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Satyam’s Enron sequel

Satyam’s Enron sequel

   The plot of almost every single movie in Bollywood is largely or loosely based on a successful Hollywood film.

   So it’s little surprise to hear that the leader of Satyam, one of the world’s largest outsourcing firms, stole the script from that famous 2001 U.S. blockbuster, Enron. The only surprise is that this version got made at all.

   After Enron, and its mildly successful sequel, WorldCom, we weren’t supposed to be seeing this movie again. Regulators were going to crack down and make the world a better place. Well, Sarbanes-Oxley seems to be doing the trick in the United States. But then again, maybe not. Satyam is listed on the New York Stock Exchange and was supposed to be S-Ox compliant.

   But after we read the company’s chairman admit that 50 billion rupees of the company’s 53 billion rupees in assets were “non-existent,” it seems like we’re starting from square one. I’ll get to the implications for India later, but let’s not pretend that this is an issue solely about India and Indian companies. We’ve seen the failure of banks and companies globally have a profound effect on markets thousands of miles away from the epicenter. The ripple in a pond is an apt metaphor.

   U.S. and European companies have become so reliant on outsourced services from India and the Philippines that the failure of one major company will shake up how companies think about their backroom staffs. Satyam had 53,000 employees and, according the New York Times, did work for one-third of the Fortune 500 companies.

   Back to India, it’s really hard to imagine what effect this will have on the economy. Coming as it has a few months after global markets crashed, and after the Mumbai terrorist attacks, it will be a serious test of the economy’s resiliency to quickly bounce back.

   On the supply chain side, there are a couple issues to ponder. One is that India has been actively trying to foster a reputation as manufacturing nation, not just a service oriented one. Though it’s portrayed differently in the West, less than 1 percent of the country’s workforce is employed by outsourcing firms (or BPOs as they’re more commonly called here). Do the math. Satyam was the fourth-largest such firm in India and employed 53,000. There are more than 1 billion people in India. The loss of jobs because of Satyam’s downfall won’t be as acutely felt as, say, the loss of jobs in the textile manufacturing industry, where slowing demand has forced hundreds of operations to shut and thousands to search for new employment.

   The second supply chain issue is outsourced logistics services. The only ramification I see occurring is foreign companies might take a second look at using Indian logistics services providers and might send their business to multinational ones. But even that’s probably taking too big a leap.

   If there’s a silver lining to this mess, it may be that the country has a chance to focus more sharply on industries that have a better foundation. Service industries are great, but India would be better served by channeling funds to make manufacturing more competitive with the rest of the world. The mantra should be: forget sending your callers here, send your purchase orders here. To make that happen, infrastructure has to get better and government needs to step out of the way of trade development.

   One more note on the government. As the sub-prime mortgage saga unfolded in the United States and Europe, I heard time and again that such things wouldn’t happen in India. That the regulatory powers in the banking and investing sectors were standing guard over people’s money.

   Obviously, the guard who was supposed to watch Satyam was asleep on the job. It goes to show that nowhere is safe from scams motivated by greed. The problem in India, however, is that the government assumes a less-free market stance than in other democracies. It takes pride in not letting things get out of hand at the expense of hyper-progress. That such a huge gaffe could happen within that “steady-as-she-goes” mind-set is troubling.

   All that said, I don’t see this affecting India trade with the United States long-term. For one, India is one of those places where you’re either in or you’re out. The accounting magic tricks of one company shouldn’t dissuade a carmaker from importing parts from a factory in Chennai. It won’t make a pharmaceutical maker turn away from setting up shop in Ahmedabad. It won’t keep Nokia from trying to selling phones to 1 billion people. What will keep those people away are the things that plagued India before Wednesday — namely, poor infrastructure and slow-as-molasses bureaucracy.

   “It was like riding a tiger, not knowing how to get off without being eaten,' Satyam Chairman Ramalinga Raju wrote in a letter to the Bombay Stock Exchange.

   The word tiger is probably a carefully chosen one, but right now the tiger India is meowing, not growling.

   Eric Johnson is editor of Namaste, American Shipper's in-depth look at trade between North America and the Indian Subcontinent region.