Japan has been a tough nut to crack for Indian software companies. However, the recent successful forays by some Indian companies indicates that the land of the Rising Sun can finally become a land of hope for Indian IT companies. Rajneesh De & Chitra Padmanabhan track these successes and investigate the obstacles still lying ahead

India Software Inc. is finally waking up to the potential of the $100 billion Japanese software market. The global tech meltdown, the US economic recession and 9/11 events have all combined to sour the Indian outsourcing honeymoon with Uncle Sam. And though Europe has been touted as the natural alternative, Japan can no longer be ignored just because it’s a difficult market to break into and work in. The truth is that Japan, the world’s second-largest software and services market, accounts for a whopping 70 percent of the Asian market and contributes more than 12 percent to the global outsourcing pie.

According to both IDC and McKinsey, the total Japanese outsourcing market was pegged at $53.2 billion in 2001 and is expected to reach $75.2 billion by 2005. Outsourcing by Japanese companies is rapidly increasing as the prolonged downturn in the Japanese economy is putting enormous pressure on companies to reduce costs. Secondly, Japan is headed for a skill shortage of 300,000 people by 2005, especially in new and emerging technologies, as companies have been unable to retain their ageing workforce. The potential of this market is evident from the fact that some of the largest outsourcing deals in recent times have originated from Japan. For example, in the year 2000, IBM Japan and NTT Comware announced a 10-year $7.5 billion deal to deliver IT services to the NTT group as well as to IBM customers seeking IT services in Japan.

India’s Japanese sojourn
India’s software exports to Japan have been on a rising curve over the last few years. According to the Electronics and Software Exports Promotion Council, an autonomous exports promotion body under the Ministry of Commerce, the big break came in 1996-97, when exports grew 105.7 percent to touch $30.7million. And it kept growing, to $150 million in 2000-01, and $226 million in 2001-02, which translates into 3.6 percent of India’s total software exports. This is pretty insignificant when compared to India’s exports of $3.9 billion to the US, (62.7 percent), $1.5 billion to Europe (23.8 percent) or even $426 million (6.9 percent) to Asia-Pacific (excluding Japan).

According to Nasscom, India Software Inc.’s exports to Japan are expected to scale up to $500 million in 2002-03. It also predicts that from the current 3.6 percent, the figure might reach 15-20 percent by 2004, which incidentally implies an amount of nearly $4 billion. As of date, 90 Indian companies are exporting software to Japan, substantially up from six in 1992-93. In addition, there are another 46 Indian players who are collaborating with Japanese companies to outsource software development work to India.

According to the McKinsey report, the biggest exporter is Wipro, followed by Infosys and then TCS. Others in the Top 10 list include, L&T Information Technology, Zensar Technologies, IBM Global Services India, Network Systems & Technologies, Compete Business Solutions, Yokogawa Bluestar and i-flex. Players like Patni, Datamatics and Polaris too have made inroads into Japanese territory.

There have been interesting success stories for India in Japan. One is the Shinsei Bank story. After the Japanese financial meltdown, Shinsei Bank, a multibillion-dollar entity, was taken over by a group of foreign investors. This resulted in 3-4 top Indian executives getting into the helm of Shinsei’s operations, which in turn provided the first major look-in for Indian IT companies into Japanese banking circles. Three Indian companies—i-flex, Mphasis-BFL and Polaris Software—got a chance to not only develop software, but also to do some amount of IT consulting for the bank during the past few years. Wipro has achieved immense success in Japan, with more than 30 active clients, including names like Sony, Toshiba TEC, NEC, Daiwa Institute of Research and BSI. Indo-Fuji Information Technologies has been another feather in the cap for Indo-Japanese collaboration.

This Bangalore-based software firm that specialises in embedded systems and broadband services might well become the first Japanese Quality System (JQS) certification body outside Japan. The JQS certificate is similar to the CMM level certification given to Indian companies. JQS facilitates the entry of Indian firms into Japan. Started in 2000, the customer-centric and wholly Japan-focused firm is expected earn revenues of Rs 20 crore during 2002-03. The company has also set up the Japan Special Interest Groups Forum with members like NetKraft, Hughes Software Systems and India Satcom to encourage more SMEs to venture into the Japanese market.

