asia competition barometer: information technology services

Asia Competition Barometer Information technology servicesAn Economist Intelligence Unit report

Supported by

© The Economist Intelligence Unit Limited 2012 1

Asia Competition Barometer:Information technology services

Contents

Preface 2

Executive summary 3

Asia’s growing importance for corporate performance and global competitiveness 5

Competition and profitability at Asian firms 7 Competition: Increasing concentration, but still highly competitive 7

Profitability:Onthedeclineoverall,butpocketsofgrowthexist 8

Case study: Wipro 10

Positioning for success in Asia 11 Competingforthenewfrontier:Asia’smarekts 11

FirmswillbroadentheirfootprintacrossAsiaforefficientservicedelivery 13

Emergenttechnologies 13

Case study: TIBCO Software 14

Outlook 15

Barometer methodology 17

© The Economist Intelligence Unit Limited 20122


SupportedbySingapore’sEconomicDevelopmentBoard(EDB),theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometerwiththeaimofunderstandingthechangingmarketdynamicsinkeysectorsandassessingtheintensityofcompetitioninthem.Drawinguponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.

ThisreportfocusesontheBarometerfindingsfortheinformationtechnology(IT)servicessector.Assessingauniverseof296ITservicescompaniesthatarepubliclylistedineightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapefortheITservicessector.

Otherreportsinthisserieslookatthetransportandlogistics,precisionengineering,petrochemicalsandchemicals,andpharmaceuticalssectorsinAsia.

January 2012

Preface



Executive summary

WhatdoestheemergenceofAsiaasamajorengineofglobaleconomicgrowthmeanforcompaniesoperatingintheregion?Asia’srobusteconomicoutlook—coupledwithdiminishedgrowth

prospectsinmanyotherpartsoftheworld—hasattractednewinvestmentintothemarketbothfromregionalplayersandWesternmultinationals.Asaresult,competitionintheregionisexpectedtointensify.Giventhedarkeningglobaleconomicoutlook,andtheexpectedimpactonsomeeconomiesandsectorsintheregion,growthandprofitabilitylookuncertaininthenearterm.Butoverthemediumtolongerterm,Asia’sstrongeconomicfundamentalswillensureconsistentgrowthacrossarangeofindustries.HowarecompaniespositioningthemselvestocapitaliseonAsia’sgrowthopportunitiesoverthenextfewyears?

TheAsiaCompetitionBarometerassessestheintensityofcompetitionandchangingmarketdynamicsinseveralkeysectors.Thisreportexaminesinformationtechnology(IT)services,whichincludethefollowingsub-segments:softwaredevelopment,includingcomputergames;ITprogramming;ITconsultancy;ITfacilitiesmanagementservices;otherITandcomputerserviceactivities;dataprocessing,hostingandrelatedactivities;andwebportals.

Amongthekeyfindingsofthisreportarethefollowing:

• Asia’s IT services sector has been expanding rapidly, in line with the region’s stellar economic growth.Severalbroadmacroeconomictrends,includingglobalcorporations’increasingappetiteforoutsourcingtheirinternalfunctionstoAsia,higherdemandforITservicesfromfast-growingAsianfirms,andrisingdesktopPC,Internetandmobilephonepenetrationrates,haveboosteddemandforITservicesintheregion.AccordingtotheEconomistIntelligenceUnit(EIU),between2001and2010,ITservicesspendinginAsiadoubledfromUS$45.6bntoUS$90.7bn.Despitethesombreglobaleconomicoutlook,theEIUforecaststhatITservicesspendinginAsiawillreachUS$141.3bnby2016.



1Weassessedatotalof296publicly-listedITservicesfirmsinAsiabetween2004and2009.In2009,therewere279whowerelistedandpublishedfinancialstatements.

• The number of players, homegrown and global, is rising.Thenumberandsizeofpublicly-listedfirmsintheITservicessectorinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesintheindustryrosebymorethan30%between2004and2009,from211firmsto279.1 Total combined revenues nearlytripledfromUS$16.7bntoUS$46.3bnduringthesameperiod.Meanwhile,inrecognitionofAsia’sincreasing importance to the global IT services sector, foreign MNCs have been building up their presence intheregion.

