Japan leaves IT cos shaken and stirred

Japans over $108-billion IT services market may continue to remain elusive for Indias top-tier software services companies for the time being,with the ongoing crisis likely to slow down deals and hit plans to grow inorganically after years of trying to establish a foothold in the countrys closed market.

The earthquake-stricken Japans over $108-billion IT services market may continue to remain elusive for Indias top-tier software services companies for the time being,with the ongoing crisis likely to slow down deals and hit plans to grow inorganically after years of trying to establish a foothold in the countrys closed market.

Globally the second largest IT services market after the US,Japan currently contributes to less than 1.5% of revenue for the top players in Indian IT sector and some 2% to Indias total IT exports revenue of $50 billion. The minuscule size of the offshore outsourcing business and language hurdles are the major hurdles in penetrating the market. But the share of business has been gradually increasing over the past couple of years as Indian firms have climbed up the value chain and are now scouting for Japanese acquisitions,according to industry watchers.

Japan has traditionally remained a closed IT market with nearly 92% of its IT services handled by a few Japanese conglomerates that form the top tier of the market and which sub-contract to the secondary and tertiary levels where Indian and Chinese players have a presence. China garners a bulk of the remaining 8% that is outsourced directly to non-Japanese players and India comes second with around $1.8 billion worth of business annually.

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There has been a change to this in the past few years and Japan is looking at alternatives to China, said Kumar R Parakala,head,IT advisory,KPMG. In order to cut the chain short,Indian players have set up operations in Japan itself and are focusing on localising by improving their language capabilities,which is one of the biggest barriers for doing business in Japan.

Both Infosys Technologies and Wipro have 400 employees in different parts of Japan,and Tata Consultancy Services has about 100 people in Yokohama city. Wipro has BPO operations in Okinawa,sales and development work in Yokohama and a sales office in Tokyo. Among the 100 people employed by Mahindra Satyam for sales and delivery,70 are locals. IT firm Cognizant also has about 98 sales employees but does not operate a development centre.

With the recent crisis in Japan,analysts dont see much of an impact in terms of revenue for the Indian IT companies as most of the top players have very little exposure to the Japanese market. And of this,the maximum opportunity comes from the banking,financial services and insurance or BFSI and manufacturing verticals,which account for 40-45% of IT business in Japan. Other areas such as system integration and ICT constitute 8-18% of IT consumption. Overall,Wipro has an exposure of 1.5%,TCS close to 1% and HCL 1%.

Our exposure to Japan is only 1% of our revenues,so it will not have any material impact. We have to see how the whole thing evolves, said V Balakrishnan,CFO,Infosys. In immediate quarters,there will not be any material impact because the exposure itself is very small.

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Indian IT firms have responded to the crisis by shifting work to offshore centres and allowing employees to return to India. Extensive business continuity measures have been put in place,so that our customer operations are not impacted, said Saurabh Govil,senior vice-president (human resources),Wipro Technologies. However,industry watchers feel that with a priority budget coming in for the next two quarters new deals will take a back seat for now. Sanjeev Hota,senior research analyst,Sharekhan,said: All these things,acquisitions or getting new clients,getting more deals,will now take some time. It will get delayed at least for a quarter or two. Smaller IT companies Nucleus Software Exports and Tata Elxsi have a large chunk of their revenue,37% and 26%,respectively,coming from Japan,he said.

The larger Indian companies have started getting direct orders in recent months as against Japans hierarchical business model for services,an indication of their climb up the value chain. These firms have been looking at acquisitions as the preferred approach to offset the language hurdle. They also see their China bases playing a major role in the same. The language skills are similar to Japan so people do use the China base for the Japanese customers. We have a China centre,it caters to some of out Japanese customers,not many, said Infosys Balakrishnan.

Besides,Japanese companies are also eyeing acquisitions in India in a bid to have an offshore IT-base as well as win more global customers,said Pradyumna Sahu,associate director,technology sector,PricewaterhouseCoopers. The very fact that Japanese IT companies are looking for targets in India indicates that they are open to offshoring.

While low labour cost,cultural affinity and language work to the advantage of countries such as the Philippines and Vietnam in catering to the Japanese market,India will still retain an edge because of the quality of work it handles. The threat lies,if at all,in the BPO sector where the dependency on language capability is extremely high, said Parakala.