Opportunities for Indian IT industry : Japan

1
Opportunities for Indian IT industry Japan
PRESS CONFERENCE New Delhi, October 20, 2008
EMERGING MARKETS SERIES
Mr. Som Mittal, President, NASSCOM
Mr. Ambarish Dasgupta, Partner and Head of
Consulting practice, PricewaterhouseCoopers
2
Agenda

• Introduction and overview
• India and Japan - need for strategic partnership
  
• Offshoring market in Japan
• Key findings of the report Opportunities for
  Indian IT industry Japan
• IT Landscape in Japan
• Who serves the market
• Indian presence in Japan
• Challenges for Indian players in Japan
• Japan offshoring experience
• Fallouts of the traditional IT management model
• Recommendations for stakeholders
• Service to target
• What should Indian vendors do
• Manage clients expectations
• Initiatives need to be taken by Japan
• NASSCOMs role
• Advantage India, Advantage Japan

3
Overview

• Indias share of IT exports to Japan is less than
  2Bn a year
• Penetrating the second biggest IT services market
  in the world continues to be a major challenge
  for the Indian IT companies.
• Indian companies looking to de-risk themselves
  from dependence on the US/European markets market
  have long tried to establish themselves in this
  market.
• Indian players have found nominal success. Only
  breakthrough being in the embedded systems space
  where they could work directly with the end
  customers
• India, with its large technically qualified
  manpower base and IT service delivery expertise,
  has a big role to play as the aging Japanese
  economy makes choices to stay competitive in
  global markets.
• Japan recognizes and respects Indias prowess in
  IT
• This study strives to bring out the key
  opportunities for Indian IT companies and the
  potential strategies for success in this market

4
India and Japan Need for strategic partnership

• The aging Japanese economy in its expansion phase
  is facing acute manpower shortage and strong
  global competition in terms of costs as well as
  innovation
• The current financial crisis is leading Japanese
  companies to look for high quality, proven and
  low cost sourcing destinations as well as newer
  markets
• India is a natural ally, complementing the needs
  with its excellent service delivery expertise,
  large spectrum of human resources and a huge
  consumer market
• Governments of India and Japan are aware of this
  opportunity for a strategic partnership. Both
  countries are facilitating increasing number of
  joint declarations, delegation visits and other
  business events between the two countries.
• India with its large consumer base is a big
  market for Japanese industries

5
Size of the offshoring market

• Japanese IT services market at USD 108 Bn is the
  second largest in the world. Indias share in the
  market is between USD 1 to 1.5 Bn
• Offshoring is limited to 8-10 of the total
  market
• China is the biggest offshoring partner

6
Key findings IT Landscape in Japan

• IT usage has focused on improving the business
  efficiencies in administrative and intra company
  transactions. Only small portion of companies
  have utilised IT for strengthening
  competitiveness of the firm.
• Low overall IT spending. Spend/ sales ratio is
  around 1-1.5 for most industries as compared to
  around 3.5- 4 in the US

BFSI and Manufacturing are the highest spenders
7
Key findings IT Landscape...
Strong traditional preference for custom built
applications
Increasing demand for package products

• Reasons for preference to custom built
  applications
• The innate closeness of Japanese businesses
  stressing on maintaining the uniqueness of
  processes
• Low employee mobility
• Relatively less cases of corporate takeovers and
  mergers with low need for integration
• More than 53 of Japanese IT services constitutes
  customised software development

• Drivers for change COBOL skills shortage, need
  for increased flexibility and cost pressures
• Top 3 ERP vendors SAP, Oracle, Glovia
• Other ERP vendors Gemplanet (Hitachi), COMPANY,
  Superstream, Flexprocess, SCAW, ProActive, SSA,
  IFS
• Highly fragmented ERP products market. Top 3
  vendors occupy only 40-50 of the market share.

Most Japanese companies continue to operate
legacy mainframe
8
Key findings - Who serves the market in Japan?
The Japanese IT Services Pyramid

• Keiretsu of IT service providers
• Top tier work as partners to clients. All major
  IT services contracts are signed by the top tier.
• Top tier then outsource pieces of work to a
  number of small and midsize providers
• Secondary service providers further break each
  module and outsource components
• Modularisation continues till more than 4 or 5
  levels
• Indian and Chinese vendors often find themselves
  at the base of this hierarchy with no visibility
  of the main customer

9
Key findings Japanese offshoring experience

• Only 8-10 IT services are offshored
• China is the largest offshoring partner for the
  Japanese accounting for over 50 of the total
  offshoring.
• Single biggest factor for choice of China for
  offshoring is the cultural homogeneity.
• However, the services offshored are low end IT
  services of coding, testing and BPO.
• Concerns over offshoring to China
• Limited capabilities to manage large complex
  projects
• Lack of high end domain and technical expertise
• Concerns over data privacy and IP protection
• High attrition
• India as offshoring destination is gaining
  popularity
• China is a preferred partner today, only because
  of the lack of alternatives