• Despite a slight increase in market concentration, competition in Asia’s IT services sector remains fierce.Amongpublicly-listedAsianfirms,theindustry’slargestplayersincreasedtheirmarketsharebetween2004and2009.However,Asia’sITservicesmarketremainshighlycompetitive,andamorecrowdedplayingfieldwillcontinuetoputpressureonprofits.Smallerplayersmayhaveaparticularlydifficulttimeinthefuturefortworeasons.First,globalfirmsseekingoutsourcingpartnerstoenhancetheirownoperationalefficiencies—akeydriverofgrowth—willbelookingforcompanieswithsizeandscale.Second,smallandmedium-sizedenterpriseswhomightotherwisehavebeencustomersforthesesmalleroutsourcedserviceprovidersmayswitchtoon-demandITcapabilitiesavailableviacloudcomputingservices,forgoingtheneedforthird-partyITservicesplayersaltogether.Nevertheless,therewillcontinuetobeopportunitiesforsmallfirmsthatcanprovideahighlyspecialisedornicheservice.

• Profitability in Asia’s IT services sector has been declining, and margins in some markets, such as India, may have peaked.Theaveragegrossmarginofpublicly-listedAsianfirmsdeclinedfrom47.8%in2004to41.2%in2009.Competitionisonlyonefactorpushingdownprofits.Anumberofothers—fromtheglobaleconomicdownturn,thecommoditisationofcertainservices,risingwagesandtheadventofcloudcomputing—haveputpressureonmargins.Tomaintainprofitability,manyfirmswilltrytomoveupthevaluechain,focusingonwhatisreferredtoas“non-lineargrowth”—thatis,increasingrevenuebutnotheadcount—throughR&Dandbyleveragingnewtechnologiesandapplications,firstandforemostthoseenabledbycloudcomputing.

• Industry-leading firms could bring growth to other markets as they seek to escape rising costs at home.Givenrisingwages,firmsoperatinginIndia,whichhavebeenthemarketleaderstodateinthissector,havebeenexpandingtoemerginglow-costcentres,suchasthePhilippines.Thistrendwillcontinue,asITservicesfirmsarestillintheearlystagesofleveragingtheirglobalfootprintforthemostcost-effectiveservicedelivery.Thisshiftwillalsoprovidegrowthopportunitiesfordomesticfirmsinthesenewmarkets.



Asia’s growing importance for corporate performance and global competitiveness

Overthepastdecade,Asiahasrapidlygrowninimportancetotheglobaleconomy.ItsshareofglobalGDP,measuredinpurchasing-powerparityterms,increasedfrom26.8%in2001to33.8%in2010.2

By2016,theEconomistIntelligenceUnit(EIU)expectsthisproportiontoriseto38.9%.TherearethreebroadtrendsassociatedwithAsia’srapidgrowthanddevelopmentthathavebeen

drivingitsITservicessector.Thefirstisglobalisation,andglobalcorporations’increasingappetiteforoutsourcingtheirinternalfunctionstoplacessuchasChina,India,MalaysiaandthePhilippines.Thistrendhasloweredcostsfortheseglobalcorporations,spurredthegrowthofnumerousAsianITservicesfirms,andraisedthestandardoflivingforthousandsofITservicesprofessionalsintheregion,whohaveseentheirwagesrisecontinuously.

ThesecondisgrowingdemandfromAsiancompanies.ThousandsofAsianfirmsacrossarangeofindustrieshavegrownexponentiallyoverthepastdecade,intandemwiththeregion’sgrowth.Some,suchasHaier,aChinesewhitegoodsfirm,andTata,anIndianconglomerate,arenowhouseholdnamesinmanypartsoftheworld.Asthesefirmshavegrownandexpanded,theyhaveincreasedtheirconsumptionofITservices.TheadoptionofsomeITinnovations,suchasenterpriseresourceplanning(ERP)and,morerecently, cloud computing services, has transformed traditional business models, boosting productivity at Asianfirms.

ThethirdtrendistherapidlygrowingPCownershipandInternetpenetrationratesinAsia,whicharedrivingdemandforITservicesamongconsumers.ThestockofPCsper100peopleinAsiaandAustralasiaincreasedfromabove4in2001toalmost19by2010,accordingtotheEIU.3Weexpectthistoclimbtomorethan30per100peopleby2016.Meanwhile,InternetpenetrationinAsiaandAustralasiaincreasedfromabout5usersper100peoplein2001to24in2010.Weexpectthistorisetomorethan36per100peopleby2016.

