The past two decades have seen the emergence of India as a leader in IT services. Can the country finally graduate from being a software services hub to a generator of products and intellectual property (IP)? If market trends are an indication, the IT products industry may well be the next sunrise sector for the country.
Software body Nasscom presents a rosy picture. The IT products sector is currently clocking revenues of close to $1 billion in a global $300 billion market, according to the forum. It is poised to touch revenues of $15 billion by 2015.
The current market trends do signal that the products? space is on a growth trajectory, driven by the technology spend on booming business verticals, a new breed of Silicon Valley-exposed venture capitalists, returning NRI entrepreneurs, and an ecosystem backed by improved IT laws in the country. Rising adoption of new technology such as SAS 2.0 and mobile technologies are other propelling factors for the industry.
Says Srini Vudayagiri, managing director of the US-based venture fund, Lightspeed Advisory Services India Pvt Ltd, ?The products? sector in India registered a growth of 55-60% in the past one year. Though on a small base, the growth is indicative of the direction the industry is taking.?
So far, the industry focused on two verticals?BFSI and telecom. However, a boom in other business verticals like organised retail, education and healthcare implied higher technology utilisation and demand for more products. ?As insurance services and organised retail become more prominent in India, they will create demand for a whole new breed of software applications. More exciting would be the potential in education and training businesses as vocational training needs rise and investments in that space mount,? says Vudayagiri.
The number of venture capital funds foraying into India is witnessing a steady rise as well. Data from research and consulting firm Zinnov shows that 40 VC companies are looking for early stage investments in India in the products space. Venture Intelligence, a research service focused on private equity and venture capital activity says that PE/VC firms have invested $38 million across 13 deals in the IT products? sector (including enterprise software) between January 2006 and September 2007. ?There is also a sustainable surge in the number of Indian entrepreneurs returning to the country to lead start-ups,? says Vudayagiri, whose company has a 75% focus on IP-lead product players in India.
Ashish Gupta, head of India-focused venture fund, Helion Ventures Pvt Ltd, says the industry could well outdo its target of $15 billion in eight years as the economy is largely on an upscale mode. ?These are interesting times because the domestic market is growing in scale. Scale and competition among companies drive the need for technology. The entire Indian economy is in that phase now,? he says.
According to Arun Natarajan, founder and CEO of Venture Intelligence, diversifying into the products space might also become a strategic option for software firms, owing to adverse market factors such as high costs and the appreciating rupee. “With the appreciating rupee and rising wages posing challenges to the IT outsourcing business, investing in products is a good way for Indian IT companies to protect and even increase their margins. High marketing costs associated with products have traditionally posed a challenge for Indian companies. However, with the higher availability of venture capital and significantly lower online marketing and product distribution costs, this is no longer a major hurdle,” he says.
Zinnov estimates India to have close to 400 product companies, of which over 200 launched operations in the past 18 months. Fifty five percent of the startups are focused on the internet and web 2.0 domains, while 30% deal with the mobile/VAS applications? business. Over 100 startups among these are focused on Indian market. Companies like VM Logic and Ugenie are among the export-oriented start-ups that form 20% of the new investments? pie.
The growth of the industry would have to be organic as well as inorganic, says Subash Menon, director and CEO of Subex Ltd. ?The growth is going to be limited only by the industry?s risk taking ability. We also need to come up with an ecosystem for VC funding,? he says.
However, skeptics point out that the going wouldn?t be that easy for the industry, given its long gestation periods and project-to-project business model (compared to the volumes? game in the services? space). Growth in the sector may face many roadblocks. The primary hurdle would be meeting its manpower requirements effectively. For one, the sector hires from the same pool of engineering graduates as the software sector.
?The average knowledge required for product companies is slightly higher than the services sector. A bulk of their headcount would comprise people with at least two years of actual software work,? says Vinu B Kartha, principal at investment, advisory and management firm Tholons.
The principal challenges posed by a technically hostile environment in the country include low quality of power and equipment, alongwith lack of continuous and reliable connectivity says Bharat Goenka, managing director of Tally Solutions. ?Yet, the opportunity lies in the growing momentum of adoption and dependency on IT,? he points out.
According to Himanshu Singh, India operations? head of governance, risk and compliance at Approva Corp, Indian companies are yet to focus on productisation of solutions. ?We should understand that the product development life cycle is different for the services and products space,? he says.