What Yahoo and Nokia’s Offshore Cutbacks Tell Us About India

Yahoo! just made about $9 billion in cash from Alibaba Group’s initial public offering, and investors are licking their lips at the thought of how Marissa Mayer might spend it. Snapchat? AOL? Well, here’s one area you shouldn’t expect her to invest in: offshoring more jobs to India.

The company is cutting about 400 jobs at its office in Bangalore, India, representing more than a third of its workforce there, Bloomberg News reported. Yahoo says the cuts were due to “some changes in the way we operate in Bangalore” and that it’s not giving up on the country. “Yahoo will continue to have a presence in India, and Bangalore remains an important office,” it said in a statement.

The allure of offshoring information-technology jobs to India isn’t what it used to be. Just yesterday, Nokia said it plans to shut down production at a factory near Chennai on Nov. 1. The plant in the southern city of Sriperumbudur was one of Nokia’s largest phone-manufacturing operations. In a statement, the Finnish tech company blamed the closure on an asset freeze imposed by India’s tax department.

Nokia’s nightmare highlights one big reason some Western tech companies are putting the great Indian offshoring experiment on pause. The country is still grappling with corruption and bureaucracy, which contribute to it being the worst-performing BRICS economy for IT development, according to a 2014 report from the World Economic Forum. That creates roadblocks for foreign businesses and local entrepreneurs, alike.

Narendra Modi, India’s charismatic new prime minister, went on a splashy American tour last month, greeted by 20,000 screaming fans at Madison Square Garden. After meeting with President Barack Obama, Modi said the U.S. visit “reinforced my conviction that India and the United States are natural global partners.”

But the outlook for Indian offshoring isn’t optimistic. The Hackett Group, a U.S. consulting firm, predicted in a 2012 report that this year would be the start of an eight-year death of offshoring to India. Even International Business Machines, a pioneer of large-scale tech offshoring to India, reportedly began making major job cuts in the country this year.

Highly skilled software and hardware engineers shouldn’t burn their Indian Institute of Technology degrees yet. According to a report this year from consulting firm Accenture, the domestic IT industry is expected to grow, thanks to government investment and a lifting of some of the regulations that make starting a company there difficult.

For foreign businesses, the Nokia plant serves as an interesting case study in Indian frustration-omics. Nokia had planned to transfer the factory to Microsoft as part of the sale of the mobile phone unit announced last year. A few weeks after the companies agreed on terms, India froze Nokia’s assets in the country, saying the company owed 20.8 billion rupees ($333 million) in missing taxes. Nokia agreed to pay $487 million in December to transfer the plant to Microsoft. The next day, an Indian government lawyer said Nokia could face an increased tax bill of 210 billion rupees ($3.4 billion) — almost half of what Microsoft was willing to pay for the entire handset unit.

The disagreements carried on for months until Nokia and Microsoft agreed at the 11th hour to exclude the plant from the deal. After Nokia announced the closure of the factory this week, Indian Commerce Minister Nirmala Sitharaman said the government hopes to prevent similar shutdowns from happening in the future.