With some of the lead indicators from the US and Europe pointing to an economic recovery, spending on information technology has seen a marked improvement. This will bode well for Indian companies and the sector is expected to grow 13-15% this year with budgets growing over 3%. However, to catch up with the heady growth of 30% in the period 2004-07 on the back of solid 7-10% growth in worldwide IT budgets may take some more time.
Indian software companies will have to tap new markets apart from America and Europe to accelerate the pace of growth. They need to focus on Japan, which is the world’s second largest IT market after the US. Of the $110 billion IT services market in Japan, India’s share is a miniscule $283 million or just 0.3%. While most large Indian IT providers have been present in Japan for over two decades, they have not been able to make much headway as language and culture are the two critical barriers to growth. Indian companies are now employing local talent and even training their employees working in the Japan business units to speak and understand the local language.
Moreover, unlike their western counterparts, companies in Japan do not outsource heavily to non-Japanese vendors. Of the $110 billion IT service market in Japan, about 70% is serviced by local firms. Indian market leader TCS has adopted the inorganic route to expand in the tough Japanese market by merging its own Japan business with the IT services arm of Mitsubishi which has revenues of over $500 million.
The merger will create a $600 million business for TCS in Japan and will provide access to high-quality client and local talent. It will also pave the way for other Indian software companies to look beyond the western markets for growth in the future.