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"We believe as a company that the rest of 2009 will continue to be tough. We think that 2010 will be difficult as well. So, for the next 12-18 months, we're taking a very conservative approach in our financial planning and expecting the recovery to happen slowly after that," Somasegar explains.
There are reports from the US that the worst of the economic crisis is over. Is it true?
If you look at the last hundred or so years, recessions have occurred several times; some with a larger impact than others. At Microsoft, we tried to analyse several of the last macro-economic downturns, and found, among other things, that when the economy expands exponentially, it sometimes goes through a reset, and then, takes a while to slowly get back to the original position.
Is this phenomenon cyclical?
I wouldn't call it cyclical but it has been happening every 20-30 years. We think it's a little bit different this time. We feel the economy is going through a reset; we don't think of it as just a recession.
The private debt to gross domestic product (GDP) ratio is at an all-time high. Before the Great Depression, the ratio was 150-160 per cent. This time, it has reached about 300 per cent. What it really means is, people have borrowed beyond their means and there was extra cash because of the borrowing. In other words, they spent a lot, and their ability to pay off their debt is much less.
We feel, therefore, that the economy is resetting itself, which means it will decrease to the right level and will not quickly snap back as it did previously. Instead, you will see normal growth from then on driven by normal GDP growth.
As Microsoft has a global footprint, we are in an interesting position to see the effects of this economic downturn from a very broad perspective.
How did you get the early signs?
We've got a pretty good listening system in place as it relates to indications of what's going on in the marketplace. We saw early signs in the small business segment, particularly when cash and credit began to really tighten up. That was the very first customer audience that really showed us an indication. When we hit the mid-September to October time frame, we saw it hit across all channels and all audiences and it certainly was very dramatic.
You said earlier that it was the debt driven economy that was the reason for all this. How will people look at debt after this?
When we looked at history, we found four major 'de-leveragings' that led to economic downturns: 1820, 1873, 1929 and today. The dotcom crash in 1999-2001 was largely restricted to the hi-tech industry, but these four major economic downturns spanned multiple industries and geographical boundaries.
Over the last 30-40 years, people have been borrowing more than they could or should. Anyone who was privy to the Great Depression would have surely advised a different path, but few people today experienced that. I would like to believe that future generations will learn from this economic climate and not make the same mistakes. This teaches us that we have a lot to learn from our own history.
What lessons can we learn from this recession?
It teaches us some good things. We have really moved from looking in the rear view mirror and studying the past, to positioning ourselves forward to focus on what we can control and what we can do about the environment.
We can't change a lot of the factors that are going on from a global societal and macroeconomic standpoint, but we need to stay focused on what we can control.
At the centre of what we do is software, and within that we are an innovation company. So, we continue to stay heads-down focused on innovation and taking a long term approach.
This year, we are investing over $9.1 billion in research and development (R&D). A year ago, we invested $8.1 billion in R&D. So, while most companies are pulling back, we are continuing to invest more in R&D. And I think that's a real privilege of working at Microsoft.
We as employees feel very good about that, because that's an investment in our future, it's an investment in the future of our customers and our partners. And so we're very focused on R&D, and we're putting our money, so to speak, where our mouth is, and backing it up by putting more.
How much has recession affected Microsoft?
Any good business, whether it is a tough time or a good time, should be thinking about managing costs. We have always aspired to do more than what our resources enable us to do, as we have many more ideas than we do people so prioritization is essential. As the economy is going through tough times, we are seeing the impact like most businesses around the world. So we are looking at all the projects we are doing in the company and making sure that we have our people focused on the right priorities.
Why did a big company like Microsoft lay off people while that's the last thing Indian companies are doing?
We have approximately 90,000 employees in our company. We continue hiring too, but in small numbers. We look at all our projects and allocate our resources to the ones that have the highest priority. If we find some projects that don't require attention in today's market, we invest in other areas. Whenever possible, we try to find opportunities for those people elsewhere in the company. For some people, if that's not possible, we unfortunately have to let them go.
Will the recovery start this time from developing nations?
I think China and India have an advantage. The financial controls in India, for example, have always been tight. The culture of borrowing is not very prevalent in India, at least when I was growing up here. If people borrow, they borrow within their means. I don't know how it has evolved in the last 15 years, but I feel that this culture will put the country in an advantageous position in these times.
Recession here is not as drastic as what you might see in the developed world because the hole that is dug is not that deep in countries like India; thus, they can recover much quicker.
When do you think we will see a turn around?
We believe as a company that the rest of 2009 will continue to be tough. We think that 2010 will be difficult as well. So, for the next 12-18 months, we're taking a very conservative approach in our financial planning and expecting the recovery to happen slowly after that.
How do you compare the mood in the US and in India?
Across the board, people are a little nervous and worried. The people I meet in business circuit are worried. So, there is not much difference in the way business people worry in both the countries.
From the consumer perspective, there is a little more optimism here than you see in the US. Do you think India's dominance in the IT industry will wane after the recession with drying up of outsourcing from the US?
No, it will be the companies' doing, if it wanes. If we do not innovate, India's leadership position in the IT industry could decrease. The services industry may see a slower growth rate in the short term but in the long term, India is in a fantastic position.
India and China have the best opportunity in the long term. We have a lot of human capital, and in this information-based economy, this factor is instrumental in keeping the country in a leadership position. How best we use it...only time will tell.