In recent years, Indian companies have found it easier to penetrate the Japanese R&D services market (mainly for embedded software) due to the shortage of skills in this area in Japan. Japan leads most of the key manufacturing segments, all of which require significant amounts of embedded software. Historically, most of the R&D and software development required for these products was carried out in-house. However, the software content in these devices has begun to increase at a rapid rate, making it difficult for Japan to cope with demand. This situation has created an opportunity for Indian companies. Wipro, for example, has a dedicated offshore development centre (ODC) for BSI that works in hi-tech telecom areas.

In parallel, Japanese companies have set up shop in India to develop various embedded software applications. For example, Canon’s Indian development centre plans to export $3 million of software in its first year of operation. Besides, Patni runs a dedicated ODC in India for Hitachi Japan while HCL runs one for Toshiba Japan. Even Sanyo’s Indian subsidiary, SLTI, provides development support and design services in the area of LSI/VLSI design and embedded software.

Samurai hurdles
However, Japan still remains a tough nut to crack for Indian companies. Despite the size and expected growth rate of the Japanese IT services market, Indian companies have managed to corner only 0.4 percent of it and are finding it difficult to participate in the country’s growing outsourcing market. Says K G Suresh, founder of Indo-Fuji, who worked in Japan for 14 years, “The Japanese culture is not as open as the American culture. And understanding the way business works in Japan is very important to get a toehold in the market. Besides, knowledge of Japanese languages increases your esteem within Japan’s business circles.”

The top five local IT services players in Japan—Fujitsu, Hitachi, NTT Data, NEC and IBM Japan control over 70 percent of the market. Suresh feels that many of these IT services companies have long-lasting relationships with their customers. They also possess a deep understanding of the key IT systems in these client companies, making it very difficult for customers to even think of switching vendors. Moreover, many of these companies are sister concerns of trading companies like Itochu and Marubeni, which often control the distribution and licensing of many packaged software applications in Japan. As a result, the system integrator (SI) arms of these trading houses have the first right of refusal for all package implementation projects.

However, Shreedhara Shetty, vice president, Japanese business unit, Wipro Technologies, believes there is still hope for Indian companies. Most Japanese IT services companies do not play in the high end of the market, i.e., consulting and network consulting, which is dominated by global IT consulting majors like Accenture. Indian companies, therefore have a potential opportunity to compete in the high end of the Japanese market if they build the requisite skills and offer a competitive proposition.

Another potential hindrance for Indian companies is that Japanese businesses follow a consensus-based decision making model, which means far more time taken for a company to reach a decision, and hence a longer sales cycle of 9 to 12 months for an Indian firm. To succeed in Japan, Indian firms must arm themselves with patience for the long haul.

Another important difference compared to US or European markets is in the way projects are executed. In the US, specifications are fixed, presentations are made and the contract is immediately signed. But in Japan, contracts can be signed only after 80 percent of the project is complete. This also implies that in Japan, businesses work more on trust and reliability, and it is imperative for Indian companies to grasp these principles. Also unlike the US, billing rates in Japan are not calculated on an hourly basis but on the total cost of the project. Therefore, Satish Joshi, vice president, Patni, believes that when billing rates in the US have taken a spectacular southward nosedive, Japan can turn out to be a really lucrative alternative for Indian companies.

The Chinese factor
However, the biggest barrier still remains language and cultural issues. Most Japanese firms are reluctant to do business with a country they are culturally unfamiliar with. Language is also a genuine barrier as Japanese customers expect employees of Indian companies to be as fluent in Japanese as the locals are. Shetty feels that the linguistic familiarity of the Chinese with the Japanese language gives them a natural advantage in Japan vis-à-vis India.

Besides, Japanese is the second language taught in the northeastern parts of China, resulting in over half a million Japanese-speaking Chinese citizens there. Moreover, this region, Dalian, which houses several Chinese companies that are targeting Japan, is just two hours away from Tokyo. The region also has newly-installed fibre optic networks and high-speed data connections. In addition, Joshi adds that most Chinese programmers are familiar with the double byte system used to generate Chinese and Japanese characters. Due to these synergies, it comes as no surprise that Japan continues to be China’s largest trading partner. For example, Toshiba operates a chip development centre in Shanghai with plans to ramp up to 1,000 engineers by 2004, Matsushita has an R&D lab in Suzhou, China while Fujitsu has two development centres in Beijing and Xian.