10
Key findings Limitations of the traditional IT
management model

• IT is viewed as a cost centre and not a strategic
  enabler. Most Japanese companies lack the concept
  of the CIO office. IT investment decisions are
  often influenced by the prime contractors.
• Oligopolistic control on clients. Clients have no
  credible alternative
• Incumbents have no incentive to offer an
  alternate model
• Usually, Primary partners the integrator and has
  hardware, middleware, product, solutions to push.
  Sub vendor has no visibility to end user
• Poorly defined IT project governance.
• Ambiguous contracts and incomplete scope of
  work documents.
• Unclear specifications
• Frequent changes in scope and specifications
• Inadequate documentation of the IT applications
  and internal processes
• Low opportunity for cost savings through
  offshoring

11
Key findings Indian presence in Japan

• Indian companies have ventured in this market
  from as early as the mid nineties
• Several of them have established Japanese desks
  and have made significant investments with local
  hires.
• Prominent Indian companies in Japan TCS, Wipro,
  Infosys, Zensar, Satyam, Mastek, Patni, NIIT
  Tech, KPIT Cummins
• Most players have found success in embedded
  systems development where they have opportunity
  to deal with the direct customers rather than
  becoming part of the hierarchy.
• Besides this, most players also offer AMD in this
  market
• However, even the larger players earn less than
  3 of their revenues from Japan

12
Key findings Challenges that Indian players
face in Japan

• Struggling to offer the right value proposition
  and positioning themselves
• Barriers to entry in terms of language cultural
  compatibility.
• Low Japanese language skills available in India.
• There are around 71,000 Chinese students enrolled
  in Japanese universities as against only 480 from
  India
• Lack of focus Far too busy serving US and UK
• Struggling to cope with the perfectionist
  attitude of Japanese clients, long gestation
  periods and undefined project management
  practices
• Keiretsu Japanese business model doesnt
  encourages entry of new players

48
lt 2
13
(No Transcript)
14
Recommendations - Services to target

• Target services which have high market potential
  and at the same time allow Indian players to
  build on the existing capabilities

• Embedded systems
• Engineering and RD
• Application development Maintenance
• Package Implementation

15
Recommendations - What should Indian vendors do?

• Avoid opportunism. Have a strategic long term
  view of this market. Market is large and would
  need patience to develop
• Establish right value proposition start small
  and build trust. Understand the business
  difference in contractual terms.
• Showcase partnership based relationship for
  mutual advantage rather than client-vendor model.
  Target transformational change projects
• Localise, localise, localise invest in
  understanding context
• Develop strengths in Japanese language and be
  more sensitive to cultural issues

16
Recommendations - Manage client expectations
17
Recommendations Initiatives need to be taken by
Japan
For Japanese industry to reap benefits of this
opportunity and improve its competitiveness

• Japan has too consciously embrace globalization
  accept that language and culture cannot continue
  to be barriers they need to be broken
• Japanese government should proactively encourage
  industries to look beyond the service provider
  pyramid and engage with global players.
• Accept that global players can offer substantial
  value through domain expertise and service
  delivery maturity,
• Facilitate inflow of foreign skilled workers and
  their acceptance in the Japanese social as well
  as business setups.
• Industries in Japan, to truly realise the
  benefits of IT need to re-evaluate their
  traditional attitude to IT and view it as a
  strategic enabler rather than a cost centre.
• Establishing a CIO/CTO office to manage IT is a
  first step, which will also help organisations
  mature on the global IT project management best
  practices

18
Recommendations - NASSCOMs role as a facilitator

• Run programs to sensitize Indian IT industry on
  specific requirements of this market
• Open a Japan desk to facilitate sharing of
  information and provide access to Japanese
  companies
• Work with Governments both sides to increase
  spread of Japanese language and culture
• Develop strong bonds with METI JISA JUSA JETRO
  to promote common interests
• Evolve embedded and application area strategies
  as independent strategies

19
Advantage India

• Japan market is a prospective alternative to
  Indian IT industry to reduce its dependence on
  US/European markets
• Indian IT vendors are regarded high on technology
  domain competence, with fast ramp-up
  capabilities, low on cost and with a better IP
  protection environment.
• Japan and China also suffer with the historical
  mistrust amongst the nations. Most Japanese
  respect Indian culture and recognise the prowess
  of the Indian IT sector,
• Indian IT companies have an opportunity to
  establish themselves as the high end service
  providers, with service offerings differentiated
  from the low end Chinese providers.

20
Advantage Japan

• As with the US and the UK, the Indian IT sector
  would contribute immensely and help accelerate
  growth of the Japanese economy which is sagging
  since last decade
• Reduce dependency on China as outsourcing partner
• Make use of best practices while offshoring with
  rich Indian experience. Get associated with the
  best minds in IT in the world
• India is first a natural partner for innovation
  led high end product development and then an IT
  outsourcing vendor
• Japanese companies would be able to increase
  profitability by cutting costs , help the economy
  fight recessionary pressures and compete globally
  

21
Questions