VZCZCXRO1975
RR RUEHBI RUEHCI
DE RUEHCG #1421/01 1881219
ZNR UUUUU ZZH
R 071219Z JUL 06
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 8905
INFO RUEHNE/AMEMBASSY NEW DELHI 1792
RUEHBI/AMCONSUL MUMBAI 4799
RUEHCI/AMCONSUL CALCUTTA 0546

UNCLAS SECTION 01 OF 02 CHENNAI 001421 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV PGOV IN
SUBJECT: HIGH COSTS HIT BANGALORE'S HIGH 
TECH INDUSTRY 
 
 
¶1. (U) SUMMARY: Escalating labor and fixed costs have 
prompted two U.S. high technology companies, Apple 
Computer and Pervasive Software, to close their recently 
opened Bangalore operations.  A shortage of qualified 
talent at a reasonable cost is cited as the principal 
reason for the closures.  Sky rocketing real estate 
prices and infrastructure overhead have also pushed up 
costs for the two companies, each of which employed fewer 
than fifty workers.  END SUMMARY 
 
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HIGH COSTS CAUSE COMPANIES TO LOG OUT OF BANGALORE 
--------------------------------------------- ----- 
 
¶2. (U) Apple Computer announced the closure of Apple 
India Services Limited, its wholly-owned, Bangalore-based 
subsidiary on May 29, 2006.  Close on the heels of 
Apple's announcement, Austin, Texas based Pervasive 
Software, which specializes in developing data 
infrastructure solutions, said on June 21, 2006 that it 
was closing its Indian subsidiary, also based in 
Bangalore.  Both companies cited high labor costs as the 
primary reason for their departure.  Each of the 
operations was relatively new.  Pervasive Software had 
operated in Bangalore for a little over a year and Apple 
Computer for only a few months. 
 
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EXPERIENCED BANGALORE TECHIES DEMAND HIGH WAGES 
--------------------------------------------- -- 
 
¶3. (U) Sharp increases in labor costs, especially in the 
past two years, have blunted Bangalore's edge in hosting 
low cost, high quality information technology companies. 
According to the National Association for Software and 
Service Companies, salaries at the entry level have grown 
between 11 percent and 15 percent in the last two years, 
while at the senior levels wages have risen by 30 
percent.  In fact, at senior levels salaries in some 
cases are actually higher in Bangalore than in the U.S. 
Indian business press reports quote a study produced by 
Stanton Chase International, a human resource consulting 
firm, as saying that a U.S. manager with 10 to 15 years 
of experience earns between $100,000 and $150,000 as 
compared with $200,000 paid to their Bangalore-based 
counterparts.  U.S. firms like Cisco and Motorola are 
finding it cheaper to relocate a U.S.-based manager to 
India rather than recruit a manager from Bangalore. 
Recruiting in Bangalore is more focused on entry level 
engineers who earn an average salary of $9,000 annually 
in the city.  That is one-seventh of what their U.S. 
counterparts receive.  Companies are required to make 
additional training investments in these entry level, 
India-recruited engineers, however, to impart the 
necessary knowledge and skills.  With competitors always 
ready to head-hunt for trained staff, most companies 
report an attrition of 10 to 15 percent. 
 
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REAL ESTATE PRICES AND POWER OVERHEAD ADD TO COSTS 
--------------------------------------------- ----- 
 
¶4. (U) Skyrocketing real estate prices which range 
anywhere between $200 and $300 a square foot in prime 
business locations as well as infrastructure overhead 
such as 100 percent power backup, add significantly to 
costs.  Small operations like those of Apple and 
Pervasive which employed fewer than fifty people each are 
particularly hard hit as their fixed costs have soared. 
Interestingly, both companies plan to continue their 
outsource relationships with third parties located in 
Bangalore. 
 
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A PLACE OF THEIR OWN? 
--------------------- 
 
¶5. (U) Senior executives at Mindtree Consulting, a mid- 
sized Indian software company, told Post that the company 
decided to move to its present campus outside the 
Bangalore city limits after the cost of acquiring real 
estate in the area began shooting upward.  Because the 
company headcount is more than 3,000, a separate company 
campus made economic sense but IT executives suggest that 
an owned campus is rarely feasible for companies with 
fewer than 1,000 employees. 
 
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SHOW ME THE SAVINGS 
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CHENNAI 00001421  002 OF 002 
 
 
 
¶6. (U)COMMENT: A long list of U.S. companies in the 
information technology business have invested or plan to 
invest in Bangalore to leverage the city's reputedly low 
cost, high quality Indian labor.  But with Indian 
software companies as well as others from all around the 
world planning massive expansion of their operations, 
hoped for savings may be harder to find than in the past. 
It may be increasingly difficult in the future for U.S. 
IT managers with operations in Bangalore to answer 
executive requests to "show me the savings."  END COMMENT 
 
HOPPER