1

Opportunities for Indian IT industry : Japan

EMERGING MARKETS SERIES

PRESS CONFERENCE

New Delhi, October 20, 2008

Mr. Som Mittal, President, NASSCOMMr. Som Mittal, President, NASSCOM

Mr. Ambarish Dasgupta,Partner and Head of Consulting practice, PricewaterhouseCoopers

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 client’s expectations

• Initiatives need to be taken by Japan

• NASSCOM’s role

• Advantage India, Advantage Japan

3

Overview

• India’s 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 India’s 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. India’s 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

• 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

Key findings – IT Landscape in Japan Key findings – IT Landscape in Japan

BFSI and Manufacturing are the highest spendersBFSI and Manufacturing are the highest spenders

7

• 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.

Strong traditional preference for custom built applications Strong traditional preference for custom built applications

Increasing demand for package productsIncreasing demand for package products

Key findings – IT Landscape... Key findings – IT Landscape...

Most Japanese companies continue to operate legacy mainframe

Most Japanese companies continue to operate legacy mainframe

8

• “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

The Japanese IT Services Pyramid

Key findings - Who serves the market in Japan?Key findings - Who serves the market in Japan?

9

• 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

Key findings – Japanese offshoring experienceKey findings – Japanese offshoring experience

10

• 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

Key findings – Limitations of the traditional IT management model Key findings – Limitations of the traditional IT management model

11

• 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, HCL Technologies

• 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

Key findings – Indian presence in JapanKey findings – Indian presence in Japan

12

• 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 doesn’t encourages entry of new players

JLPT 2007 applicants by country*

China 254,893

Korea 108,795

Taiwan 62,223

Thailand 15,793

Vietnam 13,377

Indonesia 8,547

India 7,375

Singapore 4,805

Brazil 3,654

Others 49,759

Total 529,221

* countries besides Japan

48%48%

< 2%< 2%

Key findings – Challenges that Indian players face in Japan Key findings – Challenges that Indian players face in Japan

13

14

Recommendations - Services to target

• Embedded systems

• Engineering and R&D

• Application development & Maintenance

• Package Implementation

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

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

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

Client expectations What Indian companies offer/ expect

Partnership towards a common goal of product development

Client-vendor relationship with clearly demarcated scope of work. Project centric approach

“see the larger picture”

Trust : Japanese value trust and loyalty above other aspects, especially when they are dealing with ‘outsiders’

Indian vendors view the inadequately defined contracts as potential risk area which also translates in their interactions with the client.

“develop trustworthiness”

Value proposition: Technology expertise Value proposition: Low cost services

“target transformational change projects”

Help them understand their requirements Look for clearly defined scope of work

“expect long sales cycles and scope changes”

17

Recommendations – Initiatives need to be taken by Japan

For Japanese industry to reap benefits of this opportunity and improve its competitivenessFor 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 - NASSCOM’s 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