Survival Strategies: Diversify or Die

Historically, India's IT sector has been extremely US centric, with US contributing 62 per cent of total software exports. When the US economy hurtled southward, billing rates declined dramatically and onsite orders shrunk. For the Indian IT services industry, accustomed to the low hanging fruits of the US dotcom boom; the slowdown was a wake up call - Indian companies needed to diversify operations and quickly ramp up presence in alternate markets. IT companies responded with remarkable speed in ramping presence in new markets. US continues to be the dominant export destination, but India IT Inc's exports to Japan, Europe, Asia Pacific have registered an upswing.

Probably one of the biggest success stories, this year for India Incorporated is Japan, the world's second-largest software and services market that accounts for a whopping 70 per cent of the Asian market and contributes more than 12 per cent to the global outsourcing pie. According to Japan External Organisation (JETRO), the market size for IT in Japan is $100 billion. IDC Japan has forecast that the Japanese market is expected to grow at a five-year compounded annual growth rate of 5.4 per cent and reach 6,474 billion yen ($54 billion) by the year 2004.

Currently, India software exports to Japan are valued at $226 million; insigificant when compared to $3.9 billion to the US, $1.5 billion to Europe or $426 million to Asia Pac (excluding Japan). Indian companies are, however, slowly gearing to tap the proffered potential of the Japanese market. Capitalising on its famed software expertise, Indian service majors such as Infosys, Wipro, Satyam, Hughes, Polaris, NIIT and 265 other Indian companies have set up offices and subsidiaries, or have entered into marketing alliances with companies in Japan - a global leader in hardware but facing laggard growth in the software segment.

The efforts are beginning to show. Wipro has 30 active clients in Japan, including names like Toshiba, NEC, Daiwa Institute of Research. Japan now contributes seven per cent of Wipro's revenues. HSS, specialising in convergent network, is another company to successfully foray into the Japanese market. The company entered into an agreement with NEC Corporation, the world's leading providers of Internet, Broadband network and enterprise business solutions to enhance its routers, switches and IP applications, used for building IP optimised backbones as well as edge and access solutions. Polaris one of the earliest companies to establish a subsidiary in Japan has bagged an order to implement its core retail banking product BankWare across all Shinsei Group companies. BFL Mphasis and i-Flex have also entered into an agreement with Sinshei.

The geographical diversification is not restricted to the Top five or 10 Indian IT service majors. Small and mid-sized companies are now aggressively exploring the Japanese software market. Impulsesoft, a provider of short-range wireless solutions is a 40-member company. A strong believer that size does not matter, the company is supplying components for short-range wireless products to Japanese markets. Tenet India, another mid-sized company bagged a contract from the Japanese communication major, NEC, with business of over $2 million per annum. NEC will outsource core R&D projects to Tenet in communication technologies. The company's 60-member strong dedicated centre will help NEC in design, development and testing of datacom.

In addition, Japanese companies are beginning to realise India's "high value low cost advantage" and are in the process of establishing ODCs in India. Patni runs a dedicated center for Hitachi Japan and Toshiba has entered into an ODC alliance with HCL.

While Japan is an emerging market, Europe has been India' second largest software export market accounting for 24 per cent of India's software exports. One of the biggest India success stories in Europe is Mastek, whose European operations grew by 51 per cent, there was a decline of 37 per cent in US operations in 2002. Many European countries such as Germany, Bavaria, Italy, Denmark and Britain are competing to attract investments from India. UK and Germany, however, top the list. UK is the second largest recipient of global overseas direct investment after the US, attracting 24 percent of all investment in Europe and 8 per cent of world wide investments. Incidentally, India stands sixth on the UK of top investors.) UK bagged approximately 60 per cent of Indian IT investment in Europe during the last year. Around 125 Indian companies involved in the ICT and software sectors now have a presence in the UK. Leading the pack are big names like Wipro, Infosys, TCS, Mastek, PCS and Kale Consultants among others.

Germany is another favoured destination among Indian software companies. Datamatics is aiming to be a Top 10 company in Germany. According to the Frankfurt Economic Development Agency, about 35 Indian IT companies have set up offices in Frankfurt and neighbouring regions. Two years back, Infosys set up a development center with 600 engineers and the company boasts of clients such as BMW, Deutsche Investment Trust, Adidas and Franklin Templeton. Wipro, recently, set up a design center for embedded solutions in Kiel, Germany, which will benefit customers in Germany, Scandinavia, and in the growing market in Northern Europe. The centre will provide system on chip solutions in the areas of PDA, intelligent mobile phones; mobile data capture units, Internet access solutions, networking and automobile electronics and help the company to meet the demand for a more direct customer interface. Geometric Software recently entered into an alliance with Daasault and Sonata has a close relationship with Franklin Templeton.

The penetration in newer markets displays a commitment to shrug the lopsided dependence on US markets and derisk the export model. Obstacles abound: Indian companies lack an understanding of the cultural determinants that govern business in Europe and Asia Pac. Compared to US, sales cycles in Europe and Japan are, hence, longer than the US. The Indian software services brand name, however, precedes these difficulties and recent high value orders bagged by companies like Sasken show the efforts are yielding results.

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Source:http://www.assureconsulting.com