Chinahastheworld’sbiggestpopulationofInternetusers,withabouthalfabillionpeopleonline

2AsiahereincludesBangladesh,China,HongKong, Indonesia, India, Japan, South Korea, Malaysia, Myanmar, Philippines, Pakistan,Singapore,SriLanka,Thailand,Taiwan,andVietnam

3AsiaandAustralasiahereincludesAustralia,China,HongKong,India,Indonesia,Japan,Malaysia,NewZealand,Pakistan,Philippines,Singapore, South Korea, Taiwan,Thailand.



today.Ofthose,morethan300mareregisteredmicrobloggers.4ThisspikeinthenumberofInternetusersinAsiaisahugedriverfortheITservicessector,particularlyforthoseenterprisesengagedinthefieldsofweb-basedapplications,socialmedia,andInternetgaming.

Similarly,deepeningmobilepenetrationaroundAsiahasalsobeendrivinggrowthintheITservicessector.ThemobilesubscriptionrateinAsiaandAustralasiaincreasedfromunder11%in2001tomorethan70%in2010.TheEIUexpectsthistorisetomorethan110%by2016.CountriessuchasMalaysia,SingaporeandVietnamalreadyhavepenetrationrateswellabove100%.Thishascreatednumerousopportunitiesforvideogameandapplicationdevelopers,aswellasothersoftwareproviders.ManyAsians,particularlyinremoteareas,willbeincreasinglyconnectingtotheInternetprimarilythroughmobiledevices,boostingdemandforhigher-valuemobileservices.

AsiaisincreasinglyimportantforcorporateperformanceintheITservicessectorglobally.Forinstance,AsiarevenuesatOracle,anAmericanITservicesfirm,morethandoubledfromUS$1.4bnin2003toUS$3.4bnin2009.Meanwhile,between2006and2009,AmericanvideogamedeveloperActivisionBlizzard’sAsiarevenuesalmostdoubledfromUS$135mtoUS$263m.

ForeignITservicesfirmshavebeenoperatinginAsiaforseveraldecades.Recently,inrecognitionofAsia’sgrowingimportance,theyhavebeeninvestingheavilyintheregion.BetweenJanuary2003andSeptember2011,fDiMarkets,aresearchhouse,recordedatotalof4,070ITservicesinvestmentprojectsinAsia.5MostofthoseinvestmentsoriginatedfromtheUS(60%oftheinvestmentprojects),theUK(7%)andIndia(4%).ThetopthreeinvestmentdestinationmarketswereIndia(30%oftheinvestmentprojects),China(21%)andAustralia(9%).

IBM,anAmericanITservicesandconsultingfirm,planstoinvestRM1bn(US$317.2m)inanewglobaldeliverycentreinMalaysia.SAP,aGermansoftwareandservicesfirm,morethandoubeditsheadcountinAsiabetween2004and2009from4,863to10,248.Asaproportionofthefirm’stotalglobalworkforce,SAP’sAsiateamincreasedfrom15.1%in2004to21.5%in2009.

MajorplayersintheITservicessectorobviouslyseeopportunityinAsia.Buttherearealsochallenges.TheseincludeashortageofITservicesworkers,whichhasledtospirallingwages.ManyfirmsinAsiaalsofacethechallengeofrefocusingtheirattentionawayfromdevelopedmarkets,whereeconomicgrowthisslowing,towardsemergingmarkets,whichhavearelativelyrobusteconomicoutlook.Thisswitchwillrequirenewcorporatestrategies,includingarethinkingofglobalhumanresourcedeployment.ITservicesfirmsarealsohavingtoquicklyadjusttotheadventofcloudcomputing,whichhasledtoarangeofalternativeofferingstomanagedITservices.LinguisticdifferencesalsopresentachallengeinAsia,particularlyforfirmshopingtopenetratemarketsthatuse“double-byte”charactersets,suchasChina,JapanandKorea.6

Finally,softwaredeveloperswillcontinuetosufferfromlossesassociatedwithintellectualpropertytheft,despiteAsiangovernments’effortstoclampdownonit.GaryLocke,theUSAmbassadortoChina,recentlynotedthatthevalueoflegitimatesalesofsoftwareinVietnamishigherthaninChina,whosepopulationis15timesasbig.7ArelatedchallengeformultinationalsoftwarefirmsinAsiaisinmakingoriginalsoftwareandservicesmoreaffordabletotheSMEsegment,possiblythroughcloudcomputingservicesorthroughflexiblepaymentschemes.

