India’s IT industry turns east

Despite the threat of fierce protectionism, challenging cultural barriers and major linguistic hurdles, the giants of Indian IT are looking to break into China’s previously closed software and outsourcing industry.

Exports from India’s IT sector will reach $75.8bn in the fiscal year ending March 31 according to Nasscom, the industry body in India – 10.9 per cent more than in the previous year. In the next fiscal year, Nasscom forecasts export revenues of up to $87bn.

But despite such seemingly impressive figures, the industry has had little luck breaking into nearby large Asian markets such as China and Japan. Hence the two-pronged plan of Som Mittal, president of Nasscom (pictured), to end his industry’s traditional reliance on demand from the recession-hit US and Europe.

The first aspect involves expansion into new geographies. Mittal told beyondbrics: “China has been very protective in only allowing their own companies to operate in the sector. State-owned enterprises have restrictive conditions on who they work with.”

But now both governments are worried about the trade imbalance between India and China. In the 2011-2012 fiscal year, 11.8 per cent of India’s imports, worth Rs2.76tn, came from China. Meanwhile, India’s exports into China were valued at just Rs875bn. To help close the gap, the two governments have identified IT as an area where India should be exporting more to China.

Mittal says Nasscom is working with the Indian government to lay the foundations for just this. A study is underway looking at the status quo in the Chinese market and this will be completed in four months.

Says Mittal: “It’s a long-run affair but we do hope China, in its own interest, will open the sector up to us.”

Nasscom’s efforts in China will be welcome news for India’s IT companies. Just last year, N. Chandrasekaran, chief executive of Tata Consultancy Services, the nation’s largest player by revenues, told the FT:

We have 3,000 people there, but our interest is to grow to 5,000; 10, 15, 20,000 people as fast as we can… But China is very slow, being frank with you. It has been much tougher than we thought

The second aspect of Mittal’s plan is heading off the threat from emerging Chinese outsourcing companies. The Indian IT sector has 25 years of history, while China’s is still in its infancy. But according to Mittal: “China is motivated to have a very successful services industry. English is becoming compulsory at a very early age and they are aggressively building infrastructure to support the sector.”

By his estimates, if the Indian industry plateaued now, Chinese companies would be providing stiff competition in the next five years. The hope is, of course, that Indian companies will move up the value chain, sustaining their lead.

But even if success in China proves illusive, India’s largest software groups have a back-up plan: Japan.

If China often presents government barriers, in Japan the challenge is different. Japanese enterprises use technology that is largely customised, with in-house IT operations.

“In Japan, outsourcing is less than 10 per cent of total spend, compared with the US or UK where the range is around 30 to 40 per cent”, Mittal says, nothing that Indian outsourcing groups have been much more successful at working for Japanese firms in the US or Europe than in their home market.

Now, the hope is that an ageing population and increasing international competition will force Japanese companies to consider outsourcing.

Either way, after years of looking west it seems Indian IT companies are turning their attention in the other direction.

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New Indian IT push targets UK and US, FT