Kyushu-Okinawa Summit 2000 chaired by then Japanese Prime Minister Yoshiro Mori, set the ball rolling. Okinawa Charter holds the spirit: "The essence of the IT-driven economic and social transformation is its power to help individuals and societies to use knowledge and ideas. Our vision of an information society is one that better enables people to fulfill their potential and realize their aspirations. To this end we must ensure that IT serves the mutually supportive goals of creating sustainable economic growth, enhancing the public welfare, and fostering social cohesion, and work to fully realize its potential to strengthen democracy, increase transparency and accountability in governance, promote human rights, enhance cultural diversity, and to foster international peace and stability. Meeting these goals and addressing emerging challenges will require effective national and international strategies."

A month later, in August 2000, Mr. Mori while on a visit to India, carried the message of the Kyushu-Okinawa Summit for Indian IT industry leaders:" In order to enable all of mankind to utilize IT, we need to eliminate the digital divide and undertake human resources development, thereby creating an appropriate environment for IT use...'Okinawa Charter', calling for global cooperation encompassing governments and private sectors in individual countries, international organizations, and all other entities concerned". For both Japan and India, things did not stop at that declaration. Over next three years, both the countries did progress significantly in IT sector. This has been recognized by none else than  Indian Prime Minister AB Vajpayee. "We have already established a synergy in IT. Together, India and Japan can become a very powerful force in the knowledge-based economy", he asserted at the Banquet by the Japanese Prime Minister Junichiro Koizumi in Tokyo on December 10, 2001.

Japan is a US$ 60 billion software market. It  is the second largest market in the world for information technology products and service after the US. The Japanese government have set the ambitious goal of becoming the world’s most advanced IT nation by 2005. The main elements of Jap  plan includes development of the world’s most advanced Internet network, facilitation of e-commerce, digitization of government, promotion of e-education and ensuring the highest network security and reliability in the world. The Japanese software market is dominated by the US imports. Of the total imported software market, 91 percent originates from the US. " US companies also had a tough time in penetrating in to Japanese market. They are slowly succeeding, like for example, IBM, and that has not in any way made us (Indian companies) to slow down the penetration. Also, there are few Indian companies who are expanding their business through their US associates. Similarly, there is a direct strong penetration into the Japanese software market by Indian companies", so feels Mr. A P S Mani, the President of India IT Club, Japan. According to NASSCOM-McKinsey Study 2002, Indian IT services exports will touch US$ 28-30 billion by the year 2008, the ITES segment will account for US$ 21-24 bn, while the products and technology services industry will contribute around US$ 8-10 bn to overall revenues. The domestic software market will generate revenues of US$13-15 bn.

NASSCOM-McKinsey  Survey 2002

Potential for Indian Software and Service Industry by 2008 ITES Opportunities by 2008
Category US$ Billion Service Lines US$ Billion
IT Services Exports 28-30 HR 3.5-4
ITES Exports 21-24 Customer Care 8-8.5
Product & Technology Services 8-11 Payment Services 3-3.5
Domestic Market 13-15 Content development & others 2.5-3
    Administration 1.5-2
    Finance 2.5-3
Total 70-80 Total 21-24

In an interview with indiaonestop.com, Mr. Mani said "Indian IT companies are gaining strong foothold in Japanese market. Last three years have seen a strong foothold for Indian IT companies in Japan. Also, apart from concentrating operations in Tokyo area, our companies are now spreading their operations to other cities like, Osaka, Kobe, Kyoto, Nagoya, Gifu, Sapporo, Hokkaido and other cities. This itself is a good progress as the cities outside Tokyo pose less competition from other countries' players and Indian companies can capture the market slowly in all these areas." The customized software market in Japan accounts for 45 percent of the total software. Japanese industry requires software producers to conform to their existing business models. Japan does not have a large domestic software industry and imports  make up almost 50 percent of the total market. As Japanese companies continue to streamline their business processes and look for ways to cut costs they will continue to seek out American software providers.

Japan is shaping up the new information society with the internet connecting between  not only computers but various other vehicles such as mobile phones, home electronics appliances, and automobiles and railways through ITS (Intelligent Transport System). Japan has an advantage  in these fields and by using these, we are making contributions to the international society in the new fields of IT. The country is focusing on Highspeed Switching Technologies and Optical Communication Technologies, the two indispensable technologies for Broadband Internet for next generations. To promote IT use in developing countries, Asian countries in particular, Japan's is implementing a US$ 15 billion comprehensive assistance package spreading over a five-year period. Mori who is also the President of the Indo-Japan Association is "firmly convinced that such cooperation would lead to the opportunity for the global economy in the 21st century to spur forward".  India's prowess in software technology, rich and prominent human resources, if combined with Japan's prowess in manufacturing technology, could create a giant force in global IT sector.

