Indian IT firms eye emerging markets

Indian IT firms eye emerging markets
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First Published: Mon, May 12 2008. 11 54 PM IST

Spreading wings: Infosys campus in Bangalore. In keeping with a trend to tap more mature markets outside the US. The firm has formed an alliance with Nihon Unisys software, giving it a foothold in Jap
Spreading wings: Infosys campus in Bangalore. In keeping with a trend to tap more mature markets outside the US. The firm has formed an alliance with Nihon Unisys software, giving it a foothold in Jap
Updated: Mon, May 12 2008. 11 54 PM IST
Bangalore: India’s export-driven software services companies are shifting focus to emerging economies, such as West Asia and Africa, where technology spending is growing twice as fast as in developed countries.
As the US, which contributes more than half these companies’ sales, lurches towards recession in the wake of the subprime crisis, companies such as Satyam Computer Services Ltd, Infosys Technologies Ltd and Wipro Ltd are looking farther afield, as well as to their home market, to take up the slack.
Spreading wings: Infosys campus in Bangalore. In keeping with a trend to tap more mature markets outside the US. The firm has formed an alliance with Nihon Unisys software, giving it a foothold in Japan. (Photo/Dibyangshu Sarkar/AFP)
Spending on information technology in Asia-Pacific, Latin America, West Asia, Africa and eastern Europe is on course to hit $1.1 trillion (Rs45.5 trillion) this year, up from $964 billion in 2007, according to research and advisory firm Gartner Inc.
Spending in 2011 will reach $1.3 trillion, posting compounded annual growth of around 8.5%, compared with 4.3% growth in mature markets, the Gartner report added.
Many Indian companies, which forged close ties with the US having rewritten the programming code that helped overcome the millennium ‘Y2K’ issue, have already started diversifying their customers.
Satyam, India’s fourth largest software exporter, is negotiating a score of deals worth $10-30 million in Asia-Pacific, West Asia and Africa, its director Virender Aggarwal said.
“The deals we are seeing in emerging markets now are just the beginning,” said Tejas Doshi, an analyst at broker Sushil Finance Consultants Ltd.
India’s software and back-office outsourcing industry is on course to ring up sales of $64 billion in the fiscal year just ended, up from $48.1 billion, the National Association of Software and Service Companies, or Nasscom, said.
Exports are around $41 billion of that total, up from $32 billion a year ago when the US accounted for around 60% of those sales.
“I see the US accounting for 50% of the sector’s exports in three years, down from 60% now,” said Avinash Vashistha, chief executive of outsourcing consultancy Tholons Inc.
Led by Tata Consultancy Services Ltd and Infosys, India had focused on the US partly because it was the easy option.
“They have been trying to get the low-hanging fruit,” Sushil Finance’s Doshi said.
But a weakening US economy and a rupee that gained more than 12% against the dollar last year have forced Indian software services companies to broaden their horizons.
They face tough competition from global majors such as International Business Machines Corp., or IBM, Accenture and Microsoft Corp. for outsourcing contracts from fast-growth markets such as China and India.
Analysts expect the US giants, which are also seeing a decline in demand at home, will use their size and scale to muscle their way ahead in emerging markets.
“We’ve got a broad footprint,” Hewlett-Packard Co. chief executive Marc Hurd said while announcing the company’s earnings. “There’s some exciting growth in those emerging markets and we want to compete for it.”
While all four big Indian outsourcers missed market estimates for net profit last quarter and issued cautious outlooks, IBM and Accenture reported better profits and raised their guidance.
“They are larger and have a more diverse revenue base,” said Karl Keirstead, analyst with Kaufman Bros Lp., referring to IBM and Accenture. “They may be able to weather that downturn a little bit better than the Indian vendors.”
Despite the challenges, booming technology demand in developing Asian countries, Latin America or West Asia and Africa continues to attract Indian companies.
“Recent events in the US have only reconfirmed companies’ belief in diversifying risk,” said Satyam’s Aggarwal, who heads the business in Asia-Pacific, Africa, India and West Asia.
“China and India are the two economies that look promising.”
Analysts said booming economies in India, West Asia and Australia were stepping up outsourcing of work such as building and managing data storage and computer servers and providing research and engineering services.
“The motive is to focus on the core business and leave it to somebody else who can do the job,” said Aggarwal. “They are passing the headache to professional companies.”
Wipro said in February it won a $50 million, five-year outsourcing deal from an Indian retailer. In January, its joint venture in Saudi Arabia won a $100 million, five-year contract from Saudi Arabian Airlines.
“We are seeing huge potential in India and the Middle East with considerable investments being planned,” Wipro chairman Azim Premji said after the firm reported its slowest quarterly earnings growth in about five years last month.
Tata Consultancy sees emerging markets accounting for about 20% of its revenue in five years, up from about 8% now, Gabriel Rozman, its executive vice-president for emerging markets, said in March.
Indian services firms are also tapping more mature markets outside the US and western Europe, as companies take to outsourcing to cut costs and boost productivity.
Infosys and Nihon Unisys Ltd have formed a strategic alliance, giving India’s No.2 software exporter a stronger foothold in the fast-growing Japanese market.
Infosys aims to increase sales in Japan to 10% of global sales by 2010, a spokesman said.
Japan accounted for just 2% of its $4 billion revenues in the fiscal year to March.
Reuters
Jim Finkle in Boston contributed to this story.
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First Published: Mon, May 12 2008. 11 54 PM IST