Hyderabad: With business from the US and Europe expected to decrease due to the ongoing financial turmoil, Indian information technology services (IT) firms are increasing their focus on the Asia Pacific region, particularly China, in an effort to tap the latter’s IT market and use it as a strategic base to enter the at least $100 billion (Rs4.76 trillion)-a-year Japanese IT market.
Business from the US and Europe together account for between 80% and 95% of revenues of the top five Indian IT services firms, Tata Consultancy Services Ltd or TCS, Infosys Technologies Ltd, Wipro Ltd, Satyam Computer Services Ltd and HCL Technologies Ltd.
“This crisis provides the right opportunity for Indian IT companies to try and gain more traction in the Asia Pacific region, especially in big markets like China and Japan,” said industry lobby group National Association of Software and Services Companies (Nasscom)’ president Som Mittal. The association estimates the Japanese IT services market at $108 billion, and India’s share at $1-1.5 billion. Around 8-10% of this work is offshored, with at least half of that going to China.
Upbeat on plans: Girija Pande of TCS says the company’s revenues from its Chinese operations will grow by around 45% in the next two years.
Market research firm IDC estimates the Chinese IT services market to reach at least $55 billion by 2010.
TCS entered China in 2002 with a software development and delivery center. While its initial objective was to serve its global clients having Chinese operations, the company has now started addressing the regional and local market. Currently, it has 1,300 employees working in China. In its latest annual report, TCS said its China operations had managed to break even.
According to Girija Pande, executive vice-president and head of Asia Pacific division at TCS, the Chinese IT market is growing by at least 20% annually and revenue from the company’s Chinese operations will grow by around 45% in the next two years.
“In the short term, we will be expanding our presence and increasing the headcount to at least 5,000 by 2011,” said Pande.
Similarly, Infosys has a 1,000-strong workforce in China and said it is in expansion mode. “We have expanded our operations in two cities Shanghai and Hangzhou,” a company spokesperson said in an email response. The company’s Chinese subsidiaries, however, were still loss-making as on 30 September, according to the company’s second quarter results.
Satyam admitted it is yet to make significant headway with its China operations but said it is in expansion mode with an eye on the long-term.
The company currently employs around 1,000 people in its two subsidiaries in China and plans to scale up headcount to nearly 2,000 by 2010. It is also investing in a training centre in China, which will have a capacity of at least 2,500 by 2010.
“It is still a mystery why Indian companies have not been able to get any significant share of outsourced work from China and Japan,” said Virender Aggarwal, head of rest of the world operations for Satyam.
Analysts acknowledge that China has been a rather difficult market for a variety of reasons.
“So far, the Chinese domestic market has been one that is difficult to engage, primarily because of state and public sector dominance,” said Milan Sheth, partner and head of IT outsourcing advisory at audit and consulting firm Ernst and Young. “It is critical to have a well connected and established Chinese local partner who can help penetrate that market,” he said.
TCS said it views China as a better base to address the Japanese market. “A significant share of outsourced work from the Japanese market is cornered by Chinese companies, as they have a relative cultural and linguistic advantage over their Indian counterparts. We see being present in China as the first step in building the right relationships,” said Pande.
Both TCS and Satyam are betting on local talent to succeed in their Chinese operations and help the company better address the local market as well as help build bridges with Japanese companies. At least 90% of TCS’ workforce in China comprises local hires.
Nasscom’s Som Mittal said that the size of the Japanese IT market and the potential for outsourcing presents a huge opportunity for Indian IT firms, but, he added that the market has been relatively insulated due to language and cultural barriers. “However, we see an increasing desire among Japanese companies for sourcing competitively priced IT services from foreign companies. More importantly, the factors limiting market penetration by Indian companies are being recognized and addressed by the Japanese themselves.”
Nasscom has set up a Japan desk to explore ways for Indian IT companies to adapt themselves to compete more effectively in the Japanese market.
Both China and Japan are long-term plays, said experts.
“It is very important for Indian IT companies to understand that investments in the Chinese market should be done with a long term view. Given the nature of that market, it is unrealistic to expect quick turnarounds,” Sheth said.
Wipro and HCL did not respond to queries on their China and Japan strategy.