting and technology partnership. The Chinese expansion decision comes at a time when Infosys is making a strategic shift towards global expansion through acquisitions and partnerships.

Infosys considers China as a potential market as well as potential resource pool for the company's global aspirations. Increasing competition with other multinationals for skilled IT professionals, soaring salaries in India and an emerging Chinese market were the main reasons for entering China as a low-cost center. However, China also presents significant challenges in terms of economic slowdown, political/legal issues such as government regulations and intellectual property protection, socio-cultural issues such as high attrition rates and low availability of English-speaking professionals, and increased domestic and international competition for labor and clients.

Infosys must look to expand in China as it is an important emerging market; most of its clients and other multinational companies are also moving into China and Infosys should not lose this opportunity. It should leverage its competitive advantage to attract employees and support its growth, but also keep a close watch on the external environment in China.

       I.            Overview of the Business

A.     Company Background

Infosys is a global consulting and an Information Technology (IT) Service Company, headquartered in Bangalore, India. It went public in India in 1993 and got listed on the United States of America (USA) NASDAQ in 1999. Infosys Limited was founded in 1981 by Narayana Murthy and six other people. Murthy, who was the CEO from 1981 and became the Chairman in 2002, retired in 2011 upon turning 65, and is now the Chairman Emeritus at Infosys. Infosys, most famously under the leadership of N.R. Narayana Murthy and Nandan Nilekani, came to define an industry that symbolizes modern entrepreneurial India, with legions of young workers converging on its Silicon Valley-style campuses[1]. Co-founder and chief operating officer S.D. Shibulal is the current CEO. Infosys has more than 153,000 employees. From a capital of US$ 250, Infosys has grown to become a US$ 7.126 billion (LTM Q2 FY13 revenues) company with a market capitalization of approximately US$ 28 billion.

B.     Industry(s) in which company competes

Infosys competes in the Software and Information Technology Services and Consulting industry and focuses on providing IT expertise, software design, development and maintenance services as well as on-site management and other IT functions to its customers. Driven by strong demand of IT infrastructure in developing economies, the global information technology industry is expected to grow at a rate of 5.88% during the period 2011-2015, according to a report by global research firm TechNavio[2].

C.      Customer segments served

Infosys offers business technology consulting, IT services and IT solutions in major industries such as Aerospace & Defense, Airlines, Automotive, Communication services, Energy, Financial services, Healthcare, High-tech, Hospitality and leisure, Insurance, Life sciences, Logistics and distribution, Manufacturing, Media & entertainment, Public sector, Retail and Utilities Industry. As shown in the following chart, the revenues are almost equally distributed across its five major customer segments.

D.     Products/services offered

Infosys provides end-to-end IT solutions which include software application development, testing and maintenance, business process management, infrastructure management and product engineering services. During the financial crisis, many companies cut down on IT costs. Infosys realized that in order to have sustainable growth, the company needs to move up the value chain and not simply be a low cost IT service provider.

Infosys has been shifting its strategy to increasingly offer platform and product solutions, which are geared towards providing much more value to its clients, getting more clients and delivering high value product and services in a cost effective way. Some of the popular products from Infosys are Finacle – Universal Banking Solution, Infosys Care Suite and Infosys Real-time Expertise Manager – Customer service products, Infosys Supply Chain Performance Management Suite, and SpeedSolve – Chat-based customer support product. Infosys also offers a suite of business platforms called “Infosys Edge”, that helps businesses simplify digital marketing, multi-channel commerce, manage IT asset performance, increase  employee engagement and accelerate long term growth and profitability[3].

Following is a graphical representation of Infosys revenue from product services offered in FY 2011. A bulk of the revenue is based on application development and maintenance of existing applications for its clients.

E.      Geographic scope of the business

The Infosys brand has moved out of India. Infosys has a global footprint with offices and development centers in 77 cities spread across 32 countries from Americas, Asia Pacific, Europe, Middle East and Africa. A bulk of the revenue is generated from managing the back-office computer systems of multinational companies in the US and Europe as shown in the following chart[4]. The company continues to expand at a great pace and is scouting for acquisitions in 'all geographies' to expand its overseas footprint.

F.      Business level strategy

The business model of Infosys is based on the Global Delivery Model (GDM), which takes advantage of the company’s global presence in delivering value to clients. Infosys pioneered the Global Delivery Model (GDM), based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk. Continued leadership around GDM enables Infosys to drive extraordinary efficiencies and free up clients’ resources for strategic transformation or innovation initiatives[5]. This means not only is Infosys becoming a global brand, but it also has the capability to support the global operations of multinational clients.