5fDiMarketsdefinesthesectoras“Software&ITservices”

6Adouble-bytecharacterset is one that represents eachcharacterwith2bytes.Chinese, Japanese and Korean arealldouble-bytelanguages.English, by contrast, is a single-bytelanguage.

7GaryLockeurgesChinanot to interfere in business decisions”.The China Post.Nov19th2011

4“China’smicrobloguserpopulationtops300million”.Xinhua.Nov21st2011



Competition and profitability at Asian firms

ReflectingtheboominggrowthinAsia’sITservicessector,thenumberandsizeofpublicly-listedfirmsinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesintheindustryrose

from211in2004to279in2009,whiletheirtotalcombinedrevenuealmosttripledfromUS$16.7bntoUS$46.3bn.Theinfluxofnewplayers,bothAsianandnon-Asian,hasledtoahighlycompetitiveoperatingenvironment.

Competition: Increasing concentration, but still highly competitiveWithmanycompaniesraisingtheirexpectationsofAsiaforgrowthandprofits,itisreasonabletoexpectcompetitionintensityintheregiontoincrease.TocapturethisintensitywehaveusedtheHerfindahl–HirschmanIndex(HHI),whichmeasuresthemarketconcentrationofanindustry’slargestfirms.HHI

Figure 1: Herfindahl–Hirschman Index

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200920082007200620052004Source: Economist Intelligence Unit

2004 2005 2006 2007 2008 2009

Herfindahl—Hirschman Index (HHI) 5.77 5.66 5.08 5.78 5.44 4.34



valuescanrangefrom0(extremelyfragmentedmarket)to1.0(monopoly).Herewehavemultipliedthevaluesby100toachieveascaleconsistentwithprofitabilityindicators(seebelow).TheHHIforAsia’sITservicesindustryincreasedfrom4.88in2004to5.73in2009(seeFigure1),signifyingthatthe50biggestfirmsintheBarometerincreasedtheirmarketconcentrationoverthatperiod.8

Thetotalnumberoflistedcompaniesintheindustryincreasedfrom2004to2009,atthesametimethatthethreelargestcompanies—TataConsultancyServices(TCS),InfosysandWipro,threeIndianITservicesfirms—grewtheircombinedrevenuesharefrom31.8%to37.4%(seeFigure2).

8Ameasureofthesizeofcompanies in relation to the industry, and an indicator of the amount of competition amongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseof296listedcompaniesassessed.FormoreinformationontheBarometermethodology, please refer to thelastsectioninthisreport.

Figure 2: Top ten publicly-listed Asian firms by turnover

Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn)

Tata Consultancy Services India 2.19 6.75

Wipro India 1.83 6.10

Infosys India 1.67 4.91

ECSHoldings Singapore 1.45 2.53

HCLTechnologies India 0.63 2.20

Xiamen Xinde China 0.37 1.36

Satyam Computer Services India 0.78 1.24

Aisino China 0.31 1.12

Mphasis India 0.17 0.96

Patni computer systems India 0.33 0.71

Note:ThesearethetenbiggestcompaniesbyturnoverthatwereanalysedintheBarometer,whichconsideredonlypubliclylistedfirmsineightcountries:China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam

Thisincreasedmarketconcentrationsuggeststhatdespitetheentryofnewfirmstothemarket,therehasbeenaslightfallincompetition,asthebiggestfirmshavebecomemoredominant.Nevertheless,theAsianITservicessectorremainshighlycompetitive,asdenotedbyitslowabsoluteHHIscore.

Profitability: On the decline overall, but pockets of growth existTomeasuretheprofitabilityoftheITservicessector,wedevelopedacompositeindexoffiveratioswhichmeasuredifferentaspectsofacompany’smargins(formoredetails,seethenoteonmethodologyattheendofthisreport).AllprofitmarginsfortheITservicesindustryhavefallenrelativeto2004(seeFigure3).Profitabilityshowedthesteepestdeclinebetween2007and2008.9Thiswaspartlyareflectionofthegatheringfinancialstormattheendof2007thatledtosomeclientsindevelopedmarketscuttingITspending.

