As I return from another trip to Bangalore, India to work with a new group of entrepreneurs at the Emergent Institute's Flagship Program, I find myself reflecting on the recent Detroit Bankruptcy and what this might portend for boom cities in the developing world like Bangalore. Everything has a life cycle, including cities. The decline and fall of Detroit over the past few decades has been painful to watch--as it descended from the thriving auto capital of world with over 2 million people into a de-industrialized wasteland with fewer than 1 million people, double digit unemployment, and more than 100,000 derelict buildings. Perhaps bankruptcy signals the end of the cycle of decline and the start of rebirth--witness the influx of young people and new start-up ventures bringing what appears to be a renewed entrepreneurial spirit.
Such a new spirit is sorely needed in a city that came to be dominated by three companies, all in the same industry, for more than a century--Ford, General Motors, and Chrysler. Emerging from the entrepreneurial mayhem of the early 20th century, when there were hundreds of auto ventures competing for a stake in the new industry, the "Big Three" eventually came to dominate, until international competition, rising labor costs, complacency, and strategic inertia began to erode their positions in the late 1970s.
As I look at the recent boom growth in Bangalore, I find myself wondering if the same scenario might play itself out again, this time in a 21st century IT context. Twenty years ago, Bangalore was a sleepy pensioner's city of little more than 1 million people. With an ideal climate and beautiful parks and trees, Bangalore was known as the "Garden City."
Then came the IT boom and the rise of business process outsourcing (BPO). Much like Detroit came to dominate the auto industry with the "Big 3," so too did Bangalore in BPO with its own "IT Big 3"--Infosys, Wipro, and Tata Consultancy. Driven by the IT boom over the past two decades, Bangalore exploded with growth, attracting millions of migrants, and is now a chaotic city of more than 10 million people, with burgeoning slums and shantytowns, and a major traffic problem.
And while the "IT Big 3" have generated tremendous wealth and a whole new commercial enclave-- "Electronics City"-- the boom growth has also taken its toll: Today, Bangalore is known as the "Garbage City" in the same way that Detroit, in its "Motown" heyday, was burdened by a pall of pollution from Ford's "Rouge Complex" and the other auto company operations.
The parallels with the auto industry continue: The strategies and business models of the "IT Big 3" have now begun to erode in the face of international competition, rising labor costs, complacency, and strategic inertia. In its early years, the BPO revolution was premised on low cost and acceptable quality, enabling US and European players to reduce their costs without much sacrifice in quality or service. Unfortunately, the Bangalore boom over the past 20 years has meant steadily rising costs for the "IT Big 3." Real estate has become expensive and the cost of living has skyrocketed, so starting salaries for entry level BPO workers have also had to rise to keep pace, eroding the low cost position that was the premise of the original strategy. Turnover has also become a serious problem as the thousands of young people, initially attracted by the lure of the big city and high tech, leave the IT Big 3 after only one or two years to seek other opportunities.
Increasingly, the "IT Big 3" are beginning to look like the "GMs" of the IT space--large, centralized bureaucracies with an increasingly disgruntled workforce and an eroding competitive advantage. Indeed, over the past few years, Western companies have begun to bring their call centers and back office operations back to their home countries--even the US-- because it is actually cheaper to operate there, especially in places like Detroit!
In addition, new and more robust competitive models have emerged with ventures like NextWealth, which seek to capitalize on the growing numbers of college graduates in the Tier 2 and Tier 3 cities and towns by starting smaller-scale "rural" BPOs with only 25-50 employees each. Such a distributed model allows recent graduates to remain in their home towns, avoiding costly and disruptive relocation, and also enables the companies to compete with much lower starting salaries, since the cost of living in the smaller, more rural locations has not risen as quickly as the major metropolitan areas.
While some in the "IT Big 3" have recognized the disintegrating nature of their competitive positions, comparatively little action has been taken to significantly amend or modify their strategies to either: 1. offer higher value-added services (to justify the higher costs); 2. Diversify into new lines of business; or 3. launch disruptive new business models that might significantly reduce costs and tap into the rise of the smaller cites and towns.
So, as I return from India after working with just such a group of entrepreneurial disrupters, I wonder what the possible decline and fall of the "IT Big 3" might hold for Bangalore. Already facing major challenges in infrastructure, services, and growth control due to rapid in-migration, a collapse of the IT sector could be devastating. It could make the hollowing out of Detroit look like a warm-up act.
Will Bangalore become the next Detroit?
To avoid this fate, Bangalore and cities like it must seek to spawn entrepreneurship on a scale that we cannot yet imagine. Corporations must awaken to this competitive reality and realize that their future depends on disruptive, leapfrog innovation. We at the Emergent Institute and Enterprise for a Sustainable World stand ready to engage. That is our mission.