In addition, China offers management synergies to Japanese companies who have been using China as a low-cost manufacturing base for several years. Matsushita, for example, has significant manufacturing investments in China and exports nearly 40 percent of its production. In the last few months, Matsushita and other blue chip Japanese manufacturing companies have announced plans to expand China from being just a manufacturing base to an R&D base. Suresh also offers an interesting observation. “After World War II, America wanted to eagerly compensate the damage done to Japan during the bombing in Hiroshima and Nagasaki. In the similar vein, the Japanese have an inherent urge to help China in some way or the other for the atrocities committed there by invading Japanese armies. This part of the nature of the Japanese comes to light only after continued interaction with them.”

Shetty believes that the greatest advantage for the Chinese is that they provide services at a lesser cost-at almost 50 to 60 percent of the rates provided by Indian firms. However, Joshi is still confident of Indian companies winning Japanese contracts because of the superior quality of our software code and project management skills maintained through SEI-CMM Level 5 certifications. Japan is more quality conscious than the US and therefore SEI-CMM with the recently introduced JQS certifications would definitely help. The odds against China is that the Japanese have a policy to have an English version of the product, which China is not able to provide. Moreover IPRs are more organised in India, which is one of our greatest advantages.

The road ahead
How are Indian companies attempting to overcome these odds? Our companies need to have commitment backed by deep pockets to set up the required infrastructure, which includes language training skills and a dedicated marketing team that understands the long-term business nuances of the Japanese market. Wipro has even set up a vernacular division in Chennai to impart Japanese language training to its software engineers. At $28 million, 7 percent of Wipro’s revenues are from the Japanese market.

Interestingly, Japan has a requirement for over 8 lakh IT engineers, which at present is being fulfilled by China. According to a Japan Information Service Industry Association (JISA) survey, there are only 400 engineers from India now working in Japan. Software firms like IonIdea Interactive and NetKraft prefer to enter the Japanese markets through synergistic relations with their customers like SECON and Allergan (in case of IonIdea) or through Japan-riveted firms like Info-Fuji (for NetKraft).

“The larger companies cannot afford to ignore Japan, but for SMEs it is more important to build critical mass,” feels Suresh. This is also an area for facilitators like JETRO (Japan External Trade Organisation), which has enabled firms like Polaris Software to establish its presence in Japan, besides providing liaison services for companies interested in participating at IT trade exhibitions in Japanese cities. JETRO also provides accommodation and other services to serious Indian companies interested in the Japanese markets. Joint Indo-Japanese projects like the ESC-JICA (Japan International Agency) project for sensitising IT SMEs in India to the Japanese market are currently underway.

The boom area for India’s software exports to Japan is likely to be embedded software, but call centres can also look for customers in Japan. Trading houses like Marubeni have significant establishments in the US and hence can use the services of a call centre in India to service customers in the US. Adds Shetty, “Custom application development and IT management services constitute the two leading service lines of the Japanese IT services market line. While these two segments will continue to grow at a healthy rate for the next five years, system integration and deployment is another area that is growing at a rapid pace. Manufacturing and finance, the biggest verticals traditionally, is expected to grow at a healthy rate for the next five years.”

Noshir Kaka, principal with McKinsey, believes that Indian companies need to adopt a four-pronged approach to capture the opportunity in Japan. In the IT services market, alliances with Japanese providers are critical for accessing large Japanese customers. Indian companies could also explore the possibility of leveraging Japan, particularly in R&D services. Companies should choose between setting up a wholly foreign-owned entity (WFOE) and partnering with emerging Chinese players. The few players who have the capabilities in high-end services like IT consulting should target Japanese companies with these offerings. The key is to be significantly competitive vis-à-vis leading global SIs. Finally, Nasscom and the government should raise awareness about India and proactively attract Japanese FDI into the country. If all these happen, the day may not be far off when Wipro or i-flex become household names in Japan.