Japan IT market

The Japanese government have set the ambitious goal of becoming the world’s most advanced IT nation by 2005. With US$ 60-bn, it  is the second largest market in the world for information technology products and service after the US. According to a JETRO study report, the value of B2C goods sold online in Japan which is currently estimated to be US$ 13 billion, will grow to US$ 98 bn by 2005. Most major Japanese retailers have highly developed B2C strategies. B2C e-commerce should grow in tandem with home broadband Internet access. Currently, the real estate and automobile industries account for 46 percent of the total B2C market in Japan. Other industry sectors, including travel, finance, food, gifts and entertainment are expected to narrow the gap in coming years. Opportunities in B2B are growing quickly. Most medium-to-large-sized Japanese companies are currently looking at B2B as one way to cut costs, reduce inventories, and streamline operations. The Jap B2B market is currently valued at US$ 151 bn and is expected to increase to US$ 870 bn by 2005. The B2B market in Japan is dominated by the electronics and automobile industries which together account for 90 percent of the total B2B market.

The downturn in the Jap economy has provided a market opportunity for ERP, CRM and supply chain management suppliers. In Japan the enterprise application market is largely dominated by the Japanese corporations owned by foreign software companies but in the small and medium sectors the domestic firms are leading players. The overall Japanese enterprise application market, the ERP market (as estimated for 2001) exceeded ¥100 billion, while CRM and SCM markets remained fairly small at ¥16 billion and ¥11 billion respectively. However, the percentage of CRM and SCM installations among large Japanese companies is approximately 30%—higher than 21% for ERP. The reason for this is that, in many cases, CRM and SCM is developed as custom software, whereas package software is used for ERP. Package software has become indispensable for Japanese companies to reform their business methods and reduce costs. As ERP installations increase, SCM and CRM installations are expected to follow, and custom-built software will be dropped in favour of solutions using package software. Therefore, the ERP, CRM and SCM markets will grow most likely experience considerable growth. Yano Research Institute predicts that by 2004 the ERP, CRM and SCM markets will have grown from their 2001 levels by 78.8%, 57.5%, and 80.0% respectively.

There is a demand in the Japanese market for innovative core products that can bring innovation to Japanese firms and for niche products that can enhance the core products in the increasingly popular ERP, CRM and SCM application categories. For foreign software companies that can offer products in these new fields, the possibility of success in the Japanese market is high.

The Japanese Enterprise Resource Planning (ERP) market, the JETRO report points out, is registering an impressive growth and the share of foreign vendors is also increasing markedly. ERP installation is expected to become the norm as the shift from custom software to package software gathers momentum. The installation of strategic applications such as CRM and SCM-and the number of companies using them as platform systems for simultaneously installing ERP-looks set to increase in Japan. This is revealed in a Software market report prepared by the Japanese External Trade Organization (JETRO). It is estimated that between 2001 and 2004 ERP-related sales would grow at an average of 21.4 percent. According to data prepared by Yano Research Institute, Japan’s ERP market is expected to expand from ¥ 133.48 billion in 2001 to ¥ 238.66 bn in 2004. Of this, foreign ERP vendors share is likely to go up from  ¥ 87.24 bn to ¥ 162.77 bn in 2004. The domestic vendors account for the remaining market share.

The JETRO market report indicates to a better CRM market scenario in the medium term. “…awareness of CRM in Japan is well established and, in the medium term, the market is expected to expand steadily. From 2001 to 2004, CRM-related sales are expected to grow at an annual rate of 16.5%. In order to grow the market, however, it is important that CRM vendors offer products that are suited to the Japanese market. Large companies are the main users of CRM system in Japan. If the market is to expand, small- and medium-size businesses cannot be neglected”, the report says. It is estimated that the Japanese CRM market may expand to ¥ 25.20 bn in 2004 from ¥ 15.92 bn. The number of companies to have CRM facility is expected to increase from 343 in 2001 to 630 in 2004. In CRM-related sales, the manufacturing industry takes the lead with 37.6%; followed by the service industry, at 18.1%; the financial services industry at 16.1%; the distribution industry at 14.3%; and the remainder with 13.9%.

Japan's large IT manufacturing companies began to introduce Supply Chain Management (SCM) in 1998 with a view to streamlining production and distribution and reduce lead-time. In 2001 sales in the SCM market grew 22.2% year-on-year to ¥11 billion. Although it continues to expand, the SCM market is still in its nascent stage. Construction and equipment manufacturing companies are the main users of SCM in Japan. The SCM user base is growing as SCM installations increase at wholesalers and supply and distribution companies. Forecasts predict that the SCM user base will increase as medium-size manufacturing, logistics, supply, and similar companies proceed with SCM installations in addition to the leading manufacturing companies. For the 2001-2004 period, SCM-related sales are expected to grow at an average annual rate of 21.6 percent. Sales are expected to increase to ¥ 19.80 bn in 2004 from ¥ 11 bn in 2001.So far as e-Marketplace and e-Procurement, Product Data Management (PDM) and Product Lifecycle Management (PLM) are concerned, these markets are gradually unfolding.

