Mahindra Satyam?s announcement last week that it plans to triple its headcount in China comes at a time when India?s top software companies are veering their focus around to new geographies to offset slowing growth in their biggest markets. Markets like China and Japan aren?t exactly new destinations for Indian IT firms but the push to gain a foothold into these potentially large but difficult markets is stronger now, say analysts.
The top Indian IT firms had ventured into Japan and China about a decade ago but have found it difficult to penetrate these markets because they have mostly remained closed to offshoring, in addition to the language and culture hurdle.
In February, Tata Consultancy Services (TCS), India?s largest IT firm, entered into a joint venture with Mitsubishi Corporation to cater to Japanese companies and the partnership also plans to set up a nearshore delivery centre. In June, Infosys, which has been present in Japan for 15 years and has over 1,000 employees and about 40 clients, opened its second office in the city of Nagoya in Japan, eyeing clients in the manufacturing sector.
Indian firms have so far been able to establish a presence in the tertiary rung of Japan?s over $100 billion market for IT services where homegrown conglomerates form the top tier. The Japanese IT market is among the largest globally after the United States.
China, meanwhile, has mostly been a base to tap the outsourcing business from Japan despite its own potentially large domestic market. China?s IT services market was estimated at $30 billion in 2011, split equally between domestic business and offshoring. While the offshoring model will probably still remain the immediate revenue-earner for these firms as their global customers invest into that country, local Chinese companies too are gradually warming up to outsourcing, say analysts.
In addition to these economies, Indian firms have been focussing on geographies such as Australia and South America which are still growing.
?What has happened over the last decade or so is that Indian companies have continued to set up their operations in several cities of Japan and China and, as a result, they now understand the market better than they did a decade back,? says Kumar Parakala, COO, Advisory at KPMG. ?There is a change happening because Indian companies are using local talent to provide services in the local market.?
To be sure, the top companies have been on an expansion drive despite the fact that revenue from these economies is still minuscule, often accounting for under 2% of total revenue. Infosys? China subsidiary reported revenue of $102 million in FY12, an increase of 29% over the previous year though it posted a loss of $2.49 million compared to net income of $8.73 million in FY11. The company, which currently has around 3,000 people in China and is building a new campus in Shanghai, has indicated plans to add upto 2,000 employees in the country.
Wipro too has previously said that it plans to add upto 2,000-3,000 employees over next few years while TCS aims to take its China headcount to about 4,500 employees in the next couple of years. The engineering talent pool in China is partly driving the optimism though wage hikes and attrition have been a concern.
?Chinese universities are producing a high number of quality engineers each year. We are impressed by the level of skills, expertise and the willingness to learn?qualities we will build upon as we expand our operations in China,? Amitava Ghosh, vice-president and head?North Asia at Mahindra Satyam said last week when the company announced plans to triple headcount to 1,500 employees in China by 2015.
Besides, Mahindra Satyam said it is exploring strategic alliances and partnerships with Chinese companies to penetrate deeper into the local market, especially the telecom and manufacturing sectors in addition to increasing its near-shoring support of Japanese clients. A bulk of the Chinese orders for IT services still come from large state-owned enterprises. Last year, Infosys signed an memorandum of understanding (MoU) with the Dalian High-tech Zone to focus on the software development and outsourcing business in the region, an initiative it saw as a milestone in cooperation efforts with a provincial government in China.
?Being in China and not addressing the local market does not make sense. But going on your own is not feasible and you have to have a partner,? says Pradeep Mukherji, president and managing partner at IT/BPO advisory firm, Avasant. ?Earlier, companies were not open to partnerships, now they are opening up.?
Agrees KPMG?s Parakala. ?Other than Africa, Japan and China continue to look to very promising. Both of them are attractive and companies themselves are becoming quite attuned to and inclined to use the Indian expertise and skills which, about 10-12 years back people had some reservations,? says KPMG?s Parakala. ?It will be slow and steady. It is not going to happen overnight.?