Profitabilityhasalsobeenhurtbyseveralbroaderindustrytrends,includingthecommoditisationofcertainITservices,whichislikelytocontinue.Theadventofcloudcomputing,meanwhile,hasledtoarangeofalternativeofferingstomanagedITservices,puttingfurtherpressureonprices.Marginsarelikelytoremainunderpressure,particularlygiventheentranceofnewcompetitorsintotheindustry.RisingwagesinmanypartsofAsiahavealsoeatenintoprofits.Asaproportionofoperatingrevenues,totalwagesroseonaveragefrom30.6%in2004toalmost40%by2009.Operatingrevenueperemployee

9ThecompositeProfitabilityIndexismadeupoffiveratios that each represent a different aspect of a company’sprofitability.Formore information on the Barometermethodology,please refer to the last section inthisreport.



fellfromUS$122,000in2004toUS$86,000in2009.Tomaintainprofitability,manyfirmswilltrytomoveupthevaluechain,focusingonwhatisreferredtoas“non-lineargrowth”—thatis,increasingrevenuebutnotheadcount—throughR&Dandbyleveragingnewtechnologiesandapplications,firstandforemostthoseenabledbycloudcomputing.

Figure 3: Profitability Index

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200920082007200620052004Source: Economist Intelligence Unit

2004 2005 2006 2007 2008 2009

Profitability index 115.3 100.0 93.2 100.4 75.2 83.3

EBITDAmargin(%) 24.0 21.1 19.9 23.3 16.4 17.4

Grossmargin(%) 49.8 43.0 39.7 39.4 33.7 39.8

Returnoncapitalemployed(%) 14.1 12.5 11.8 14.5 8.0 5.8

Returnonequity(%) 16.0 13.5 12.8 16.3 6.7 5.4

Returnonassets(%) 7.2 6.0 5.9 7.4 2.8 2.2

Herfindahl—Hirschman Index (HHI) 5.77 5.66 5.08 5.78 5.44 4.34

Trendsinprofitabilitydifferbycountry.GiventhelargeproportionofIndianfirmsintheBarometer—theyconstituted139ofthe296publiclylistedcompaniesassessedfortheBarometer—theProfitabilityIndexreflectsmostcloselytheirresults.Theiraveragegrossmargindeclinedfrom73.7%in2004to53.5%in2009.Conversely,Chinesecompanies’averagegrossmarginclimbedfrom24.4%in2005to29.4%in2009,nodoubtreflectingtheirfocusonlocaldemand,whichwasrelativelyinsulatedfromtheeconomicturmoilinWesternmarkets,onwhichIndiancompaniesdepend.

Theonlyothercountrieswhereaveragegrossmarginsimprovedfrom2004to2009wereIndonesiaandSingapore.OnepossiblereasonisthatIndonesiancompaniescouldtapintoalargerdomesticmarketwhich,despiteitsrelativeimmaturity,isparticularlyattractedtomobiledataandsocialmediaservices.Thismakesitafertilegroundforapplicationsdevelopmentinthosespaces.Singapore-basedcompaniestendtoofferserviceshigherupthevaluechain.

GivenhowthefocusandoperationsofITservicesfirmsdifferfromoneAsiancountrytothenext,uniquefactorswillcontinuetodriveprofitabilityineachmarket.ThiscouldtranslateintomarkedprofitabilityvariationswithinAsiaintheyearsahead.Eachcompany’sprofitabilitywillbeheavilydependentonitsparticularproductandmarketspread.



Case study: Wipro

Wipro: Opportunities in AsiaWipro,anIndianconglomeratewithalargeITservicesbusiness,has

expandedacrosstheworldoverthepastdecade.Wipro’sITbusinesstodayemployssome131,000peopleacrosstheworld.

Though Wipro has established itself globally by providing IT services tofirmsindevelopedWesternmarkets,todaythecountriesclosertohome—includinginIndia,Japan,therestofAsiaandtheMiddleEast—contributeabout20%ofthefirm’sglobalrevenues.“Thishasbeenthefastestgrowinggeographyforus,”saysRajatMathur,Wipro’sseniorvicepresidentandchiefsalesandoperationsofficerforAsiaPacificandJapan.“Mostofthecountriesinthisregionareshowingveryhigheconomicgrowthanditishenceimportantforustotapintothesemarketsandbepartoftheirgrowthstory.”

ButthisgrowthisattractingWipro’scompetitorsaswell.MrMathurseesmanyfirmsinvestingintheregion,drawnby,amongotherthings,“largeend-to-endandturnkeydeals”happeninginplacessuchasChina,Indonesia,MalaysiaandVietnam.“Theregionisinterestingnotonlyasamarketbutalsoasaresourcingdestinationsincethereisa

largeandcost-effectivetalentpoolavailableprovidinganinterestingextensiontoourglobaldeliverymodel,”MrMathursays.

