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“Bangalore, the Silicon Valley of India

is crumbling and not able to cope up
Digg
Digest on Stands
with the unprecedented growth” – this
is the message anybody will get if he submit
has been keeping track of the media in
the last one year. Both, the corporates
and the public is equally vocal on the state of
crumbling infrastructure, traffic congestion, power
shortage, inadequate airport facility and above all
the government’s apathy towards acknowledging
and solving these issues.

A strong sentiment of despair is clearly visible and it’s widely believed that if things
don’t improve soon, Bangalore’s boom will be history. This might as well douse the
enthusiasm of existing companies and drive them to take their expansion plans to
other emerging cities in India.

Indeed, Bangalore has shot to the top of world IT map quickly. Bangalore has more
than 1500 IT companies (In fact, it adds 4 new IT companies every week) which
employ 2.85 lakh IT professionals and still growing at more than 30% annually. On
top of it, there are 20,000 biotechnology workers in the city. The IT industry has a
multiplier effect on the local economy and many more are employed in support
industries (transport, catering, security etc) that thrived with the upsurge in IT and Subscribe to
BPO. Bangalore is the choice destination for more than 450 MNCs, 66 global Fortune Businessgyan
500 companies apart from innumerable home grown companies. The city has grown
over 11% per annum over the last decade to be seen as one of the top two IT Digest
destinations in the world and virtually become a global brand. Click here to Subscribe

But what made all these tech giants choose Bangalore as their base? To analyze
this, let’s look at what the factors are that make a particular city or cluster attractive
for an industry. These are broadly as follows: Related Items:
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Infrastructure Power, Telecom, STPI, Physical, Roads, Airports Million Truck portf
Financial Cost of Living, Real Estate Prices Oracle opens Bangalore centre
to cash in on the
Catalysts Government Support, Supporting Industries, Social Yahoo to establish research lab
& Political Stability, Competing Companies, in Bangalore
Development of City, Weather

Articles Menu
Source: neoIT India City Competitiveness Report
Main Menu
Bangalore had and still has an edge in most of the parameters vis-à-vis other Indian Home
cities. Most of these advantages go beyond cost competitiveness. The most critical Business Personalities
aspect of the knowledge based industry is availability of quality workforce. Karnataka Economy & City
is considered to be the knowledge capital of India as the education system is well Business in Bangalore

http://www.businessgyan.com/content/view/994/415/ 6/11/2009
businessgyan - Competitive Advantage of Bangalore and a New Phase of Evolution Page 2 of 5

tuned in for IT and BPO sector requirements. Karnataka has 135 engineering Bangalore
colleges, 103 R&D centers, 181 polytechnics, 600 ITI and 11 universities to see that Economy
enough talent pool is available locally. Karnataka state government also was the Facilities
pioneer in the country to formulate IT industry specific regulations and provide
Finance & Legal
lucrative financial and non-financial benefits to IT and ITES companies. And being the
Human Resource
capital as well as commercial and political hub of the state, Bangalore was the
beneficiary. The “air-conditioned” city’s climate was an added incentive for the MNCs Marketing
and their foreign workers. In sum, the city provided excellent business environment Operations Gyan
and talent pool for the IT industry though the infrastructure was still lacking. The cost Personal Business
of living and real estate prices were still at par with most other cities in India. All these Strategy Thoughts
factors together created an extremely conducive ecosystem for the knowledge based Industries Focus
industry and propelled Bangalore into the world IT services horizon. Entrepreneurship
Take it easy
But, perhaps the city was not ready for such a massive and uninterrupted growth. It’s
Tech Talk
infrastructure couldn’t keep pace with it and the administration did not have the
foresight to take proactive action. Within a span of few years the city was bursting
with people and vehicles causing a severe strain on the infrastructure. Immediately
the cost of living & real estate prices shot up and the city’s attractiveness as an Syndicate
affordable destination was under threat.

A parallel development is taking place in other parts of the country which is

threatening Bangalore’s dominance in IT and ITES sector. Buoyed by Bangalore’s
success in attracting foreign investment and generating employment, other Indian
states have started developing their own IT and ITES hubs. These emerging
destinations go beyond traditional Tier I cities like Mumbai, Delhi, Hyderabad and
Chennai and Bangalore is facing challenges from Tier II cities like Gurgaon, Pune,
NOIDA, Chandigarh, Thiruvananthapuram, Kochi etc. The state governments of
these cities not only provided similar financial incentives and support conditions, but
also these Tier II cities are much cheaper locations. Companies (especially BPO) are
finding better loyalty among the workforce in these Tier II cities which is significantly
reducing their operating expenses. All these factors are narrowing down the
attractiveness differential between Bangalore and other emerging cities.