The company’s global presence allows its clients certain benefits which include the ability to work around the clock and business continuity. For example, if the client has working hours from 9 to 5 in the USA, the next shift picks up in India after 5pm in America and works when the USA office is closed. It also saves the customer from any disruption to its business in the event of say a natural disaster, as the business operations just get picked up by another location not affected by the disaster.

From the beginning, Infosys focused on “differentiation” strategy through innovation and quality and positioned itself as a premium IT service provider compared to its peers in the Indian IT services industry. In line with this, it also enjoyed higher margins of 25-30% as compared to its peers such as Wipro, TCS and Cognizant[6]. However, compared to its other global competitors such as Accenture, Deloitte and IBM, Infosys is a “low-cost” service provider.

    II.            Description and Brief Discussion of the Strategic Decision

A.     Strategic Decision

Recently, Infosys announced the expansion of its offices in China. Infosys is planning on establishing its own development center campus in Shanghai, Hangzhou and Beijing that can accommodate about 8000 employees, a sales office in Hong-Kong and a global education center in Jiaxing, with a proposed investment of $125-150 million. Infosys BPO, the business processing outsourcing arm of Infosys, is also setting up a new center in Dalian, China, with a 500-person capacity[7]. Though most Indian software firms have face difficulties in the Communist country, Infosys believes it’s all about perseverance and intends to hire 2,000 more employees, despite attrition rate climbing to an unusually high 20%[8]. In this paper, I will analyze Infosys’s strategic decision to expand operations in China and examine the strengths and weaknesses of Infosys as an organization as well as the opportunities and threats to Infosys as it pursues expansion in China.

B.     Time line and Timing of the Decision

Infosys established its first BPO centre in China in 2006. The decision to expand operations in China was announced in the late 2011 after 5 years of operating in China. Construction for the new projects has already begun. And when completed, the new centres will undertake projects in software development, IT services and IT-enabled services, and will also act as one of the training and research centres of the company. Infosys has big plans for China and sees it as a potential market for it to grow in terms of new clients and customers, and the low-cost high-skilled labor acts as a attractive source for the company to expand and setup new development centers outside India.

 III.            External Environment (Opportunities and Threats):

A.     Macro-environmental forces

1.      Economic

One of the reasons that encouraged Infosys to enter China in the early 2000s was the rapid growth of the Chinese economy which had attracted several multinationals, many of which were clients of Infosys. However in recent years, there has been an economic slowdown in China; while India’s stock market has soared in recent years, the opposite has happened in China.

China’s GDP growth rate has also been declining in the last ten years. Infosys will need to closely monitor the economic situation in China in the coming years.

2.      Political/Legal

The political environment in China also presents a higher degree of difficulty in conducting business as compared to India. India has a more laissez-faire attitude in both politics and business. China, being a communist nation, has greater regulation and involvement. Infosys had a first-hand experience of Chinese government regulation concerning the ownership structure, repatriation of profits and the shareholding pattern, when it first tried to establish a branch office and was given permission to set up a joint venture with the government[9]. Infosys was against the joint venture as both parties would have conflicting agendas; government with its political agenda of creating jobs and acquiring knowledge, and Infosys with its agenda for maximizing profit. Infosys then established a representative office and started working towards obtaining permission to establish a development center. These issues had delayed Infosys' Chinese venture but eventually Infosys set up Infosys Technologies (China) Co. Limited as a wholly-owned subsidiary in 2003 and Infosys Technologies (Shanghai) Co. Limited as a wholly-owned subsidiary in 2011.

The legal environment in China also poses a risk for Infosys in terms of Intellectual Property protection. Like India, the intellectual property laws are present, but not strictly enforced which results in software piracy and copyright infringement issues. When working with multinational clients in China such as banking, financial services or insurance, Infosys will need to strictly enforce governance standards to ensure intellectual property and sensitive data protection.

3.      Sociocultural 

Chinese programmers tend to have limited English-language skills are better equipped to understand and analyze material written in Chinese and to customize programs for the Chinese market. Infosys will need to invest in language and technical training of the employees to cater to multinational companies. Although the labor costs in China are lesser compared to India, Chinese employees are unlike Indian employees. Infosys has an extremely high attrition rate in China because the Chinese believe a 10-12% annual raise is not good enough^[10]. Infosys will need to find alternate ways to engage the Chinese employees and get return on investment for its training and maintain its profit margin.

4.      Technological

The foreign companies entering China are looking at established players in the software industry, who could understand systems, technologies, procedures and standards in China, and Infosys does not want to miss this high potential business opportunity. The market for software and IT services in China is expected to grow exponentially and according to Gartner, Indian IT companies are expected to account for 40% of this market.

B.     Industry and Competitive Environment

1.      Existing Competitors

Infosys is competing globally with other Indian IT companies such as TCS, Wipro, HCL Technologies, and Cognizant for clients as well as human resources. The 2011 global market share of its competitors is as presented below.

