The Hindu Business Line : Develop a yen for Japan

With the financial hurricane pounding US and European shores — the cornerstone of the $40-billion Indian software and services exports industry — there couldn’t be a more opportune time for India’s code-jockeys to look eastwards, and crack the Japanese market.

“Japan, with shortage of technical skills and urgent need for business transformation, can turn out to be a very large market for us,” says Som Mittal, President of software association Nasscom.

And for a good reason too. The Japanese IT market, at a whopping $108 billion, is the second largest IT services market globally. Despite this, the island nation accounts for less than 2 per cent of IT services exports from India, compared to the US and Europe, which form nearly 90 per cent of India’s overall IT exports.

“While de-risking is one of the drivers for Indian companies to look at geographies such as Japan, the Japanese companies too realise that they have to go global, in order to grow. This is the right time for Indian industry to partner with Japanese companies,” points out J. Kalyanaraman, Head – APAC for HCL Technologies Ltd.

big slice for bfsi

A recent Nasscom-PwC report, which offers a bird’s eye view of this large yet relatively uncharted IT territory, notes that for most Japanese companies usage of IT has, so far, been restricted to improving business efficiencies in administrative and intra-company transactions, with only a few harnessing it to strengthen competitiveness.

Japan has low overall IT spending with spend-to-sales ratio at around 1-1.5 per cent for most verticals, compared to 3.5-4 per cent in case of the US.

“Japan is largely a products country as opposed to a services economy, and much of the IT spend seems to be camouflaged in product costing,” says an industry expert.

As is the case with other geographies, banking, financial services and insurance (BFSI) — which incidentally is the sweet-spot of Indian IT players in other markets — is the highest IT spender amongst all industries in Japan. BFSI, together with manufacturing industries, consumes close to 42 per cent of Japanese IT services; Systems Integrator accounts for 16.3 per cent; and public sector and ICT 8.6 per cent and 7.9 per cent, respectively.

Another aspect that stands out is the domination of custom-built software over packaged products.

At present, while less than 10 per cent of the outsourced IT services is actually offshored by Japan ($8.6 billion), arch industry rival China has cornered over 50 per cent share of these offshored services.

India’s share is a mere 13 per cent, with the Philippines and Vietnam completing the list of low-cost offshoring destinations for Japanese IT work.

But all that may change soon. The industry is optimistic that India could play a greater role as the world’s fastest ageing nation prepares to make bold choices to remain competitive globally.

Opportunities for India

Where India is busy reaping the demographic dividend, Japan is facing a negative growth in population.

“The skills shortage in Japan is getting worse. Most of the IT systems are legacy systems and with the current set of technical professionals retiring, Japanese companies are staring at a huge challenge.

India also has a definite edge in the engineering services and embedded systems space,” says Girija P. Pande, Executive Vice-President and Head Asia Pacific, TCS.

Moreover, the financial crisis is nudging leading Japanese companies to look for high-quality, proven and low-cost sourcing destinations, and newer markets.

Enter India. “We can be a natural ally to the Japanese market, given India’s excellent service delivery expertise, strong Human Resource (HR) skills, and large consumer market. Indian IT vendors are regarded high on domain competence, and offer fast ramp-up capabilities, lower costs and a better-IP protection environment,” says Mittal of Nasscom.

While embedded systems development and engineering are the ‘quick win’ service offerings for Indian vendors, opportunities in application development and maintenance are also opening up.

According to the Nasscom report, with the changing business requirements and increased need for flexibility, Japanese enterprises are now overcoming their preference for custom-built application and embracing packaged software applications — ERP, Sales force automation and CRM lead the wish list. This augurs well for the Indian IT industry as it offers implementation opportunities.

Top Indian companies, including TCS, Satyam and HCL, have already started demonstrating project wins not only in applications development and maintenance but also areas such as ERP implementation and embedded systems — perhaps an indication that Japanese companies are getting comfortable with Indian service providers.

TCS, for instance, has built an algorithmic trading platform for Japan’s Daiwa Securities, and also set up a broking solution for another large Financial Institution — these projects would perhaps have been nearly impossible to clinch just a decade ago.

Satyam, whose Japan revenues are high on ERP implementations, has seven-eight active clients and also serves 20-25 smaller engagements.

2 High entry barriers

But while the industry has established a strong foothold in most developed markets, a similar level of success in selling tech wares in the Japanese market continues to elude India.

“Selling goods and services in Japan takes a long time, and IT seems to be no exception,” points out a senior official of a leading IT company.

For one, Japan market poses two high entry barriers for India — language and cultural compatibility. China, on the other hand, scores as it is familiar with the Kanji script.

In addition, the north-eastern Chinese city of Dalian has a large number of Japanese speakers, given the city’s historical links with Japan, and has, therefore, emerged as a hot-spot for Japanese companies.

“For most of the Indian companies that currently serve the Japanese market, revenues from Japan will be less than 3 per cent of the overall turnover.

This is primarily because language acts as a hurdle, and also because Japan, as a society, is relatively closed.

As a result, a significant chunk of the work ends up in China,” says Virender Aggarwal, Director and Senior Vice-President, Satyam - Asia Pacific Middle-East, India and Africa operations.

Satyam derives nearly 1.6 per cent of its revenues from Japan where it serves companies in the automotive, electronics manufacturing, and insurance sectors.

Besides, Indian companies, who have long served global clients, struggle to cope with the IT project management practices in Japan — Japanese clients tend to give out projects based on relationships, points out Nasscom.

“Indian providers have to build trust, the marketing cycles are long and the quality consciousness is extremely high with Japanese companies,” says Pande of TCS.

Last but not the least, the incumbent IT services hierarchy offers little incentive for Indian companies keen on working at high-end technology levels.

IT service providers are stacked in a Keiretsu model where Fujitsu, NEC, NTT Data and IBM comprise Tier-1.

The IT development work is first contracted to these Tier 1 providers who, in turn, sub-contract work to secondary and tertiary players.

Where we can score

The good news, however, is that Japan is seriously looking to experiment with India when it comes to IT services.

Though China has long enjoyed preference as an offshore location, Indian industry can derive some solace from the pattern in which this work is offshored. Where China is seen as a low-end service provider with limited capabilities to manage large and complex projects requiring high domain expertise, Indian IT vendors are considered high on technology and domain competence, says Nasscom.

Pande of TCS emphasises on the need for Indian vendors to maintain a strong front- end presence in Japan. TCS has 1,200 of its employees working with Japanese clients, nearly 300 of them based onsite, while 800 professionals are based in India, and 100 are in China.

Satyam has 250 professionals based in Japan, while another 250 are based in India and 100 professionals in China work on Japanese customers.

‘Turn trusted advisor’

“Indian companies must change their mindset and move from being transactional to transformational in their approach and be ready to invest in strong relationships upfront.

The alternative markets to the US and UK, such as Japan, are relationship-focused. The prospects expect the partners to prove themselves in a relationship, building trust and being a trusted advisor rather than a vendor selling them products and services,” says Ambarish Dasgupta, Partner and Head of consulting practice at PricewaterhouseCoopers India.

Agrees Kalyanaraman of HCL Technologies.

“Indian industry has to shift gears and move to a partnership mode and not a supplier-buyer mode.

Indian companies interested in the Japanese market will need to commit a certain amount of investment, time and effort to understand and work out a suitable strategy,” he stresses.

moumita@thehindu.co.in

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