H-1B Visa curbs impact on outsourcing and real estate

Bindas Bhai has asked a very relevant question on the impact of H-1b Visa curbs on outsourcing. here is my analysis on that question and I will assess the impact to real estate in India as well. Others can chime in and discuss further.

Question :

Will IT revenues/salaries be hit by the H-1B/L-1B visa clampdown ?

Short Answer : YES

Long Answer : The revenue earned by IT service providers will decrease since the wage arbitrage between the salary paid to the H-1B/L-1B employee versus the hourly rate billed to the client will decrease. Its a well known fact H-1B employees are paid up to 40% lower then local US citizens or green card holders. Many IT service providers charge a hybrid rate or a blended rate to account for onshore and offshore resources. As the number of local onsite employees reduces, the blended rate will tend to decrease. As the revenue earned by the IT companies reduce, so does their inclination to grow the workforce in India, invest in training and hire more employees. The focus is now on cost-cutting be it reduced transportation options, decreased food subsidy and elimination of fringe benefits. All IT companies have a variable pay component which will reduce to zero or almost zero as they face pricing pressure, project cancellation and reduction in onsite billing.

The net impact on the IT service employee is that he has less income when offshore and reduced options to go onshore. Most IT employees factor the onshore component into their salary. Now since that component will be zero for the foreseeable future due to the visa clampdown, their ability to take more liabilities in terms of housing loans and car loans will reduce.

Will H1 visa problem increase outsourcing jobs in India ?
Short Answer : NO

Long Answer: Conventional wisdom will dictate that as H1-B's visa reduce, most work done by the H-1B's will move offshore or to the home country of the H-1B workers. However this is not the case this time. There is huge unemployment within the IT workforce as companies in every corner have cut any surplus employees and are operating with minimum capacity. There is still room for more layoffs and more employees are coming to the market as the quarter revenues keep declining and layoffs mount. There is increased pressure on local salaries and it is no uncommon to see pay cuts up to 30% in many cases. In the case of startups, there are some cases where people are willing to work for free to gain experience with the hope that the employer will hire them when the market turns around. I've seen some billing rates of $10-15 in this market, something which the IT offshore companies cannot match even in India. Tech salaries will continue to decline into the next year and it will not be uncommon to find someone with experience working for $60k, a level we last saw in 1997. As the minimum salary to be paid to an H-1b worker is 60k, there is no wage arbitrage left for the IT service provider. The bigger issue is the clampdown on L-1 visa. L-1B visas have no quota and were used by every IT provider to bring in Indian employees to work in client locations.

The most interesting quote I saw today was from Mohandas Pai, the Infosys CFO. He said we are trying to understand the meaning of the word "employee" as it relates to the new H-1B bill. This sums up the conundrum Infosys is in. If they hire more local citizens and green card holders, they lose the wage arbitrage, they have to pay severances if they layoff locals, they cannot employ the performance appraisal sham to boot out employees by giving tests like they do in India. They now have to play by the US Dept of labor rules, something they have resisted till now. All things considered they will be forced to hire locals, reduce offshore resources to operate more efficiently.

As any experienced professional will tell you, there is a 10x productivity difference between a top IT employee and an inexperienced employee. IT companies operate on the premise that they can hire lower paid fresh graduates in bulk and replace the experienced bunch as the experienced bunch moves onshore. Now with the H-1B clampdown the option to move offshore been taken away, they will be faced with more experienced employees earning higher salaries on bench. As with the sub-prime the whole model worked beautifully as long as the employees kept moving onsite Now that the flow has reversed they have to adapt to the changed scenario. Will IT companies fire experienced staff and replace them with new graduates ? If some of them do, who will hire these experienced folks at their high salaries. Either these folks join new employers at lower salaries or they remain unemployed.

As we discuss IT companies, they are mostly concentrated outside Mumbai. Their real estate markets they affect are mostly non Mumbai. If you look at the R2Iclubforums.com polls, there are hardly any NRI's moving to Mumbai. Most end up in Pune, Bangalore, Chennai, Hyderabad and Gurgoan/Nodia. There is a trickle which makes Mumbai their homes after their return.

Now the question to ask is why will someone facing an uncertain future in India, with no hope of going onsite invest in a property of 1 crore ? This question is more pertinent to Mumbai more then any other place. All other cities you can get apts for under 50L, some even at 30L. Now if Mumbai is never considered an IT hub, apart from black money operators who has disposable income of 1cr or will get a loan of 80L in this market ? Now if still one believes Mumbai has headed for 50% jump in prices in the next few years, invest and check back in 2 years.