Indian IT market

The Indian IT software and services sector is on track to achieve its long term target aspiration of US$ 77 billion (excluding e-commerce transactions of $10 billion). According to the revised NASSCOM-McKinsey Study 2002, by 2008 the industry would employ 4 million people, account for 7 percent of India's GDP and 30 percent of India's foreign exchange inflows.  The changing economic scenario and slower industrial growth notwithstanding, the long term potential of the Indian IT industry is robust, so predicts the study. The NASSCOM President, Mr. Kiran Karnik is of the view that while IT Services exports and products and technology services growth pattern may not undergo significant changes, the ITES sector is likely to grow faster given the increased interest in offshoring by global companies. The domestic market is likely to grow slower due to delays in product market reforms.

The IT software and services industry has been segmented into four components-the IT services exports sector, ITES exports, product and technology services and the domestic market. As per the NASSCOM-McKinsey Study, IT services exports will touch US$28-30 billion by the year 2008, the ITES segment will account for US$21-24 billion, while the products and technology services industry will contribute around US$8-10 billion to overall revenues. The domestic software market will generate revenues of US$ 13-15 billion. IT software and services export revenues will account for more than 30 percent of all foreign exchange inflows in 2008 compared with 8 percent in fiscal 2001-02. The industry will create over 2 million jobs by 2008 with software contributing to approximately 1.1 million and the ITES sector to an additional 1 million jobs. In addition, the parallel support services industry will create employment for another 2 million people.

Large non-English speaking markets in Japan and Western Europe remain under penetrated by Indian IT companies. These two markets alone offer the Indian Industry over US$ 5-6 billion in export potential. Germany has the potential to emerge as a high-growth geography for Indian companies in the next 2-3 years followed by France, Italy and Japan. But there are challenges in terms of awareness, cultural openness to offshoring, conduciveness of regulatory environment and penetrable language barriers that Indian companies need to overcome.

The Indian offshore market offers companies the opportunity to expand and enhance competitiveness.  Many companies outsource their requirements to Indian companies.  Others have successfully established a wholly owned development centre in India.  UK companies - large and small - have gone down these routes, enabling them to take advantage of the highly skilled and cost effective resource base in India.  And, as a number of experienced players have discovered, operating from an Indian base allows them to compete with the big Indian software houses in the Indian domestic market and elsewhere.

The domestic IT market is small and is driven by big corporate companies. NASSCOM estimates the total domestic market for software and services to be US$2.55 billion. Growth in the domestic market fell from 18% in 2001-2 to an estimated 13% in 2002-3, largely due to a slowdown in spending by manufacturing and banking sectors.  Dataquest, on the other hand, has reported that domestic IT spending actually fell, by 17% in 2002-03, but predicts a return to growth in current fiscal (2003-4). Spending across all vertical sectors was strongest on hardware, but this trend is likely to change and the emphasis will move on to services as organizations concentrate on reducing costs.

The ERP market is estimated to grow to US$ 102 million by 2005 from  at US$ 40 mn in 2002. The Supply Chain Management market which was estimated at US$ 11 mn  in 2002, and is forecast to grow to US$ 30 mn in 2005.  The CRM market is likely to expand to US$ 27mn US$ 11 mn in 2001-02. Enterprise Portals may witness five-fold increase to US$ 30 million by 2005. With federal state governments' increasing emphasis on e-governance, this sector may witness a spectacular growth in coming years. E-commerce solutions market may increase three to four-fold to stand at US$ 13 mn by 2005 from US$ 4 mn in 2002.

So far as IT Enabled Services (ITES) sector is concerned, India and Ireland surpass all other competitors in terms of employment, number of companies sourcing ITES and the spectrum of verticals and services lines they offer. The IT Enabled Services sector in India has steadily increased its share in the overall IT software and services industry, from a low of 6.5% in 1998-99 to almost 20% in 2001-02. The Indian ITES Industry is also expected to account for 37% of the total IT software and Services export market in India by 2008, the NASSCOM-McKinsey Study points out.

A major issue that both the Indian IT industry and the federal government of India is trying to resolve with the Japanese government relates to Double Taxation Avoidance Treaty. NASSCOM estimates software and services exports to reach US$ 50 bn by 2008. Of this, Japan is likely to account for US$ 3-4 bn. NASSCOM maintains that under the provision of Article25(3) of the DTAT for resolving the issues of Japan's instances on levying 20 percent withholding tax. Under current structure, Indian IT firms are facing adverse implications in terms of significantly higher effective tax rate, potential exposure to double taxation and impact on export of software and service.

Posted on December 1, 2003

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