Trump's Election Raises Visa Concerns for IT Services Firms
However, we think workarounds exist for these providers.
Donald Trump’s election as U.S. president has caused consternation for some IT services investors, as there is uncertainty regarding his stance on visas and the IT services industry’s use of them. During the campaign, Trump flip-flopped between talking tough on the H-1B visa program, saying he’ll end it forever as a cheap labor source, and showing a great willingness for America to attract high-skilled foreign workers. Whatever the outcome, we expect offshore IT services vendors to adapt accordingly to mitigate any negative impacts from visa restrictions. We are maintaining our economic moat ratings and fair value estimates for Cognizant (CTSH), Infosys (INFY), Wipro (WIT), and Tata Consultancy Services (TCS). Cognizant remains our top pick in the IT services industry.
While temporary nonimmigrant visas such as H-1Bs are most likely in Trump’s crosshairs, we don’t necessarily expect visa changes to be easy. Plenty of resistance exists in Congress and even within the Republican party--for instance, Florida senator and former presidential hopeful Marco Rubio is in support of expanding the H-1B program. Silicon Valley lobbyists are sure to get more vocal, and we could see international political leaders becoming involved. With Trump touting himself as a businessman--he even uses H-1B visa holders within his own enterprise--a good business case from firms such as Cognizant, Infosys, Wipro, and TCS could make visa changes more lenient. Silicon Valley has been making its case for the H-1B visa program for some time, indicating a lack of skilled U.S. IT workers, and we could see a similar case being made for IT services firms in terms of getting the right engineers and designers to help their U.S.-based clients.
We would expect new legislation to clamp down on lower-tier business process outsourcing work. We’ve seen instances of offshore workers coming in for temporary training (being taught by the workers they’re going to replace) and then leaving shortly thereafter, taking the jobs offshore with them. We agree that such exploitation is unwarranted, but question the efficacy of clamping down on the higher-skilled work surrounding digital transformation initiatives, enterprise application development and modernization, and infrastructure planning and management that Cognizant, Infosys, Wipro, and TCS all provide.
We expect the market to respond if visa changes arrive. The argument is that nonimmigrant visa changes aren’t going to eradicate offshoring, as the work can still move to overseas locations; for example, there’s nothing stopping an enterprise from having something designed and engineered from an overseas location. If Trump seeks to keep jobs within the United States, domestic fallout could result from work purely moving offshore.
Another take is that the IT service providers will adjust their operating models. Over the past few years, we have seen the market shift resources to lower-cost areas of the U.S. such as the Southern states. We could possibly see more investment from the India-based providers to these lower-cost regions, too. Additionally, we could see more M&A of U.S.-based consultants. We have already indicated that the Indian vendors would look to do this regardless of the outcome of the election, given the increasing need for consulting expertise as digital-related work becomes more important in the industry. Still, the consultants will be the minority front-facing workers; the majority of development will still take place offshore. Lastly, if visa restrictions were enforced, we’d expect to see an investment ramp-up in automation to mitigate rising wage costs. To a certain extent, this is already happening in services such as maintenance testing and business process outsourcing.
Overall, what remains certain is uncertainty. Cognizant has attended recent investor conferences, but we only heard vanilla commentary from the firm around partnering with the new administration. We’ll continue to monitor the situation closely in the months ahead.
Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.