The most important reason for entering China was the soaring salaries of software professionals in India - a result of growing global demand for them^[11]. With an increasing number of international firms such as IBM, Microsoft, Accenture, and Deloitte competing with Infosys for hiring from the same pool of software engineering professionals, the gap between the demand and availability of skilled manpower in India was likely to increase further, and India was estimated to witness a shortage of 250,000 workers in the IT industry by 2009, according to a study conducted by KPMG and NASSCOM. However, Infosys will still face intense competition in China from domestic software companies as well as foreign competitors who are also trying to expand Chinese operations, many of whom have entered China much before Infosys. However, China is undergoing a huge industrial revolution and is an important emerging market with a strong talent pool.

2.      Threat of Substitute Products or Services

Infosys provides a range of proprietary products and support services that can be customized to suit the business needs of its clients across multiple domains such as banking, retail and insurance as described earlier. However, similar bespoke products and services are also provided by its global competitors as well as domestic competitors in China, so there is a higher threat of substitute products and services with lower switching costs. Infosys has been known to acquire long-term project contracts with its clients in US and UK. In China, due to the highly competitive domestic software services industry that is vying for foreign clients, Infosys will need to price the projects right in order to gain long-term contracts[12].

3.      Bargaining Power of Buyers

Due to the presence of a large number of domestic and international IT companies in China the bargaining power of its customers has increased. Also multinational companies may prefer to switch to domestic IT and consulting companies to leverage the local knowledge.

4.      Bargaining Power of Suppliers

Infosys has to compete for skilled-labor with the global and domestic IT companies in China as well, which increases the bargaining power of its suppliers, who are mainly software and IT engineers. Software companies are known to poach employees by providing a “joining bonus”. This may eventually drive up wage levels, just like in India, making it more difficult to attract and retain employees.

5.      Barriers to Entry

The Chinese government regulations present significant barriers to entry to international IT companies. However, there are relatively lower barriers to entry to domestic IT companies, except in terms of technological infrastructure requirements.  

  IV.            Internal Environment (Strengths and Weaknesses):

A.     Mission

Infosys’s Vision and Mission are important drivers of its strategic decisions. The vision statement “We will be a globally respected corporation” reflects its intent for going global and expanding globally. The mission statement “Strategic Partnerships for Building Tomorrow’s Enterprise” reflects a desire to acquire or partner with the right company with complementary expertise. Infosys Chief Executive Officer and Managing Director S. D. Shibulal articulates his vision of the smart enterprise by focusing on “emerging economies” as one of the key drivers of business. In light of these views, the decision to expand into China clearly supports Infosys’s mission of becoming a global enterprise.

B.     Financial Position

Reviewing the financial statements of Infosys at the time it entered China, Infosys' global revenues increased by 33.5% from Rs 71.3 billion in the financial year 2004-05 to Rs 95.2 billion in the financial year 2005-06. However, its Chinese subsidiary had incurred loss of Rs 166 million on revenue of Rs 260 million. The reason for this loss, Infosys said, was that though it was able to secure some local clients, it was unable to attract foreign companies operating in China to procure its services[13]. By altering its premium pricing strategy and leveraging its competitive advantage with existing multinational clients in China, Infosys has been able to gain a sturdy financial position in China and has been listed as the Top 10 global service providers in China by the China council for International Investment Promotion[14].

Infosys is in a strong financial position with revenue of more than $6 billion in 2011. Infosys has been consistently enjoying not only financial success but also a very high price-equity ratio that gives it an excellent valuation on the stock markets and a blue chip status. This implies that it has the capital to expand, and also the basis to leverage potential investors. Infosys hopes that its Chinese operations would contribute 10% of its total revenues by 2015[15].

C.      Sources of Competitive Advantage

Infosys has a strong brand recognition in the IT industry in India and abroad. It was the first Indian company to list on a US Stock Exchange. It is ranked among the 50 most respected countries in the world by Reputation Institute’s Global Pulse 2009. It has also been voted most admired Indian company in the Wall Street Journal Asia since 2000. The strong brand identity would definitely help Infosys in attracting employees as well as new clients in China. Many of Infosys’s existing clients have moved into China, and they might prefer to continue their strategic IT alliance with Infosys to leverage existing knowledge and keep learnings within the company. Having Infosys located in China, will give the proximity advantage for customer service that Infosys maintains with its on-site client locations.

Infosys China office has been operational since eight years and has served as an additional base for global customers. The time zone difference between the western countries and China will help Infosys leverage its Global Delivery Model effectively. The low labor-cost advantage will also help Infosys in maintaining its profit margins and differentiation strategy while providing value-creation products and services to its clients.

