New Delhi: With a likely softening of demand for their services from buyers in a slowing US economy, Indian tech services vendors such as Tata Consultancy Services Ltd, Wipro Ltd, Satyam Computer Services Ltd and HCL Technologies Ltd are increasing their focus on a market that has until now not believed too much in outsourcing: Japan, the world’s second largest economy.
Traditionally, Japanese corporations have outsourced tech and support services to their information technology or IT units or have relied on relationships built over years with local vendors.
There has been “a lack of competitive element which has not pushed them to think differently,” said Sanjeev Nikore, corporate vice-president and global head of sales and marketing at HCL Technologies. With increasing global competition, “that is changing”, he added.
According to estimates by India’s largest tech services firm TCS, or Tata Consultancy Services by 2010, IT spending in Japan will touch $95 billion, or Rs3.82 trillion at today’s currency rates, growing at an annual rate of 3.2% from 2005. Currently, work worth around $32 billion is outsourced, a number expected to grow by a quarter to $40 billion by 2010. Around 4%, equivalent to $1.28 billion, of the outsourced work is sent to offshore locations—a market segment that a TCS spokesperson, quoting research compiled internally, said is expected at $5 billion by 2010.
New trend: The Tokyo headquarters of Shinsei Bank Ltd. The bank, formerly Long Term Credit Bank, has transformed itself into a profitable bank using modern-day banking processes and technologies. (Kaku Kirita / Bloomberg)
Though it takes time,said Yukihara Yorifuji, IT services group manager at researcher International Data Corp., Japan, some Japanese customers “may delegate even custom development”. Local businesses, Yorifuji said, through a spokesperson, could ship work directly to offshore firms bypassing local vendors.
The top five tech service vendors in Japan are Fujitsu Ltd, NEC Corp., Hitachi Ltd, a local unit of International Business Machines (IBM) Corp., and NTT Data Corp. IBM Japan, set up in 1937, is the only non-Japanese firm with a strong presence.
TCS, which set up its subsidiary in Japan in 2002, today has some 1,800 workers servicing Japanese businesses, including more than 300 based in that country. An offshore delivery centre in Kolkata drives all Japan specific initiatives for the firm. TCS’ revenues from Japan amount to around $100 million (revenues for the company in fiscal 2007 was $4.3 billion), but expectations are high. “We expect this to grow rapidly,” said a company spokesperson adding the focus will remain on embedded systems.
TCS will invest $10 million in the next year in a Pune facility to develop solutions on the needs of the Japanese market in embedded systems in auto, consumer electronics, telecom, and office automation sectors. A development centre for embedded systems was opened in Yokohama, Japan’s second-biggest city, with 100 engineers and researchers, in the December quarter.
The primary trigger for TCS’ moves are changes sweeping across Japanese businesses. Last May, the Japan Information Technology Services Industry Association, an industry body, said in a report on the IT services industry in Japan “domestic Japanese vendors are being exposed to competition on a global scale, and the improvement of their international competitiveness has become an urgent issue.”
For example, since being bought out by New York fund Ripplewood Holdings LLC in 2000, Shinsei Bank Ltd, formerly Long Term Credit Bank, has transformed itself into a profitable bank using modern processes and technologies. Shinsei is “one unique company in Japan that is so dramatically different from the others. It is the only bank which says English is its official language,” says Harsh Vardhan, head of business in North Asia for Satyam in Singapore.
IBM, which today has around 25,000 people from 90 locations serving Japanese firms such as Toyota Motor Corp., Matsushita Electric Industrial Co. Ltd and Sony Corp., is shifting work to low-cost destinations in Asia.
“Recently, we have been aggressive in leveraging IBM’s global delivery capabilities particularly in China and other Asian countries including India. Though the market presence of Indian tech companies is still small in Japan, the global delivery trend has been increasing,” said Motoyuki J. Suzuki, manager media relations at IBM Japan. In 2006, IBM’s Japan revenues were about 1.2 trillion yen ($11.17 billion) and its operating profits were about 150 billion yen.
Still, the trend favours shipping work to North Asia rather than India. “Over 80% of Japan’s services is outsourced to China and around 10% to India because of the similarity in the Japanese and Chinese scripts (used in) software specifications,” said Satyam’s Vardhan. That said, he predicted, a build-up of bilateral relations between the two countries will help bring work to India.
For Satyam, around 1.8% of its total business comes from Japan, growing at about 30% annually. In the last four months the firm has set up centres in Pune, Kanzen (Japan) and Nanjing (China) to address the Japanese market. “From April this year, we plan to double our growth rate to 60% thereby double our revenues as well,” Vardhan said.
Slowly, but surely, Wipro too is seeing Japanese businesses turning to India.
“The severe shortage of engineers is starting to have an impact on Japanese companies that need to look at alternative methods for software development,” said A. L. Rao, chief operating officer of Wipro Technologies, the overseas software services division of the Bangalore firm . Some 3% of the firm’s $2.57 billion tech revenues in fiscal 2007 comes from Japan and is growing.
HCL Technologies, which serves Japanese customers from Noida and Chennai, said its growth in the Far East country “will be driven by strategic investments in technology areas, collaboration and partnerships in the application area,” said Nikore.
It recently opened a development centre in Chennai for the Konica Minolta Group which is expected to turn in $30 million revenues in three years. It also has a joint venture with NEC to provide offshore software engineering solutions.
Infosys Technologies Ltd, India’s second largest tech services firm, which did not respond in time for this story, said in a statement on Tuesday it has signed a deal with Nihon Unisys Ltd combining its partner’s “experience in the Japanese market and Infosys’ global delivery model.”