With traditional markets suffering, India's big IT players are hoping to expand in Eastern Europe, the Middle East, Africa and Asia
The global economic recession has compelled local IT firms to focus more on the domestic market and expand to newer geographies. According to a recent Ernst & Young report, the domestic BPO (business process outsourcing) market grew over 50 percent over the last five years, outpacing the export market last year to reach nearly US$1.6 billion.
Ernst & Young predicted that India's BPO industry will expand at a compound average growth rate (CAGR) of 38 percent to reach US$6 billion by 2012. In fact, the consulting firm believes this sector presents significant untapped potential with an addressable market opportunity reaching US$15 billion to 19 billion by 2012.
Sudip Saha, senior research analyst of services at Springboard Research, said in an e-mail interview: "The entire Indian IT export industry has been severely impacted due to developments in the U.S. and U.K., and as a result, offshore services providers have started addressing newer markets in Europe, Asia and Latin America that are relatively insulated from recession."
Kapil Dev Singh, country manager for IDC India, told ZDNet Asia in an e-mail that local IT companies are looking at high-growth regions such as Eastern Europe, the Asia-Pacific, Middle East and Africa.
They are also expanding operations in countries such as France and Germany, where language skills had proved prohibitive.
Saha added that local companies have made significant headway in these markets by recruiting locally. Wipro, for instance, set up a development centre in Germany in 2002 and has since expanded its presence in six German cities. The Indian outsourcing company also has a large package implementation practice for German business software vendors SAP.
Similarly, Infosys is growing its footprint in Europe by expanding its existing sales and marketing offices and increasing recruitment. TCS has also been investing in Latin America since 2002 and recently set up a global delivery center in Buenos Aires, Argentina. Latin America contributes 5 percent to the company's US$6 billion revenues.
Domestic focus for growth
The domestic market is also seeing strong demand from sectors such as banking, telecommunications, insurance, government and utilities.
"Domestic market offers a huge opportunity," Milan Sheth, partner in technology practice at Ernst & Young, said in a phone interview. There is phenomenal IT spending taking place and large volume contracts from public sector undertakings, leaving government and Indian businesses up for grabs.
"Besides, there is under-penetration of IT in the organized sector. This coupled with factors like falling hardware and broadband costs and improvements in bandwidth, are encouraging companies to increase their IT spend," Sheth added.
Citing local examples, Saha said Infosys entered the domestic market in early-2008. "Since then, Infosys has come a long way. It has entered into a partnership with Airtel and more recently, has been participating in the bidding process for all big government projects with an intention to garner US$1 billion (46.3 billion rupees) revenue from India in the next three to four years," he said. Recently, Infosys also bagged US$45.3 million (2.1 billion rupees) in a pilot project to build the Indian Railways an integrated coach management system.
Patni Computer Systems also expects to increase revenue from the domestic market from less than 1 percent today, to 6 per cent of its overall revenue by 2012. The company is also eyeing acquisitions to increase its penetration and growth in the domestic market.
According to Saha, three key verticals targeted for growth in the domestic market are: transportation and logistics, including airport and port modernization projects and metro rail development projects; utilities, including power projects, oil and gas and water distribution projects; and public sector, such as Indian Railways modernization, smartcard deployments and several State Wide Area Network projects. Springboard Research estimates these three verticals to grow at 24 percent CAGR between 2008 and 2013.
IDC also expects the Indian IT-ITES (IT and IT-enabled services) industry to cross US$110 billion (5.1 trillion rupees) by 2013, growing faster than exports. The domestic market's contribution is expected to increase from 31.7 percent in 2008 to 41.9 percent in 2013.
Singh said: "From an IT perspective, government, telecommunications and the banking, financial and insurance services sectors are some of the strong industry verticals providing growth. Here, we are seeing strong growth both in turnkey projects and large support services projects."
According to Sheth, Indian IT firms are also increasing their focus on the domestic market to enhance their skillsets. "They get to handle larger projects that offer opportunities to move up the value chain, which are difficult to come by in the developed markets. This helps Indian IT firms develop capabilities that can be leveraged in other emerging markets like Brazil and newer markets like Africa," he explained.
Double-digit growth in 2010
According to trade body Nasscom, the local IT industry to see lower growth rates this year at 4 to 7 percent, compared to 35 percent per annum over the last decade.
However, Sheth believes there will be no impact on India's IT market over the medium and long term. "No sub-segment of the Indian IT industry has experienced de-growth," he said, noting that while Nasscom may have predicted lower overall growth, volume growth would be significantly higher. "The drop in growth is primarily due to the pricing pressure," he said, adding that price-points have come down by 10 to 15 percent.
The analysts said double-digit growth will return by end-2010, boosted by a market revival. However, this high-growth trajectory will see a slower revival for the services sector, which is typically affected at a later stage.
Singh explained: "The segment gets impacted by an economic slowdown at a later stage, compared to hardware and software businesses. The same lag effect applies when the markets start reviving."
Concurred Saha: "The local IT market is already showing some signs of recovery and according to our data, will experience double-digit growth by mid-2010."
However, Sheth said, the local IT market will unlikely post growth levels like before at 35 percent.