IT exports set to surge as corporates open new offshoring windows

Written by Sajan C Kumar | Chennai | Updated: Oct 29 2009, 04:39am hrs
This one could be music to the ears of IT and software export firms worldwide. For, amid the global economic downturn, IT service exports are in for a big leap.

The United Nations Conference on Trade and Development (Unctad), in its Information Economy Report 2009: Trends and Outlook in Turbulent Times, predicts that software exports are likely to increase. This is because more and more corporates are taking to services offshoring as it reduces costs and enhance competitiveness. As the recession adds to cost pressures, companies will choose to offshore new services to lower-cost locations. In the medium to long term, as the global economy recovers, Unctad expects the offshoring of services to widen geographically and sectorally as well as across business functions.

In fact, the expansion of offshore services has only just begun, the report says. According to market analysts, the global market for the offshoring of IT and ICT-enabled services was estimated at $90 billion in 2008, of which IT services accounted for 60%. A close examination of the data suggests a trend towards geographical diversification, at least in the case of ICT-enabled services. While the top five countries Canada, China, India, Ireland and the Philippinesstill account for four fifths of the exports related to offshoring, many new destinations are emerging and account for a growing share. More countries in Africa, Asia, Europe, and Latin America and the Caribbean are today perceived as attractive offshoring destinations. This trend is particularly visible in the case of voice-based services, where companies look to develop global supply capabilities covering many language areas and time zones. In IT services, however, India remains the dominant exporter, with an estimated market share of about 55%.

Long-term growth prospects for the offshoring of IT and ICT-enabled services therefore are promising for early starters (such as India) as well as for many other emerging nations. As the global offshoring business is poised to grow, there should be room for more countries to develop sizeable export-oriented services industries.

The report says the recession has had significant repercussions on the global trade of ICT goods such as computers, accessories, laptops, mobile phones and telephones parts. The fall in exports appears to have been particularly steep in economies whose exports were stagnant or in decline prior to the crisis. Germany, Japan, and the United States are in that bracket. Of the worlds top six exporters, Japan experienced the steepest decline, with its exports of ICT goods shrinking from $5.1 billion in October 2008 to $2.9 billion in March 2009. It is possible that the crisis will accelerate a shift in the geographic composition of ICT goods trade, with developing Asia reinforcing its market share.

Market surveys suggest that it may take a while before spending on ICT picks up significantly. The IT departments of most large companies lowered their budgets in the first quarter of 2009 and only a few signalled increases. Even as the recovery begins, it is likely that ICT goods exports will remain well below their pre-crisis levels for an extended period of time. According to the report, between 1998 and 2007, the value of ICT goods exports rose from $813 billion to $1.73 trillion, representing 13% of all merchandise trade.

During the same period, the share of developing countries in such trade jumped from 38% to 57%. This increase was almost entirely attributable to developing Asia. Other developing regions as well as economies in transition remain marginal exporters of ICT goods. China has quickly emerged as the worlds largest exporter, with its market share shooting up from 3% in 1998 to 20% in 2007, more than twice the share of the second largest exporter, the United States. Hong Kong (China) and the Republic of Korea saw the second and third largest increases in market share, while the United States and Japan experienced the greatest declines.

IT and ICT-enabled services, such as computer programming, software development, customer-service call-centre work and back-office services, are of growing importance in world trade and have been more resilient during the crisis. Increased broadband connectivity in a rising number of countries has eased the reorganisation of services and led to the expansion of export-oriented services in places offering attractive locations or lower wages.

Elaborating on the status of exports of ICT goods, the report says Chinas exports of ICT goods saw strong growth, reaching an all time high of $22 billion in October 2008. Exports then fell sharply, by nearly 50% to $11.4 billion in January 2009. They recovered somewhat in March, before sliding again in April and May. Compared to the same period in 2008, Chinese exports of ICT goods were almost 25% lower in May 2009. As it is by far the largest source of such exports, China has seen the largest declines in absolute terms.

The report says exports of ICT goods from the United States were flat during the first three quarters of 2008. Sharp falls in January and February 2009 brought export volumes to levels approximately 20% lower than a year earlier. They recovered somewhat in March 2009 before falling again in April. Germanys exports also saw a decline. In this case, the downward trend that started in November 2007 accelerated in November 2008. By March 2009, Germanys exports of ICT goods were a-third below the level recorded in March 2008. Preliminary data from the Federal Statistical Office of Germanythe outfit is responsible for collecting, processing and analysing statistical information concerning the economy, society and environmentsuggest that the countrys overall exports fell again in April and May.

Of the top six exporters, Japan has experienced the steepest decline in relative terms, with its exports of ICT goods shrinking from $5.1 billion in October 2008 to $2.9 billion in March 2009. As in the cases of Germany and the United States, its exports had been stagnant in the months prior to the crisis. Despite a small recovery in Japans ICT goods exports in March, they remained over 43% below the level recorded a year earlier. Its export performance over this period suffered from a sharp appreciation of the Japanese yen against the United States dollar after September 2008.