WiprofacescompetitionfromforeignMNCs,IndianMNCs,aswellasotherlocalplayersinAsia.Nevertheless,MrMathurdoesnotreallyseethemasthreats.“Themarketislargeandthereisenoughtodoforallofus,”hesays.

Giventheregion’storridgrowth,MrMathurbelievesthatAsia’scontributiontoallfirms’revenueswillincreasesubstantiallyintheyearsahead.Furthermore,heexpectslocalAsianfirmstogrowandexpandacrosstheworld.“Allthiswillpresentinterestingopportunitiestocollaboratewitheachotherinsomecasesandcompeteinothers,”hesays.

Cloudcomputing,mobilityandotheremergingtechnologieswillhaveamajorimpactontheindustry.MrMathuralsocitesthreelargertrendsthatwilldriveITspending:“ITvariabilisation”(convertingfixedITcoststovariableones);“ITconsumerisation”(increaseduseofconsumertechnologyintheworkplaces);andtheincreaseduseofbusinessanalytics.

Inordertoboostprofitability,MrMathurbelievesthatWiproandotherITservicesfirmswillhavetooffertheircustomersbettervaluewhilerelentlesslydrivingdowncosts.



Positioning for success in Asia

Competing for the new frontier: Asia’s markets

Although the recession delayed or decreased the IT services orders of many companies in the Western world,personaldemandforITproductsandservicesinAsiagrewsteadilythroughoutthatperiod,

especiallyinChina.Asprivateconsumptionintheregiongrows,theITservicessectorwillbepoisedtobenefit.

TheEIUforecaststhatChina,bolsteredbyavastpotentialruralmarketandcommittedgovernmentsupport,willovertakeJapantobecometheworld’ssecond-largestITmarketin2013,behindonlytheUS.China’sInternetpenetrationwillbecloseto60usersper100peopleby2016(seeFigure4).Theexplosionofconsumerdemand,pairedwithstronggovernmentsupportandinvestmentininfrastructure,willdrivethegrowthofthedomesticITsector.Thatsaid,governmentinterferenceandcensorshipmayprovetobeobstaclestothesector’sdevelopment.

Figure 4: Internet users(per 100 people)

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VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina

2010 2016

Source: ITU, EIU



CompaniescansimilarlytaptheIndiandomesticmarket,thoughthepotentialappearssmallrelativetoChina.TheEIUestimatesthatonly6%oftheIndianpopulationusedtheInternetin2010—thesecond-lowestrateoutofthecountriesstudied,aboveonlythePhilippines.TheEIUforecaststhatIndia’sInternetpenetrationratewillreachalmost10outof100peopleby2016.TheNationalAssociationofSoftwareandServicesCompanies(NASSCOM),anIndiantradechamber,seesITservicesasoneofthefastest-growingsegmentsinIndia’sdomesticmarket.Public-sectorreformsthatencourageITacceptance,likeNationaleGovernanceProgrammes(NeGP)andtheUniqueIdentificationDevelopmentAuthorityofIndia(UIDAI)programme,mayalsoencouragehigherITadoption.

Ofthecountriesstudied,afterChinaandIndia,SingaporeandMalaysiahavethehighestIT-servicesspendingforecastsfor2016,atUS$3.9bnandUS$3.3bnrespectively(seeFigure5).TherearesignsthatAsianITservicesfirmsarelookingwithinAsiaforopportunities.However,itistooearlytogaugethesuccessoftheseefforts.Initsfinancialyear2009,only6%ofTCS’srevenuescamefromtheAsia-Pacificregion.Itissimilarlyunclearifcompanies’cross-penetrationistotakeadvantageofdomesticgrowthwithintheseAsianmarkets,ortoreapcostorproximityadvantagestoservicetraditionalmaturemarkets.AcommonconsensusisthatIndianfirmsreachintoChinaprimarilytohavelocalbranchestoservicemultinationalfirmsthatoperatethere.Forexample,whileWiproisexpandingintoChina,atleastpartofthemotivationhasbeentouseChinaasanoutsourcingbaseforJapan’smoredevelopedmarket.

