Growing Interest in the Asian Market

Thursday, 13 November 2008

Traditionally, Asia (excluding Japan) has been perceived as a ‘provider’ of IT services rather than a potential ‘buyer’ of services. However, with the rapid economic growth, a surging services sector, proliferation of technology in various sectors and increasing number of companies going through a global facelift, Asia is witnessing a rise in IT spend.

Worldwide IT spend in 2008 is expected to grow at a slower pace at 5.5%, down from 6.9% in 2007. This reduction is primarily due to the economic slowdown in the US and Europe.

According to a recent report by Forrester Research, more than 40% of large businesses that they surveyed across North America and Europe have cut their IT budgets this year. 70% of the respondents said that they were likely to renegotiate rates with their existing suppliers.

Growth in IT spend

Note: The size of the bubble indicates market revenues in US$ billion
Source: Gartner estimates, ValueNotes Research

Although Asia-Pacific constituted only a 6% share of the total global IT services market in 2006, IT spend in the region is growing at a much faster rate compared to the mature markets. These growth rates are not expected to be significantly dampened by the economic slowdown. A large portion of the IT spend in developed markets is towards upgradation and maintenance of their software and systems. On the other hand, Asian companies have recently started investing significant amounts in IT.

Global IT vendors embrace Asia market

Asian companies (excluding Japan) have been relatively slow in adopting technology as compared to other developed markets. With privatization and increasing competition, companies in India and China are now undertaking massive computerization and investments in technology to compete with global players.

Aggressive adoption of IT and centralization of operations will serve as a key enabler to IT outsourcing in these markets. Indian companies from high-growth sectors like telecom, retail, banking and financial services are amongst the leading buyers of IT services in Asia.

This growing opportunity has attracted large global vendors such as IBM, Accenture and EDS who have bagged large contracts and are rapidly building capacity in the Asian markets. Some of the prominent recent deals include:

Large deals in Asia

Year	Vendor name	Client name	Contract value (US$ m)	Country
2008	IBM	Max New York Life	N.A.	India
2008	Wipro Infotech	Aircel	525	India
2008	IBM	Bharti Airtel	150	India
2008	Wipro Arabia (a JV between Wipro and DAR Al Riyadh Group)	Saudi Airlines	100	Saudi Arabia
2008	TCS	New India Assurance	40	India
2008	HP	Unilever	675	India
2008	Wipro Infotech	Pantaloon Retail	50	India
2008	EDS	Infocomm Development Authority of Singapore	1000	Singapore
2008	IBM	Thanachart	60	Thailand
2008	HCL Comnet	Union Bank of India (UBI)	14	India
2007	IBM	UTStarcom/BSNL	17.7	India
2007	Accenture	Thomas Cook	400	India
2007	IBM	DLF	29	India
2007	IBM	Idea Cellular	600 to 800	India

Source: ValueNotes DealTracker

Interestingly, while global vendors were successful in winning large contracts in the Indian market, Indian vendors have not been able to fully capitalize on the opportunity in the domestic market so far. Though Wipro and TCS do have some India focus, IBM, Accenture and EDS have been beating these companies in their own backyard. One of the obvious reasons for this situation is the comparatively lower billing rates in the domestic market vis-à-vis the US or European market. Hence, the US and Europe have continued to be the preferred markets for Indian vendors. Further, most of these vendors do not have the capability to offer end-to-end IT integration and consulting services, which drive the large deals. However, this is changing as local companies are waking up to the potential opportunity and building capacity and capability.

We believe that global providers like IBM and HP will continue to have an edge in large deals – primarily because of their system integration and consulting capabilities. For smaller (pure services) deals, there are innumerable small IT providers that undercut TCS, Infosys or Wipro on price.

Ironic, isn’t it – to see the Indian IT biggies being squeezed in their own backyards!

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