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India Information Technology Report Q3 2007Product Type: Market Research ReportPublished by: Business Monitor International Published: October 2007 Product Code: R302-1328 Description Market OverviewIndia’s IT market is expected to grow at a CAGR of at least fourteen percent over the next few years, at least double that of GDP. Growing local demand for large outsourcing projects, such as Reliance’s current US$500mn tender, are adding new momentum to an IT sector expected to grow from US$10.2bn in 2006 to around US$12.0bn in 2007. Other drivers of robust growth through 2007 and beyond should include new tax incentives for hardware manufacturers, falling computer prices, the government’s ambitions to connect the vast rural areas to the outside world, and the growing domestic popularity of outsourcing. The market remains heavily hardware dominated. Certainly the potential of India’s IT market is plain: only 1.3% of people in India own a computer, one-fifth of the China level, meaning particular potential in the lower-end product range. Significantly, 45% of India’s population is under 25, which should boost PC and IT usage. The government has been unveiling a new series of tax incentives and subsidies to encourage the fast growing hardware sector, however a number of restraints remain including high tariffs. As a result chip manufacturers have been relatively slow to establish facilities in India. Some risks pertain to BMI’s forecast scenario, including uncertainty over the future evolution of the tax regime. India is also facing an increasingly strong challenge from regional rival China for its share of the global outsourcing spend. From an economic perspective however, the overall growth outlook is positive, with the economy still growing at a strong rate and annual GDP growth expected between 7% and 8%. The government is currently leading a major drive supported by local governments to attract investment to new regions, setting a national target of attracting US$40bn of investment into IT over the next three years. Industry Developments In line with government and vendor emphasis on regional development, Chennai state is expecting to attract nearly US$8-10bn worth of investment in the IT sector over the next three years. The State recently held the first meeting of a newly established State Level IT Task force, chaired by State Chief Minister M. Karunanidhi. The Chief Minister pointed that the state has already become an important destination for foreign vendors and manufacturers over recent years. Despite the government’s launch of a semiconductor policy in March, concerns are growing that the global semiconductor manufacturers have not yet shown the hoped for enthusiasm for India. The policy proposed a range of incentives, such as tax advantages and subsidies, with the specific policies expected to be confirmed in September. One issue however is continued delays in the launch of the government’s China design testing lab, first proposed by the IT Ministry in 2004. The government recently revealed that further delays of at least a year are likely. Competitive Landscape Foreign vendors in India are profiting from an increasing focus on the SMB segment. HP is one company now reporting as much as 50% growth each quarter in this segment, equivalent to one hundred new clients a quarter. Manufacturing typically accounts for close to 75% of HP’s SMB business with most demand for ERP, CRM and basic office automation and security solutions. The average IT deployment deal size is now reportedly around INR10 lakh, much more than just a couple of years ago. In HP’s view, 50% growth per quarter may even be conservative given the growing demand in Tier 2 cities such as Coimbatore, Madurai, Salem and Tiruchi. As larger manufacturing enterprises are relocating to Tier 2 cities, the local players are having to raise their game. Meanwhile, with the government proposing new incentives in March for hardware manufacturers, Dell has recently rolled out its first India made computer. The computer was the first to come from Dell’s new plant at Sriperumbudur, an industrial hub near Chennai. The plant is Dell’s third in Asia after China and Malaysia. Computer Sales According to BMI figures, sales in India’s hardware market will be worth around US$6.6bn in 2006, up from an estimated US$5.8bn in 2005, with expected tax breaks and subsidies for hardware manufacturers expected to support growth. BMI predicts the CAGR for the hardware sector as a whole will be around 12% between 2006 and 2011, with unit sales showing strong growth. The average price of a PC has nearly halved over the past few years to less than US$250. Desktops will still account for more than 80% of unit sales, a higher ratio than for many countries in the region. Combined shipments of desktops and notebooks have now comfortably exceeded the 5mn mark. Investments of more than US$18bn in hardware manufacturing in India (including telecoms hardware) have stoked expectations of a hardware boom. However, a high tax regime means that around 25% of the retail price of an average computer goes to the government, and there are fears that this may delay growth. Moreover, it will be difficult for India to catch up with Taiwan and mainland China, given the strong lead these two territories have. HP is the market leader in all segments, ahead of local company HCL and Chinese giant Lenovo. Toshiba is a strong performer in the notebook segment. Other current drivers of PC penetration include the growing popularity of LCD/TFT monitors and other entertainment features and accessories. The mobile phone revolution has raised consumer aspirations, while earlier reforms of duties and tariffs helped to drive affordability. Software In August 2007 the first IPR (intellectual property rights) court opened in Karnataka. The new court has been taken as a sign that the issue of illegal software is becoming a more central policy issue for the government. Other states such as West Bengal are expected to follow Karnataka soon. With software piracy in India at around 72% the moves are a boost for foreign vendors of packaged software. Overall BMI forecasts domestic sales of US$5.4bn in 2007, up from US$4.5bn in 2006. Combined software and service CAGR for 2006-2011 is expected to be in the region of 16%. The tax free status of software firms, which has done much to fuel local sector performance, is due to end in 2009 and industry analysts will be watching to see what impact this has. However, the IT Ministry is lobbying the Finance Ministry to extend the exemption for another ten years. The local market is likely to sustain vendor investment, with small and medium firms becoming more sophisticated in their demand for customised software and applications to increase business flexibility. A second major driver is the emergence of India as a global centre for outsourcing, with large US and European companies focusing on offshore software development to lower costs. Several sectors are leading the way in this respect, including auto ancillaries and pharmaceuticals. Services Accenture and EDS are among those bidding for a US$500mn IT outsourcing contract from mobile telecoms giant Reliance Communications. HP and a unit of Deutsche Telekom were also reportedly among the bidders for the huge tender, which at time of press was expected to be finalised by the end of August 2007. The tender highlights the potential for IT vendors of the high spending Telecoms industry, with huge increases in capital expenditure budgeted by most service providers in 2007. A recent report by industry association NASSCOM found that China was unlikely to catch up with India’s lead in global IT outsourcing in any significant manner over the next 3-5 years. India’s offshore industries grew three-fold from US$4bn in 2000, to US$12.8bn in 2004, according to new government figures. However, domestic company demand for IT Services is also increasing rapidly. This was demonstrated again by the recent deal by which Idea Cellular agreed to outsource IT infrastructure and other services to IBM. The deal, which is for ten years and also covers billing and customer management, has a reported value of up to US$80mn. The current trend is that average project size, typically below the US$1mn mark, is now increasing and this has resulted in several projects exceeding the US$100mn mark. This trend is being accompanied by a conscious move on the part of large players to migrate from just ‘cost plus’ advantage to that of value-added service provider. E-Readiness Broadband subscriber numbers are consistently falling behind target in India, with less than 3mn subscribers by the end of 2006, according to BMI figures. The main reason for the slow uptake is thought to be insufficient demand and, as a result, the government recently announced a reduction in licence fees for NLD/ILD services from January 2006. One brake on PC penetration is a poor dial-up internet home user experience, even in cities. If this is to change, the government must take the initiative in improving bandwidth availability. Government plans to encourage WiMax network deployment may have some impact on penetration going forward. Broadband penetration is currently expected to exceed 70mn by 2011, while the number of internet subscribers will rise from 108mn to 412mn in the same period. Table of Contents
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