Are the doors of US closed for Indian IT? - Views on News from Equitymaster

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Are the doors of US closed for Indian IT?

Jun 13, 2013

After few months of debate, the US immigration Bill has been cleared by the US Senate on Tuesday, the 11th of June, 2013. The Bill has quite a few implications for companies that rely on work being outsourced from US. The most notable are those in the Indian IT sector. Therefore let us analyse the aspects of the Bill, which can influence the IT sector. Our idea here is not to look at the impact on a specific company but on the sector as a whole. Here are some key highlights of the Bill:

  1. Outplacement of H1B workers from client offices: This proposal prevents the placement of H1B (a non-immigrant visa) holders on client locations. We believe that this particular proposal will have a material impact on the workforce composition of all the major Indian IT companies. This is because they will have to replace a substantial portion of their onsite workforce that are currently on an H1B visa in the US, with local hires. As it is, the subcontracting charges, i.e. payments made to local experts in the US to do IT related work is on the rise since the last two financial years. So, this proposal is expected to increase the cost of employees located in the US even more.

  2. 50:50 Rule: This provision intends to limit the proportion of visa-holders (H1B and L1) to 50% of an employer's overall US workforce starting FY17. For FY16, the norm is less than 65% and for FY15, the norm is less than 75%. Thus, any Indian IT company with more than 75% of its US based employees on H1B/L1 visas will not be able to apply for any visas in FY15. This proposal is again expected to put cost pressures on Indian IT companies. Like the previous provision, they will have to rely more on local hires to fulfil their client demands.

  3. Increase in visa processing fees: Most Indian IT companies will have to shell out an additional USD 10,000 as visa processing fees per additional worker from 2015 onwards. However, from a longer term perspective, we are a bit circumspect as to how this provision will impact the cost structure of the Indian IT companies in the US, given the outplacement and 50:50 rule.

  4. Higher wages for workers on H1B visas:It is a widely known fact that Indian workers on H1B visa working onsite in the US have a much lower salary than permanent US residents. The new Immigration Bill proposes to do away with this cost disparity by increasing the minimum salary that is to be paid to an H1B salary holder. This again would lead to higher employee costs for the companies.

  5. Creation of an H1B job data base and mandated job postings before hiring an H1B resource: This particular immigration provision envisages that any open position should be advertised on the US Department of Labour's website for at least 30 days before hiring an H1B holder to fill the position. Obviously this move is intended to promote local hiring. It is interesting to note that unlike the current 8% average unemployment rate prevailing in the US, the unemployment rate in the IT sector is in the range of 4%-5%. So, again this will add to the cost pressures of the Indian IT companies as demand-supply gap of local talent in the US is not very high.
To conclude

It is clear from the above provisions that the Indian IT sector will be under pressure once the new Immigration Bill becomes a law. Therefore, in order to thrive it would be imperative on the Indian IT companies to offshore i.e. do as much work as possible from India. We believe that most Indian companies are capable of doing so. Further, with the advent of cloud computing and Software as a Service (SaaS) model, low-end deliverables can will gradually be independent of location.

Taking a closer look at the outplacement provision, we find it interesting to note that the Bill prevents H1B workers to be present at client locations. Thus technically Indian software professionals on an H1B visa can be stationed at the Indian IT company's local premises. However, this may not be practically possible as Indian workers are stationed at US clients premises spread across the country. So, the most convenient way of confronting the situation will be to have more employees with L1 visas on payroll.

We further note that an offshoot of the outplacement and the 50:50 provisions will be the impact on onsite utilisation of employees based in the US. Indian IT companies generally maintain an onsite utilisation rate of above 90% in all their locations abroad including the US. They are able to do so as they have the flexibility to send back the Indian employee back to India if sufficient project related work are not in store for them. Post the implementation of the above two provisions, Indian IT companies will not have this particular flexibility. As such the cost burden seems unavoidable. Therefore in all likelihood we would see the margins of the Indian IT companies come under pressure.

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