Is the Bangalore party over? – Not yet probably. First let’s look at hard facts. The
table below summarizes the growth of IT and ITES industry in Bangalore (except for
Software exports)

99-00 03-04 CAGR (99- 04-05 YOY

00 to 03-04) Growth (04-
05 over (03-
04)

No. of IT Companies 782 1322 14% 1520 15%

in Bangalore

Software Exports 957 4000 43% 6270 57%

from Karnataka (USD
M)

No of ITES/BPO 28* 113 101%** 138 22%

Companies in
Bangalore

ITES/BPO 56* 486 195%** 805 66%

Companies Exports
(USD M) from
Bangalore

No of Electronics and 18 36 19% 44 22%

Hardware Companies in
Bangalore

Total Exports from 40 369 74% 405 10%

Hardware Sector (USD
M) from Bangalore

* This data is for 2001-02 ** CAGR (01-02 to 02-03)

If looked at closely, one can see that Bangalore has almost maintained the
momentum of growth of the few initial years. This is commendable considering that
each passing year the base of comparison becomes bigger and maintaining the
similar growth rate becomes a daunting task. Out of the total Software export of US$
6270 M, Bangalore’s share is more than US$ 6000 M. The growth of BPO exports is
also excellent considering that the industry is entering into a slightly mature phase

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businessgyan - Competitive Advantage of Bangalore and a New Phase of Evolution Page 3 of 5

now and has a higher base to be compared with. According to McKinsey, the
number of people employed in the IT sector (excluding Hardware and Bio-technology)
is expected to touch 525,000 in 2010 from a figure of 240,000 in 2004.

The IT industry in Bangalore is entering into a new and mature phase, which is
characterized by a higher skill level and service maturity. Bangalore sees itself high
on the learning curve and has acquired greater competencies and project
management skills. It is high time organizations based out of Bangalore rationalize
their service portfolio and develop competencies that fit the prevailing conditions in
Bangalore. Bangalore is uniquely positioned as the city with highest availability of
middle and top management talent, apart from abundance of entry level IT and
general graduates. Thus companies based out of Bangalore have better project
management capabilities and carry out complex projects which require higher project
management and service delivery skills. Years of experience has also endowed
Bangalore based companies with better process maturity. In fact, half of India’s CMM
level 5 companies are based out of Bangalore.

Bangalore’s unique advantage also emanates from the mature and thriving
ecosystem that supports the IT and ITES sector. Apart from strong education system
that is a continuous source of quality manpower and industry friendly policies, the
existence of complementary and supplementary industries also makes Bangalore the
fourth largest IT cluster in the world. Other cities in India will have to go a long way
before they could nurture a similar mature ecosystem.

In fact,
Bangalore is
increasingly preferred by companies who want to outsource high end jobs or R&D.
Major global players like Motorola, Intel, Google, Philips, AMD, Microsoft, Texas
Instruments, GE, SAP, Daimler Chrysler, Oracle etc have set up their R&D facilities in
Bangalore. The reasons are spelt out before - greater skill set, project management
skills and better supplier maturity.

On the other hand, Bangalore is not finding favors for the expansion plan of city
based software giants (there are exceptions also e.g. Infosys) which fuel the
apprehension about Bangalore's dimming attractiveness. But a closer look will reveal
that Bangalore based facilities of these companies are actually performing higher end
and complex works which require better delivery capability, project management skills
and service maturity. Thus the IT industry in the city is upgrading and rationalizing its
services portfolio. Even the expansion plans of these city based companies have a
strong Bangalore centric approach. A lot of these companies are expanding to other
areas in Karnataka (like Mysore, Mangalore, and Hubli etc) so as to keep their
Bangalore facility as the hub.

neoIT's India City Competitiveness Index, which ranks various Indian cities in terms
of their attractiveness for the IT industry, Bangalore continues to be the second most
preferred destination.

From the customer's perspective, Bangalore will continue to find favors with first time
offshoring firms - as it significantly mitigates risk because of the mature and
established service delivery capabilities. This trend is seen with customers working
with a third party supplier as well as firms setting up their own centers for IT. As these
companies familiarize themselves with the Indian conditions and try to expand, they
might as well be in the look out for other emerging locations.

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businessgyan - Competitive Advantage of Bangalore and a New Phase of Evolution Page 4 of 5

Secondly Bangalore will continue to retain it's high attractiveness on the services
globalization map, for more complex and higher end services outsourcing.

The Bangalore story is not over yet. Rather it is entering into a new phase of
evolution, where it'll be a base for higher end work to justify it's higher supplier
maturity and project management skill set. The emerging Tier II destinations have still
a long way to go before they can develop a mature ecosystem like Bangalore.
Bangalore still retains the attractiveness for new entrants due to its mature business
environment.

Mr.Sambit Kumar Panda is an analyst at neoIT. Their website is www.neoit.com e-

mail: sambit@businessgyan.com

Issue BG55 Oct05

Related Items:
A Talent Perspective
Arun Pai - Walk the Talk Bangalore Walks
Bangalore - Port of Export
Bangalore a Brand
Bangalore as a Business Destination - Some Vignett

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