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US auto crisis: Indian IT feels the pain

By BS Reporter in Mumbai
May 06, 2009 11:13 IST
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US auto major Chrysler's filing for bankruptcy and talk that General Motors may have to follow suit are making Indian information technology firms edgy. Tata Consultancy Services, Wipro and Satyam Computer Services are some of the Indian IT vendors who have both the auto majors as their clients.

Chrysler and GM each annually outsource $200-300 million (around Rs 10-15 billion) worth of projects to different vendors, which may be hit by 20-25 per cent, says Avinash Vashistha, chairman and CEO, Tholons, a research and advisory firm.

Chrysler signed a $120 million (around Rs 6 billion) deal with TCS for application maintenance and support services in April 2008. This was in addition to another deal, estimated to be worth $100 million (around Rs 5 billion), in February last year.

Additionally, GM is an over $100 million (around Rs 5 billion) account for India's largest IT services provider.

"GM is among TCS' top 10 clients. For TCS, these two auto majors account for 2-3 per cent of its revenue," said an analyst tracking the firm.

The automobile industry is one of the focus markets for the IT major and comes under the manufacturing vertical, which accounted for 10.5 per cent of TCS' FY 2009 revenues.

Announcing its fourth-quarter results, TCS had admitted to 'uncertainty and continued weakness, which could hurt performance going ahead.'

GM is also one of Wipro's top clients. The Bangalore-based firm signed a $300 million five-year deal with GM in 2006. This was in addition to the projects it already got from GM. In 2006, GM was contributing close to $30 million revenue for Wipro on a quarterly basis.

GM is also among the top 10 clients of Hyderabad-based Satyam, recently acquired by Tech Mahindra. Satyam won a five-year $150 million deal from the auto major in 2006.

A senior official from Satyam, however, said GM was a small client and the company would not face any major impact of any adverse development at the automobile major. "Besides, the work that Satyam does is critical and will go on," he added.

Analysts, however, say that while in the short term there will be an impact on new deals from these firms, the outsourcing story is intact.

"In the short term, any increase in outsourcing deals will be suspended. But once a new owner or a new restructuring plan is in place, outsourcing will be back in focus. Cost pressure in the industry is huge and firms are keen to outsource. Whether the beneficiaries are Indian IT vendors or MNCs like IBM and Accenture remains to be seen," said Vashistha.

Analysts feel a filing under Chapter 11 in the US does not mean closing shop.

"In India bankruptcy means closing business but it is different in the US. By filing for Chapter 11, the firm is saying that it has some issues and asks courts to step in and manage its creditors and suppliers. In most of the cases, if a supplier or a creditor is core to the company's operations, it is paid on time. As for any new development or ramp-ups, that will obviously take time," said Siddharth Pai, partner and MD, TPI India.

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