BRICs in the limelight again - Views on News from Equitymaster

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BRICs in the limelight again

Jun 9, 2009

BRIC nations pile on reserves
It is well known that the BRIC countries - Brazil, Russia, India, and China - were brought into the limelight by Goldman Sachs which had predicted that the economies of these four countries would surpass those of the West by 2025. Now, as reported on Bloomberg, the BRICs have once again garnered attention as the four countries have increased foreign reserves by more than US$ 60 bn in May to limit currency gains as the first global recession since World War II restricts exports. Obviously, given that exports of many of these countries have received a hammering, they are not keen on seeing their respective currencies appreciate against the dollar as that would further restrict the gains that exporters would enjoy.

However, given that the BRIC economies are in a much better shape than the developed world, renewed interest has been generated in these emerging countries as investors are seeking higher yielding alternatives to the US dollar. Further, while there is a lot of noise that is emanating from China, Brazil and Russia questioning the dollar's reign as the world's reserve currency and suggesting de-substituting the currency, we believe that implementing the same is easier said than done.

For then the question arises, which other currency would be better fitted to assume that role. The US currently maybe in the doldrums but so is Europe and Japan and hence it could be a while before the US dollar gets toppled as the currency of choice.

The allure of captive units is fading
The recession has changed the way companies are thinking in terms of opening captive centers in India. Many global companies, especially those in the West, that had opened centers in India to perform back end tasks at a cheaper rate are now selling off these centers or shutting them down as the need to scale down costs has assumed paramount importance. This is a complete U-turn given that till about a few quarters back, foreign companies were rushing to Indian shores to set up centers here to capitalise on the low cost advantage that India had to offer.

In the past, companies calculated that building their own offshore offices could save them from paying the 15% to 20% margin that outsourcers typically charge. But that view seems to have changed and many of these companies no longer feel that the benefits of managing their own centers are that considerable.

Given that employee churn at offshore offices is typically high and workers in India often receive annual raises, the cost structure of such centers can escalate rapidly. Also, as reported in the Wall Street Journal, it costs about 25% more to operate a captive center than to have an outside company provide the same services. Of course, despite Obama's recent remarks on outsourcing which do not bode well for India, the advantage that the country offers is too good to ignore and if global companies decide not to open their own centers in the country but instead go in for third party service providers then this could be beneficial to Indian IT firms who would see more business coming their way.

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