Building ICT Trade in Asia Pacific, Egidio (Edge) Zarrella,KPMG

IT ADVISORY

ADVISORY

Building ICT trade in ASPAC

NASSCOM Indian Leadership Forum 2008

Mumbai, India – 13 February 2008

© 2008 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

KPMG and the KPMG logo are registered trademarks of KPMG International.Liability limited by a scheme approved under Professional Standards Legislation.

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Change in world capital

Sir Martin SorrellChief Executive of WPP Group

“Fundamental change is happening in the world – last two to three hundred years the West, controlled the capital…now it is shifting to the East where it will remain forever.”

Sir William Castell LVODirector of General Electric

“In the future the GE Board will be one third Indian, one third Chinese and one third European…and this one will happen whether we want it or not.”



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The Indian IT-ITES industry is facing challenging times…

•India’s rising rupee bedevils

outsourcers

•Newsreports a few weeks back suggested that the GDP of India had crossed the trillion-dollar mark. The recent appreciation

of the Rupee since January 2007 by approximately 10% helped reach the milestone far earlier than it would have been

otherwise possible.

•In short, at Rs 45 to a US dollar it w

ould still be roughly $900 billion. At Rs 40 to a US dollar, th

e GDP of India now stands at

$1 trillion. Let us extrapolate these arguments mathematically on a 'linear scale.' At Rs 20 to a US dollar, In

dia's GDP would

be $2 trillion; at Rs 10 it w

ould be $4 trillion, at Rs 5 it w

ould be $8 trillion; at Rs 2.5 it w

ould be $16 trillion and at 1 Rupee to

a dollar it would be approximately $40 trill

ion.

•That would be approximately 3.5 times the GDP of the US, which stands at approximately $12 trill

ion! With our population

3.5 times the size of the United States, naturally this would translate into an annual per capita income (and with it p

erhaps

the lifestyle and consumption) that is close to

•India to face stiff competition

from global destinations

•Newsreports a few weeks back suggested that the GDP of India had crossed the trillion-dollar mark. The recent appreciation


otherwise possible.

•In short, at Rs 45 to a US dollar it would still be roughly $900 billion. At Rs 40 to a US dollar, the GDP of India now stands at

$1 trillion. Let us extrapolate these arguments mathematically on a 'linear scale.' At Rs 20 to a US dollar, India's GDP would

be $2 trillion; at Rs 10 it would be $4 trillion, at Rs 5 it would be $8 trillion; at Rs 2.5 it would be $16 trillion and at 1 Rupee to

a dollar it would be approximately $40 trillion.

•That would be approximately 3.5 times the GDP of the US, which stands at approximately $12 trillion! With our population

3.5 times the size of the United States, naturally this would translate into an annual per capita income (and with it perhaps


•Poor infrastructure a major

hurdle for growth•Newsreports a few weeks back suggested that the GDP of India had crossed the trillion-dollar mark. The recent appreciation


otherwise possible.








•Fears of US slowdown haunt

IT companies

•Newsreports a few weeks back suggested that the GDP of India had crossed the trillion-dollar mark. The recent appreciation of

the Rupee since January 2007 by approximately 10% helped reach the milestone far earlier than it would have been otherwise

possible.

•In short, at Rs 45 to a US dollar it would still b

e roughly $900 billion. At Rs 40 to a US dollar, the GDP of India now stands at $1

trillion. Let us extrapolate these arguments mathematically on a 'linear scale.' At Rs 20 to a US dollar, India's GDP would be $2

trillion; at Rs 10 it w

ould be $4 trillion, at Rs 5 it w

ould be $8 trillion; at Rs 2.5 it would be $16 trilli

on and at 1 Rupee to a dollar

it would be approximately $40 trillion.

•That would be approximately 3.5 times the GDP of the US, which stands at approximately $12 trillion! With our population 3.5

times the size of the United States, naturally this would translate into an annual per capita income (and with it perhaps the

lifestyle and consumption) that is close to

•High attrition rate: A big

challenge•Newsreports a few weeks back suggested that the GDP of India had crossed the trillion-dollar mark. The recent appreciation


otherwise possible.










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…and the Stock Market is not treating it kindly…

•The BSE composite index has gone up by 26% whilst the BSE IT Index has declined by 32%.

0

20

40

60

80

100

120

140

160

IT Index BSE Index



5

… but growth in the medium term is assured

62% 65%

38% 35%

0%

25%

50%

75%

100%

2001 2006

India

Others

India’s Share in global IT offshoring

USD 10 Bn. USD 36 Bn.

With an expanding global market ….. …..coupled with India’s rising market share.

13

.30 18

.30 24

.20 3

1.9

0

8.3

0

10

.20

13

.20

15

.90

-

510

15

20

2530

35

FY04 FY05 FY06 FY07E

Rev

en

ue

- U

SD

Bill

ion

0

500

1000

1500

2000

Peo

ple

Em

plo

ye

d '00

0s

Exports Domestic Direct Employment

3.6%

4.1%

4.7%5.4%

Rising share of IT/ITES in India’s GDP

While the technology revolution has led to a surge in the services sector … the increasing share of services is having a cascading

effect on IT/ITES sector

CAGR 6.3%

1,647

345

1,292

Source: IDC, NASSCOM, NelsonHall, KPMG Research

2010P

Worldwide spend on IT – ITES USD Billion

2006



6

Significant headroom for growth is still available..

