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Tier three cities in India like -- Ahmedabad, Chandigarh, Indore, Kolkata and Nagpur are best positioned to emerge as major centres for the offshoring of activities by IT companies over the next five years, according to a recent Jones Lang LaSalle report titled "India - The Next IT Off shoring Locations. Tier III Cities".
Jones Lang LaSalle is the world's leading real estate services and money management firm, operating across more than 100 markets around the globe.
The report, which is part of the firm's World Winning Cities research, highlights these five cities as fulfilling the requirements that IT companies look for when deciding on off shoring locations, namely availability and costs of labour and real estate, business environment as well as physical and social infrastructure.
Mr. Vincent Lottefier, Country Head of Jones Lang LaSalle India said, "The continuing cost pressures characterising India's Tier I cities, Bangalore, Mumbai and Delhi and Tier II cities, Hyderabad, Chennai and Pune, are encouraging more companies to actively look at Tier III cities to satisfy their future requirements. However, for firms entering India for the first time, Tier I cities are likely to prevail for some time, as they provide higher comfort levels."
"Tier III cities currently provide cost advantages of 15%-30% over Tier I and II cities through lower labour and real estate costs and reduced staff attrition rates and this gap is expected to widen further. Of the five leading Tier III cities identified in our research, Kolkata and Chandigarh are best positioned to mature into major centres over the next five years," added Mr Lottefier.
In addition to the five cities identified in this report, a number of other cities are also emerging as potentially suitable locations for IT offshoring. Cities such as Cochin, Trivandrum and Mangalore are beginning to appear on the radar screens of IT firms and will be examined in a future report.
From a human capital perspective, Kolkata and Nagpur provide the largest manpower pools with these cities being comparable to Pune (Tier II) in terms of future labour availability. Nagpur currently provides a cost advantage of about 15% over Kolkata, which offers a 10% cost advantage over Pune.
From a real estate perspective, Kolkata provides the largest availability of grade A office space, with large developers such as DLF and Unitech, who have traditionally operated in Tier I cities now operating in Kolkata. From a facility cost view, Nagpur and Ahmedabad provide a 25%-30% cost advantage over Kolkata and Delhi.
Ahmedabad and Chandigarh provide the highest cost advantage amongst the subject Tier III cities and are therefore likely to attract occupiers that place a high weight on the cost factor.
The question of where to locate in India is a complex one and no single city emerges as suitable for all activities or all companies. Jones Lang LaSalle's research looked at various scenarios which yield different location choices (see table below).
Most Suitable Locations for different types of company
Scenario
-- Scenario A - Companies entering India
Cities of choice - Tier I: Bangalore, Mumbai, or Delhi
-- Scenario B - Companies present in Tier I cities and looking to expand into cities offering large pools of skilled labour (labour driven)
Cities of choice - Tier II: Hyderabad, Pune, or Chennai; Tier III: Kolkata or Nagpur
-- Scenario C - Companies present in Tier I cities, and looking to expand into cities offering lowest cost (cost driven)
Cities of choice - Tier II: Chennai; Tier III: Ahmedabad or Chandigarh
Scenario D - Companies present in Tier I cities that are expanding rapidly into locations offering access to multiple labour pools
Cities of choice - Tier II: Pune
Looking ahead, risk avoidance is becoming an increasing priority and the issue for firms already located in India is the extent to which risks will be reduced by establishing facilities in other countries. Low cost destinations elsewhere in Asia (e.g. Manila, Dalian and Tianjin) along with those in Central Europe (e.g. Prague, Budapest, Warsaw and Krakow) and Latin America (e.g. Sao Paulo and Buenos Aires) are all competing for the same market as Tier III cities in India.
According to Mr Lottefier, "Despite the increased competition from established offshore centres elsewhere, the lower wage rates and significant pool of skilled staff in India's Tier III cities will have the effect of prolonging India's position of global leadership in the offshoring of IT activities for the next five to seven years.
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