Is It Over For India’s Outsourcing Model?

I always look at India’s tech industry for a possible indication of what the future might be for the VFX industry.

In a recent article titled Indian Outsourcing Model ‘Over,’ Says HCL Exec  , executives at HCL, a large Indian outsourcing tech company, have decided to stray away from outsourcing to India towards nearsourcing facilities to the US and hiring more workers that are US citizens:

“You can look at the early signs that the Indian IT model is over,” said Krishnan Chatterjee, head of global strategy and marketing at HCL Technologies, during an interview last week. “The question that customers are now asking is, ‘Are you willing to blend multiple services into an integrated offering, so we can talk as business partners, rather than you giving me 10 bodies who will churn out x lines of code at the cheapest rate.”

To meet demand for onshore services, HCL is building out its presence in the U.S. Company officials said about 8,000 of the their 83,000 employees are now in the United States, and that number will grow.

Ultimately, it wants more than 12% of its employees to be based in the U.S. or Europe by 2015. About 40% of HCL’s current U.S.-based workers are Americans or green card holders; the rest are on H-1B and other temporary visas. Officials say they also want a larger percentage of their U.S.-based workers to be citizens or permanent residents.

Along the same lines, companies are marketing their services for near sourcing rather than outsourcing:

“Conventional cost-based thinking regarding outsourcing is dead,” states Raymond Watt, U.S. practice manager for Red-Consulting, an independent Oracle-certified tech support company. “The evidence is stacked against outsource frugality. Forbes recently published scary statistics about the rapid rise of Indian salaries. By 2015, India’s cost advantage over the United States will have disappeared. Then what? The recent launch of AlwaysOn, our North American counterpart, is the response to that question.”

The Countries Most Threatened By VFX Outsourcing Are India And China

When I first started this blog, I asked a rhetorical question:

when I look at the evidence and get asked which countries are most threatened by outsourcing of vfx work you know what my answer is?

India and China

Most would think the US is at most risk but much of that is due to government film subsidies used as a lure to artificialize the price of VFX.

For India and China, their bread and butter is having the cheapest labor. However the double edged sword is in the reality that wages are rising in both countries, the quality is stagnant, and other cheaper labor pools are joining the market to compete as bottom feeders.

Still Don’t Believe Me? Look At Indian Animation

I wrote another post linking to an Indian article about the demise of it’s animation industry. The hope was that a new film called Delhi Safari would turn things around. It was supposed to be released last month but then nothing. No mention of when it will be actually released. You’d figure the claim that this was India’s best animated film to date would at least have a release date. No show radio!

If you still believe that India will soon catch up and dominate the VFX and animation industry then do me a favor: Put your money where your mouth is.

Last week Digital Domain was lampooned for trying to become a publicly traded stock. It turns out India’s Crest Animation which made last year’s Alpha & Omega has been a publicly traded stock in India for the last 12 years. Take a look at their historical stock price which was $US 23 a share at one point. It’s now hovering at around 55 cents a share.

Would you put your money in an Indian animation company? Given the return on investment, you might be better off outsourcing that decision to a table in Las Vegas.

Soldier On.

 

31 Responses to Is It Over For India’s Outsourcing Model?

  1. David Rand says:

    Great coverage Soldier.

    I bought a bit of DDMG this morning at $6.20 a share.

    In 1994 i was part of the finance team that brought the first foreign money into India, Oppenheimer’s India Fund (IFN) NYSE. It tanked at first, I had so many clients with the last name Patel yelling at me as mostly NRI’s (non resident Indians) bought the stock and Patel is a very common name. I still have nightmares about that. Over the years IFN began to do very well. India’s Middle class is bigger that all of North America’s population and that became a driving force.

    In 2008 I went all in on the worst days. I’m up 600%.

    If you only buy stocks when things are great you may be missing on the some of the best prices. Risk and reward go hand in hand, Buy when there’s blood in the streets….etc…

    Some have no risk tolerance and some money is not to be put at risk so act accordingly.