23

1225.0

2006-07E 2009-10E

10.0

• The NASSCOM forecast for the Indian IT / ITES sector’s exports for the year 2010 is USD 60 billion. The IT sector is expected to contribute USD 35 billion.

Additional market that can be gained through extended leadership

NASSCOM target for 2010

35.0

USD Billion

Addressable market

Currentsize

Addressable Global IT market*

23

13

36India’sexports

Others

USD Billion

200-250

Upside potential of approx 6 – 7 x

Indian IT market (Exports)

50% growth projected in next

3 years

(Estimates) (Estimates)

Source: NASSCOM Strategic Review 2007, NASSCOM-McKinsey Report 2005

Source: NASSCOM Strategic Review 2007, NASSCOM-McKinsey Report 2005* Includes addressable markets in currently offshoring industries

• According to a NASSCOM-McKinsey study, just 18% of the off-shorable market has been addressed so far.

•Assuming that India will maintain its current market share, the potential market for India based IT players is as large as USD 130-160 billion

Significant opportunities exist in the offshore ITO market as the current penetration levels is around 18%

Potential market of USD 130 – 160 billion

For Indian IT



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…and faster growth rate will be derived from non-traditional markets

Source: Nasscom, Nelson-Hall, KPMG AnalysisNote: 1) The share of Indian BPO exports is assumed to mirror total IT and ITES off shoring

2) The share of Indian BPO exports in FY10 to the total Indian BPO size is assumed at the current level

Source: Nasscom, Nelson-Hall, KPMG Analysis

North America

•Nearly half of Global IT Services. US accounts for 44%

Europe

•Nearly a third of Global IT Services

Asia Pacific

•Nearly 15% of Global IT Services

CE, ME & Africa


Latin America


Growth @ 7% Growth @ 6.4% Growth @ 12%Ex - Japan

Growth @ 10%

Growth @ 12%



8

The sourcing phenomenon

26

22

14

14

10

9

5

54

19

35

0 10 20 30 40 50 60

IT solutions

Accounting, debt collection, and/or tax processing

Data collection and/or report writing

HR management, inc healthcare/benefits processing

Supply-chain management

Customer servicing, including after-sales service

Research & development

Risk management

Sales and/or marketing

Strategic planning

What services are currently outsourced?

% of respondents

According to KPMG’s Asian outsourcing survey, the next wave, outsourcing appears to be more pervasive than generally thought



9

20

16

7

5

5

4

4

4

2

15

55

9

36

0 10 20 30 40 50 60

India

China

Singapore

Hong Kong

Malaysia

Philippines

Japan

Taiwan

Indonesia

South Korea

Thailand

Vietnam

Other

While India remains a key source of outsourcing services, China is catching up fast as a provider – and more companies in Asia are tapping high-cost Singapore and Hong Kong

than those that source from lower-cost Philippines

The sourcing phenomenon

Off shoring facilitatesICT trade



10

Country Profiles – Human Resources and Skill Sets

The Prime years YoungOld Population :19.9 m

Literacy Rate: 99.0%

Australia

The Prime years YoungOld

Population :1081.2 m


India



11


The Prime years

YoungOld

Population :24.9 m


Malaysia

Population :127.8 m



Japan



12



Population :81.4 m


Philippines

Old

The Prime years Young

Population :48.0 m


South Korea



13



Population :7.1 m


Hong Kong


Population :1313.31 m


China



14



Population :3.9 m


New Zealand

Old

The Prime years Young

Population :4.3 m


Singapore



15



Population :222.6 m


Indonesia


Population : 22.7 m


Taiwan



16



Population :63.5 m


Thailand


Population : 82.5 m


Vietnam



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The mega-trends we see

• The regional dynamics is changing fast – every 12 months

• Aggressive plans are now in execution for large global multinational to expand in the region

• Talent Acquisition and retention is becoming a major area of focus for Mature and Emerging economies

• The entire ASEAN region is getting closer, building better long term relationship that will dictate trade



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• Major global multinational are plan to relocate to the region particularly to countries such as Vietnam, Malaysia, Phillipines, other than India and China

• There is constant raise in labour costs in countries such as India and China and controlling inflation will be a major contributor to future investment.

• What about “Chindia” or “Indichina” ?



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• Largest and most ambitious “global” IT companies sit in India and China and increasing the market both internally and externally

• Paradigm shift will happen when ASPAC companies in China and India companies into Intellectual Property

• The ICT Trade continue to get massive boost from the Outsourcing and Telecommunications sector in the region.

• Investment from large companies based in India and China into other ASPAC countries including Australia, Malaysia and Vietnam will increase.



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ICT Trade - China

• Government policies and Free Trade Agreements (FDAs) will continue to facilitate trade in the region.

• Every major corporation is currently being impacted by China

• China will continue to spend on development of ICT infrastructure and telecommunications

• China will emerge as a destination of people resources, particularly when the English skills of Chinese people are increasing rapidly

• Building long term relationship with Chinese ICT will be crucial for future trade



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Key ICT Growth sectors - Summary

• Telecommunications

• Outsourcing/ Offshoring

• ICT Professional Services

• Hardware manufacturing (Vietnam and China focus)

• Software development (India focus)

There will be major growth in every sector

Stop thinking Negative … Think Opportunities

22© 2008 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All

rights reserved.KPMG and the KPMG logo are registered trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

Presenter’s contact details

Egidio Zarrella

Global Partner in Charge, IT Advisory

KPMG ,

Email:

[email protected]

The information contained herein [is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2008 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Building ICT Trade in Asia Pacific, Egidio (Edge) Zarrella,KPMG

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