India IT Majors’ Growth Track

From Business Today dated Oct 17, 2010.

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FT : The Lengthening Shadow Of The New Outsourcing Dragon

India’s outsourcing groups may be keeping a wary eye on China but the world’s second-largest economy does not necessarily spell doom for the subcontinent.  Tata Consultancy Services, India’s largest outsourcing services group, last month said that it would double its headcount in China, a clear signal that the Indian sector is keeping a close eye on a market that could evolve into a serious competitor.  The threat appears clear enough.  China’s outsourcers are set to grow at a faster pace than India’s over the next few years, according to analysts.  “The Chinese outsourcing sector is bound to see the same curve the Indian industry had before – they are in for incredible growth,” says Egidio Zarrella, a partner at KPMG.  “There’s paranoia among the Indians because they remember what they did to us [in the west] – rolling up our markets in just a couple of years’ time,” the China head of an American outsourcing group says.  “They fear the Chinese are going to do the same to them now.”  The Chinese government has offered strong support to the industry, including incentive packages and tax breaks, in the hope of emulating India’s success and creating millions of jobs.  Beijing’s declared goal is to create 10 internationally competitive outsourcing hubs, encourage 100 multinational companies to outsource to China and develop 1,000 Chinese outsourcing services vendors that are qualified to serve the global market.  As a result, the Chinese are now increasingly picking up orders in the US and Europe, traditional strongholds for Indian companies.  Last year, all top 10 Chinese outsourcing services vendors saw revenues from US and European customers rise and in some cases outgrow the portion of business that is derived from Japan and South Korea, where they initially started offering services.  HiSoft, the third-largest Chinese offshore vendor, which went public on Nasdaq in June, serves a smattering of global clients including AIG, Microsoft, and Citigroup.

However, some say fears of a Chinese challenge to the Indian industry globally are mostly overblown; partly because the Chinese industry is still relatively small and fragmented; but also because China, unlike India, boasts a big potential domestic market. China’s IT services exports were worth just $9.6bn last year while India’s were $49.7bn, according to CLSA, the brokerage.  Neusoft, the largest Chinese player, reported Rmb4.2bn ($618m) in revenues last year, less than one-tenth of Tata Consultancy’s revenues of $6.5bn for the financial year ended March 31.  Not a single Chinese outsourcing group approaches even 10% of TCS’s headcount of 160,000.  In addition, Indian and Chinese outsourcing services vendors often still do not compete head-on, according to analysts.  “The pie is growing rapidly. It’s not a question of India versus China, there’s room for everyone,” says Sidney Huang, chief operating officer of VanceInfo, China’s second-largest IT services company.

The main reason is China’s potential domestic riches.  IT services account for only 13.8% of China’s total IT market compared with a 30.3% share for Asia-Pacific overall, according to IDC, the research firm.  That number will increase as government requirements for more efficiency push local groups to step up outsourcing, IDC analysts argue.  There are already signs that this is happening. At $8.1bn, China’s domestic IT services market was bigger than India’s with $5.8bn last year, according to CLSA, and many Chinese outsourcers are now increasingly looking to the local market for business.  “In the past four years, China has been the driver of our business,” says Mr Huang of VanceInfo.  In 2006, the domestic market accounted for just 5% of the company’s revenues, but in the second quarter of this year, that share had soared to 45%.  HiSoft says its domestic business has soared over the past six quarters.  “By the end of 2010, China will account for 10% of our revenues, but by 2012 it’s expected to be 40%,” says Ross Warner, vice-president.  Both Indian and Chinese outsourcing companies are preparing for the bigger, long-term opportunity of business from state-owned banks and telecommunications operators in China.  But that day is still distant, analysts and executives say. “IT services demand in this segment is still primitive,” says Mr Huang of VanceInfo.

Reference : The Financial Times Sep 8th 2010

Mind Map : Indian BPO Industry

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FT : Indian Outsourcers Expecting “Crisis Dividend”

After facing one of their toughest years on record over the past 12 months, Indian IT companies are expecting a turnround in business as western financial groups look to outsourcing to help recover from the credit crisis.  Banks in developed countries are now seeking to implement new IT platforms to consolidate recent acquisitions.  At the same time, legislative changes in the US are expected to force through cost cuts in the credit card industry, and potentially in healthcare, that could benefit outsourcing groups.  “We are seeing banks ‘re-platforming’ at the moment,” said Steve Cardell, president of enterprise applications and consulting at HCL Technologies, which paid £440m ($700m) for Axon of the UK last year in the Indian outsourcing industry’s biggest overseas takeover.  “Partly because there were a lot of acquisitions that happened during the credit crunch, suddenly there’s a lot of work around merger integration in financial services.”

India’s outsourcing companies were hard hit by the first phase of the global economic crisis, when banks put on hold outsourcing deals, ranging from the implementation of new software to contracting out business processes such as handling mortgage applications.  Industry leaders such as Infosys Technologies, Wipro and Tata Consultancy Services reduced headcount, in contrast to their pre-crisis workforce growth rates of about 30% a year.  But most Indian IT companies are now predicting that the wave of cost-cutting that inevitably follows a recession will eventually result in a “crisis dividend” for their industry – increased outsourcing to countries such as India, where costs are lower.  US president Barack Obama’s crackdown on credit card practices and proposals for healthcare reforms are both expected to result in more work for Indian outsourcing companies.  Markets have cottoned onto the change in sentiment.  Indian IT stocks have risen 85% this year, beating a 63% rise in the benchmark Bombay Stock Exchange Sensex Index.  Ananda Mukerji, chief executive at Firstsource Solutions, predicted that rules to be introduced in the US next year – which would cap the interest rates and fees that can be charged on credit cards – would lead to greater outsourcing.  “It’s going to reduce the revenue opportunities for a lot of credit card issuers, so all the issuers are trying to figure out what the model is going to be,” he said.  Mr Mukerji said the other potential windfall for Indian business process outsourcing groups would be healthcare reform, which, if the proposed reforms are passed, could result in pressure on hospitals to reduce costs and a push to bring more people under the insurance net.  But analysts caution that it may take several quarters before these structural changes in clients’ business benefit Indian IT companies’ bottom lines.

Reference : http://www.ft.com/cms/s/0/6e3e12ba-ad17-11de-9caf-00144feabdc0.html

NASSCOM Strategic Review 2009

While the current mood is that of “cautious optimism,” the industry is expected to witness sustainable growth over a two-year horizon, going past its USD 60 billion export target in FY2011.  While the industry has significant headroom for growth, competition is increasing, with a number of countries creating enabling business environments aimed at replicating India’s success in the IT-BPO industry.  Hence, concerted efforts are required by all stakeholders to address the current challenges, to ensure that India realises its potential, and maintains its leadership position.

Full Executive Summary here.

Reference : http://www.nasscom.org/Nasscom/templates/NormalPage.aspx?id=55772