    As for the animation company I’ll see what I can dig up tonight Looks like it spiked on the offering, Thanks for highlighting it.

  2. David Rand says:

    Could be a “dead cat bounce”. I’d like to get more a good prices for in the long run I still believe they have a good chance. Times are changing, I have faith in our industry, and in DD’s talent and product.

  3. meh says:

    It’s clear from Occupy, the American debt crisis, the shrinking American middle class, China buying into Europe and India buying into western VFX that the old outsourcing model is dead. The ‘threat’ to western VFX is not outsourcing but commodity pricing pressure from investors based in countries without unions
    http://www.imf.org/external/pubs/ft/survey/so/2011/new040511a.htm

    • VFX Soldier says:

      Could you cite an example of how Western VFX facilities are effected by commodity prices?

      • VFX Soldier says:

        The vfx facilities are commodities, the talent is not.

        If what you said was true, then why are facilities like ilm and weta able to separate themselves from the rest: talent, not commodities.

        Furthermore, during the creation of a film I worked on, the studio side Oscar winning vfx supervisor was stressed by the fact he went through so many different facilities which led some to ask why he didn’t just choose one.

        He explained that each facility has their own “character”, essentially a personality for the vfx they did that made them uniquely different. While the technical aspect of putting it all together was tough, to him it was worth it.

        Doesn’t sound like he thinks it’s a commodity.

      • k says:

        Meh, I read both of those articles, and I don’t get from them the same thing you do. VFX workers are highly skilled individuals, and China is years away from producing such workers on their own. When they do gain the capability to train significant numbers of competent VFX workers, a substantial portion of China is going to have wages and living standards comparable to those in the west.

        The ONLY thing potentially driving VFX work to China is low wages. This is offset by the lack of training, education, studio infrastructure, and knowledge. Wages in China are rising much faster than those other factors are improving. Toss in the endemic Chinese corruption, the extraordinary costs of managing remote studios and remote workers, and the language/cultural differences, and the threat of high-end animation and VFX disappearing to China becomes a paper tiger.

  4. Rahul says:

    Outsourcing might be ending in India but it has just begun in Vietnam, Philippines or Cambodia.

    Well, this movie portrays that idea well http://www.imdb.com/title/tt0425326/

  5. k says:

    Thanks for highlighting, and pointing to some substance, regarding something I’ve been saying for years. The animation industry has a long history of trying to outsource. Part of Rocky and Bullwinkle was outsourced to Mexico in the 1960’s. TV blew up in the 1970’s and much of it went away. For decades since, many people have assumed EVERYTHING would follow suit.

    When I got into the industry in the 1990’s, everyone constantly told me it was all going to South Korea, Japan, and the Philippines. It didn’t. Most everyone who tried to send high-end work overseas lost their shirts.

    For 6 or 8 years it’s all been going to India. Yawn. Now it’s all going to China. Ha! I’ve been paid good money to try to fix the garbage that comes back from China. It’s a black hole for time and money.

    The rube above me is already shifting to the new sky-is-falling meme, that it’s all going to Vietnam or Cambodia or the Philippines (again). Excuse me if I plan to continue my career in here in the States for a while longer.

    • Rahul says:

      I believe outsourcing as bad for east as it is for west but I was just saying the reality. The business is not driven not by western or eastern values but with inhumane concept of supply and demand.

  6. k says:

    Rahul, sorry for referring to you as a ‘rube.’ No need for me to be disrespectful. I just get tired of hearing the same nonsense, over and over, for a couple of decades.

    • Rahul says:

      no worries matte, we all are frustrated with this business model! I don’t think any fellow artist would say outsourcing is good for them unless if they are owning the studio.

  7. bob says:

    K, did you not see TMNT? That was done entirely in China. Technology has advanced to the point it can and will be made where ever is cheapest. As far as L.A. is concerned it is all but dead. There are no large effects houses that have any plans to put or keep work in L.A.. If you don’t mind working 3 months a year only picking up 911 work sure you can stay in L.A.. The last minute save the show work will probably always be there. However the longer term show is anywhere but L.A. or soon will be.

