Booming India (2) India’s Dramatically Changing IT Industry and Japan-India Partnership [Date of Issue: 4/March/2019 No.0288-1100]

Date of Issue: 7/March/2019

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India's dramatically changing IT industry

As IT innovation accelerates worldwide, India's IT industry has sustained a strong growth trajectory. According to India's IT industry association NASSCOM, sales have expanded 20-fold from US$8 billion in 2000 to US$154 billion in 2016. Offshore orders account for US$116 billion, or around 80 percent, of those sales—seriously global business.

When India started out in IT, it took on the downstream component of developed countries' software development (coding, testing and maintenance), but this later expanded to include upstream processes such as requirement analysis and design. These days, Indian companies are also tasked with system, product and service development as a whole. The emergence of disruptive technologies such as Big Data, AI, IoT and blockchains is further accelerating the industry's growth.

The secret to the Indian IT industry's success is the incredible speed with which it manages to catch up with these technologies, aided by its close relationship with Silicon Valley firms and a huge number of top-flight young IT personnel. India's IT technological capacity is in fact quickly approaching Silicon Valley's own (Fig. 1).

While the hub of this dramatic change is the southern Indian city of Bangalore (officially known as Bengaluru), which is often called India's Silicon Valley, but cities around India are now also rapidly following suit.

The IT industry in India directly employs 3.7 million people, far higher than the approximately 900,000 in Japan (Ministry of Economy, Trade and Industry, Study of Recent Trends and Future Estimates Concerning IT Human Resources, June 2016). One of the reasons for this massive scale is that Indian companies primarily subcontract huge jobs from Western companies.

Looking at the value of India's IT service exports by region in 2016, the vast majority (62 percent) go to the United States. Adding in the United Kingdom (17 percent) and Europe (11 percent), that's around 90 percent going to the West. Japan is in the “Other” category of less than two percent, but Japan alone in fact accounts for less than one percent, buying less than US$1 billion. As it stands, Japanese companies' utilization of India's IT industry is clearly extremely limited (Fig. 2).

The growth driver for India's IT industry is its IT service firms. They have continued to expand over the years and are now absolutely massive. Five of these service firms currently employ more than 100,000 people each, with the largest company, Tata Consultancy Services (TCS), employing around 400,000. Multinational global IT service companies like IBM and Accenture have a third of their global human resources in India—more than 100,000 employees—and that ratio is steadily increasing (Fig. 3).

Global companies' development operations in India become strategic hubs

More and more global companies are setting up development operations in India every year, and the scale of those operations is also growing. It would in fact be safe to say that most Western majors now have a development arm in India, and, moreover, it tends to be their biggest facility outside their home country. These aren't just the world's top IT companies either, but span the range from telecommunications, semiconductors, electronics, automobile and industrial machinery to retail and finance.

The particular role of these in-house development arms differs according to the company, but in many cases they handle R&D and product development and are in fact called R&D centers. As at 2015, around 1,000 companies had been set up, employing 800,000 people. They account for around 20 percent of India's IT exports, a scale of US$21.5 billion (2.4 trillion yen). By country, 68 percent are US firms, 24 percent European, and a scant four percent Japanese (Fig. 4).

Many Japanese firms conduct their R&D and product design in Japan, treating India as a market. Western companies, however, are already using their Indian development operations to develop global products—and, moreover, as their strategic hub for business in India and other emerging markets.

Indian startup numbers soar

In recent years, India has seen its startup numbers soar to 4,700-4,900 as at 2016. That's the number of technology startups. While the US might stand out head and shoulders with a whacking 52,000-53,000, India now follows only behind the second-placed United Kingdom (4,900-5,200). Israel is in fourth place with 4,500-4,600.

In 2010, India had only 480 startups, so the last six years have effectively seen a 10-fold increase, and by 2020, the figure is expected to reach between 10,500 and 11,000 firms. Without a doubt, India will move up into second place in terms of world startup numbers, following only after the United States (Fig. 5).

It isn't just the number of companies. According to CB Insights, as at October 2018, India had 14 “unicorn” companies (unlisted startups valued at over one billion). Not only does this place India third after the US (130 firms) and China (82 firms), but the number of Indian “unicorns” is currently rising rapidly. Japan, by the way, has only one “unicorn.”

Factors behind startup growth include the presence of multiple venture capital funds and angel and individual investors, as well as of a strong entrepreneur support ecosystem. As at 2016, India boasted more than 140 startup support organizations driven by a range of entities from universities and companies to government. Many famous universities have created incubation centers, while global companies too are launching accelerator programs aimed at open innovation.

Possibilities for Japan-India partnership toward the IoT era

Few Japanese companies are currently making use of Indian IT service companies, or have R&D operations in India, with partnership between the two countries in the field of IT remaining limited.

This is partly due to Japanese firms' lack of understanding of the dramatically changing Indian IT industry, while the language barrier in India posed by English has also been an issue. Japan also has its own particular way of working. Indian IT companies have actively adopted Western development methods, so in one sense they're close to the global standard. For Japan to keep up with the speed of IT innovation, we need to be ready and willing to change.

The coming era of IoT will present huge possibilities for partnership between Japan and India. Japan still has an overwhelming lead in terms of design and manufacturing knowhow, but the lack of the necessary IT personnel represents a major hurdle. Another issue is that Japan's advanced social infrastructure has led to the development of goods and services that are just too unique to work internationally. IoT will further accelerate these trends. India, on the other hand, has already acquired cutting-edge IT technologies through partnership with IT forerunner America, and offers an abundance of human resources, not to mention the massive Indian market.

Partnership between Japanese companies and the Indian IT industry to date has been limited to small-scale offshoring aimed at reducing costs. Unfortunately, this model has produced limited results. These days, all companies need to be innovating with IT technologies right in the foreground, which is where strategic partnership with India has enormous potential.

The various possibilities include forming partnerships with Indian IT service companies to develop solutions for the Indian and global markets, using Indian startups with an eye to open innovation, and setting up operations in India to make use of top-flight Indian personnel to create new products and services that fuse Japanese technologies with the latest IT technologies.

India is the only emerging country in the world which simultaneously stands among global leaders in the IT field. It is also beginning to produce its own innovations. Connecting Japan's experience and knowhow with India's IT industry could be a powerful strategy in terms of enabling Japanese firms to survive in an era of global competition.

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About the Author
Yukio Takeyari
Former Managing Director
Sony India Software Centre Pvt. Ltd.

Yukio Takeyari holds B.Sc. and M.Sc. degrees in electrical engineering from Keio University. He served in various capacities within Sony Corporation, including software development, design and management for NEWS (Engineering Work Station), VAIO (PC), network services and consumer electronics products. During his time at Sony, he also studied software architecture at the Massachusetts Institute of Technology for a year. In October 2008, he was put in charge of the Sony India Software Centre in Bangalore, India. After seven years in that post, he came back to Japan at the end of 2015, leaving Sony but continuing to work to promote partnership between India’s IT industry and Japanese companies as the chair of the NASSCOM Japan Council. In March 2018, he published India Shift: Why are the world’s top companies establishing operations in Bangalore?
(PHP Institute).

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