New strategies for new markets
The world is looking at new engines of growth – mainly China, but also India and Brazil – to power a quick recovery. India has been slow to look beyond the West. The demise of the Soviet Union, a trusted partner for many things, further reinforced our westward focus in both politics and economics. Trade with China has seen rapid growth in the last decade, but exports are largely commodity-centric. The Look East policy seems to be gaining momentum only slowly. Yet, for all its focus on the West, India’s top exporter – the IT sector – has, for some years now, been active in geographies beyond its traditional markets (US, UK and Western Europe).
For many years, it has sought to tap the big Japanese market with very limited success. Over the last few years, attempts are being made to break into the booming domestic market in China; here, too, success seems elusive. Korea has not seen too many Indian IT companies, nor has Indonesia or most countries in South East Asia. The Philippines is an exception: it has become an important base for IT companies – especially call centres and BPO operations – and India has tapped into this in a big way, with a visible and substantial presence of many Indian players.
This lack of substantial success outside our traditional markets is a matter of concern, especially in the context of the IT industry’s perspective – articulated by industry body, NASSCOM, in a study with McKinsey – for the year 2020. This report targets massive growth – quadrupling exports from $50 billion to over $225 billion by 2020 – with a possible additional upside of $80 billion if we can be innovative enough. However, as much as 80 per cent of the incremental growth will have to come from new customers and, of this, the biggest chunk will need to be from new markets – particularly, China, Brazil and Russia.
The United States, UK and Europe will, undoubtedly, continue to be both profitable and large markets. Yet, the big opportunities of the future will require the IT industry to penetrate markets in China, Japan, Latin America and Africa. The experience of the last few years indicates that the strategy perfected for the US and UK does not quite work in China or Japan – or even in France and Germany.
Some Indian companies have set up operations in Latin America. The ratio of Indian to local employees is of the order of 10:90. In the US and UK, it is almost the obverse. In these countries, joint ventures and local acquisitions are rare; on the other hand, successful Indian companies with large operations in ‘new’ countries work through joint ventures or locally acquired companies. Little wonder, then, that after years of slow growth in Japan, a company like Infosys is now looking for a major acquisition there (in a recent interview, the CEO has indicated a willingness to invest as much as half a billion dollars on this); or that the Indian IT giant, TCS, has entered Chile by acquiring a local company with thousands of employees. Presence through a local company seems to be a necessary entry-point into countries like China, Japan, Germany and in Latin America.
It seems clear that the strategy for success in new markets will have to be very different from that used in more conventional markets. The same is likely to be true with regard to new areas of work, outside the software applications development and maintenance that Indian IT companies have specialised in, or the traditional banking, insurance and financial services that they have mastered. Many of the new markets will be based on doing more work on-site (in the host country), using mainly local employees – which means little or no wage arbitrage.
What then, can be the competitive advantage for Indian companies? One is the ability to recruit, train, motivate and manage a large number of highly skilled professionals. The value of this is little recognised, till one observes that China – despite its outstanding success in IT manufacturing – has not been able to create any large software companies. Another is the skill to understand, analyse and then meet customer needs with an extraordinary degree of flexibility. The third is the capability to engender trust, facilitating the building of partnerships with customers.
To build on its phenomenal success, the IT industry will have to reinvent itself. Changed contexts and different markets require a new strategy. An integration of the three advantages mentioned above, a focus on innovation (in products, processes and business models) as a differentiator, and local acquisitions, will have to be the cornerstone of a new strategy that helps to propel the Indian IT industry into the big league in the next decade.