    If we were organized we could have stopped it, like Washington Boeing workers are doing with South Carolina opening.

    This craft can be taught and it can be learned. It is arrogant to think otherwise.

    http://www.variety.com/article/VR1118047491?refCatId=1009

    • VFX Soldier says:

      And what happened to that Chinese company that made tmnt?

      • bob says:

        Not certain, what happened to the dozens of vfx houses in L.A. over the last decade or more?

      • VFX Soldier says:

        TMNT was created by Imagi Studios which shut down in 2010 because of financial woes. Hard to believe given how cheap the labor market is. Perhaps there is more to it than just labor costs?

        There is still a significant amount of work going on at Imageworks, ILM, Digital Domain, R+H, Method Studios, Luma Pictures, Hydraulx, Zoic Studios, Pixomondo, The Mill, Tippett, and the list goes on.

        What has changed is more jobs are project to project which is why I support unionization. The facilities that have shut down have done so not because of cheaper labor costs, but because of subsidies in other countries and the poor bidding model.

  8. bob says:

    Aren’t most of those studios having their work done in Canada and other countries and states or moving the work to other places. Last I heard half those studios were opening studios elsewhere and doing a large percentage of the work there for incentives.
    I don’t disagree with your point. However the trend is to put the work elsewhere.
    I want to add I am only pointing these facts out to raise awareness of how powerless we are staying unorganized. It is an anti-LA rant it is the start of a trend that is sure to grow.
    Take a close look at the Nike business model. They pick up and move to cheaper places constantly and that is the new vfx model. It is dangerous to ignore these trends and fruitless to hope that somehow some way jobs will return to Ca.
    Canada may fall, but London hasn’t, For years I too thought the work would return to L.A. but in reality more and more is simply leaving. It isn’t going to stop on it’s own. If Canada falls it will end up in the next place that is cheapest.
    Hoping it will somehow return to L.A. and wages will stop shrinking is not going to change that fact. They aren’t going to wake up one day and say you know what we should go back to the good old days when we paid artists well in L.A.. Just not going to happen.

  9. bob says:

    It is not an anti-L.A. rant. I mean

  10. Mahesh says:

    I dont agree with Someof the things u said, first of all Delhi Safari is not the best of Indian Movie, and not even Alpha and Omega.
    The reasons for worry to LA based studios starts from 2012 because the quality in Indian studios r really picking up take the example of movies like Tinker bell Movies done in India for Disney. Atleast 4 more Movies r in production in various studios in India like Dorthy of Oz (2013), Not born to be a Gladiator (2012), Ribbit (2012), Norm of the North (2013). These movies have made a sincere attempt at delivering quality output and they successfully delivered them in a fraction of Hollywood budget.

    • VFX Soldier says:

      4 or 5 years ago the same thing was being said of the failing slated of Indian animated films today. The articles I point to are from the Indian animation industry. They are talking about the challenges for a reason.

      Tinkerbell wasn’t a feature animated film, it was direct to dvd.

      How can India rise to the top and be the cheapest on the block at the same time?

      • Mahesh says:

        The failed slates ur mentioning were all Bollywood (Indian release) movies made by stupid directors and new studios not Hollywood and not outsourced…

        The 4 movies I mentioned r for international release by major Hollywood distributors like Universal, Lions Gate and Paramount Pictures… I agree they r not as good in quality now as much as major Hollywood releases, but its a big jump considering the fact that until 2-3 years back Indian studios survived only on low quality Tv series… Now 4 Movies at a time… Waaaw….

        We Indians are learning from Americans, let us take the first step now and deliver low budget movies with good enough quality for Hollywood standards, 5-10 years down the line i am sure we will learn enough to do stuffs that will surprise u…

        I am sure U would agree with most critics that Tinker bell was good enough for US theatrical release…

      • VFX Soldier says:

        Then why didn’t any of them get a theatrical release?

      • Mahesh says:

        They r currently under production and atleast one movie will release this Year…
        And plz dont think i am mocking u in any way, its the fact and I am discussing it in an open forum.

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