Infosys has a comprehensive portfolio of solutions as well as IT quality standard certifications such as CMM Level 5i and Six Sigma expertise to differentiate from domestic competitors in China. Infosys also has excellent infrastructure, telecommunication facilities and the capability of global 24/7 delivery through its development centers in other locations, which gives it a competitive advantage over the domestic competitors.

Infosys has been awarded the No. 1 spot globally for its corporate governance practices and No. 2 spot for its financial disclosures policies by IR Global Rankings (IRGR). IRGR is the most comprehensive technical ranking system for investor relations websites, corporate governance practices and financial disclosure procedures[16]. This will definitely provide Infosys a competitive advantage compared to other IT companies in China, which has a weak legal structure.

Despite being a huge IT company compared to its Indian competitors such as TCS, HCL, Wipro and Cognizant, Infosys is much smaller than its global competitors such as IBM, HP and Accenture. Infosys generated $6 billion in 2011, which is relatively low in comparison with large global competitors such as Hewlett-Packard ($91 billion), IBM ($91 billion), EDS ($21 billion) and Accenture ($18 billion)[17]. Also, Infosys’ Chinese office has been operational for only eight years, so it has relatively less experience in China than some of its other international competitors.

Infosys has also been struggling with high attrition rates of 14.9% in 2012 due to wage-hike issues. These attrition numbers are thrice as much as the general industry rate[18]. Infosys will need to revamp its human resource strategy in China to prevent a high attrition and retain its resource knowledge and capabilities within the organization.

Infosys does not have experience with acquisitions and has traditionally been averse to acquisitions; its first acquisition was Lodestone Holding AG in Switzerland in October 2012. There is a significant learning curve from incorporating another company, especially when the parent company has a strong corporate culture. As Infosys plans aggressive expansion in China through acquisitions, it should look to find a suitable company with a similar corporate culture to avoid any culture clashes that create disharmony within the organization.

D.     Corporate Governance

In the last ten years, after founder Narayan Murthy stepped down as CEO, Infosys has had four CEOs, with each of the co-founders taking a shot at leading the company. This has affected the company’s growth and critics say that Infosys is overly focused on service delivery and not enough on sales; that it is slavish to preserving margins at the expense of winning new business[19]. Infosys’s new CEO S.D. Shibulal who took over in 2011 is the main driver behind the strategic shift towards global expansion through acquisitions.

E.      Corporate Culture

Infosys has a strong corporate culture, where each employee is treated as part of the Infosys family and referred to as “Infoscion”. It invests in its employees with a long-term goal and trains them to become global employees, so as to facilitate easy movement of resources between different development centers and client locations. It is common for employees to rotate between on-site client locations and off-shore development centers. Customer-centric focus is a strong part of the corporate culture and the company urges its employees to work towards “customer delight” and not simply “customer satisfaction”. Infosys’ approach in China is also with a long-term view of obtaining skilled resources to join the Infosys “family” and work towards creating a strong skilled labor base.

F.      Code of Ethics

Infosys is a highly respected IT company that considers ethics critical to its business strategy. Although Infosys is targeting China mainly for low-cost labor, it is focused on delivering long-term value to its employees, shareholders and society[20]. Many manufacturing companies like Nike are known to take advantage of the low-cost labor in China through sub-contractors, which can cause labor law violations and worker exploitation. Infosys is known to invest heavily in training its employees to support the long-term goals of the company and not exploiting its employees for short-term gains. Infosys’ long-term goals in China are evident from the $125-150 million investment in establishing its own campus in Shanghai versus subcontracting to local IT companies in China.

     V.            Global Ethics and Social Responsibility Considerations

Infosys has been consistently viewed as the most transparent and ethical organization by the customers, employees, society and the investor community. Infosys's founder and Chairman Emeritus, Narayanamurthy, has always been a great follower and advocate of ethics in business. While a number of organizations today are engaged in window-dressing their accounts and also are trying to communicate a performance far better than the actuals, with a view to inflating their valuation, Infosys always followed the policy of naked transparency in front of the investing community, through their ' When in doubt, disclose' approach[21]. Infosys was ranked among 'India's Best Companies to Work For - 2009' in a survey by the Great Place to Work® Institute India in collaboration with The Economic Times. Infosys featured among the best companies for large organizations and corporate social responsibility.

  VI.            Final Conclusion and Summary

With the slowing growth rate in the last ten years in US and Europe due to economic slowdown, a turbulent corporate leadership at Infosys, growing pressure from the shareholders, the increasingly competitive skilled-labor situation and soaring salaries in India and an emerging market in China, I think Infosys’ China expansion is a need of the hour. However, Infosys will need to keep

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