Figure 5: IT services spending(US$bn)

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VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina

2010 2016

Source: IDC, EIU

Nevertheless,asChinesemultinationalsgrowinsize,andthecostofdoingbusinessbothathomeandabroadrises—ChinesewageincreaseshavebeenthreetimesasfastasanyotherAsianmarketforthepastdecade,andChina’soverallworkforceislikelytoshrinkafter2015,puttingfurtherpressureonwages—businessleaderswillstarttothinkmoreaboutIT-enabledefficiencydecisions.Theywilllikelyfollowtheleadoftheirpeersindevelopedcountries,andengagemorewithITservicesproviders.

Inordertocapitaliseonthisgrowth,inNovember2011SAPannouncedthatitwouldinvestmorethanUS$2bnoverthenextfouryearsinChina,openingfivetosixnewoffices,anddoublingitsworkforceinthecountry.10SAPsaidthattheinvestmentwillbegearedtowardsnewproductresearch,aswellasimprovingservicesforitslocalandglobalclients.

10“SAPtoInvestUS$2BillioninChinaExpansion”.PCWorld.Nov15th2011



Firms will broaden their footprint across Asia for efficient service deliveryTwotrendsareforcinglargeITservicesfirmstobroadentheirfootprintacrossAsia.ThefirstisatalentshortageinplacessuchasIndia,whichhasbeendrivingupwagesthere.AccordingtoareportcommissionedbyNASSCOM,IndiafacesanITtalentshortfallofbetween800,000and1.2mworkersby2012,withrisingsalariesandanappreciatingrupeeexacerbatingtheindustry’swoes.11

ThesecondistherelativelyhighergrowthoutlookforITservicesinAsiaversusotherregions(seeFigure6),whichispromptingfirmstorejigtheirservicecapacitiestowardsAsia.

11Findingcitedin“Resilienceamidturmoil:BenchmarkingIT industry competitiveness 2009”.TheEconomistIntelligenceUnit.Sep2009

Figure 6: Aggregate regional IT services spending(% growth per annum)

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12WorldWestern EuropeUSAsia and Australasia

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Source: IDC,EIU

Some Indian companies, for instance, have for several years been building up their operations abroad:InfosysandTCS,forexample,havesetupunitsinthePhilippines.AccordingtoGartner,anITconsultancy,IndonesiaandVietnamareemergingasthelow-costleadersinthesector.12 Malaysia, meanwhile,isattractingmuchinvestmentin,amongotherthings,sharedservicesoutsourcing.

Aslower-valueworkmovesabroad,firmsinIndiaarestrivingtomoveupthevaluechain,focusingonR&Dandtheuseofnewtechnologiesinordertogrowrevenueswithoutincreasingheadcount.Thistrendwillcontinue,asITservicesfirmsarestillintheearlystagesofleveragingtheirglobalfootprintforthemostcost-effectiveservicedelivery.Thisshiftwillalsoprovidegrowthopportunitiesfordomesticfirmsinthesenewmarkets.

Emergent technologies FirmsofferingnicheservicesfocussedonemergenttechnologiesarelikelytoexperiencerapidgrowthinAsiaoverthenextfewyears.ThisispartlybecauseofAsia’sseculargrowthstory,butalsobecauseoftheregion’sgenerallyhighadoptionratesofnewtechnology,aswellastechnologyleapfrogging.Forinstance,manyconsumersbypasslandlinesanddesktopcomputersinfavourofmobiledevicesandthishasledtoaspikeinmobilepenetrationrates.

Asia’scloudcomputingmarketispoisedtoexpand,bothforcloudconsumersaswellascloudproviders,accordingtoJohnGalligan,regionaldirectorforInternetPolicyatMicrosoft.“TheknowledgeeconomywillfuelAsia’sfutureandwethinkthatcloudcomputingisthenextgreat‘leveller’forthe

12“Gartner’s30LeadingLocationsforOffshoreServices,2010-2011”.Gartner.Dec20th2010



region,poisedtohelpacceleratethemomentumaroundtrade,”hesaidatthelaunchofAsia’sfirst“CloudReadinessIndex”inSeptember2011.13

Similarly,demandforsocialmediaservicesislikelytogrowrapidlygiventhepopularityofsocialnetworkinginAsia.Forinstance,IndonesiahasthesecondlargestnumberofFacebookusersintheworld(aftertheUS),withabout40mpeople.India,currentlyinthirdplacewithmorethan32musers,isfastcatchingup,buoyedbyFacebook’sdecisiontoofferamobile-onlyversioninsome40countries,includingIndia,whichcanbeusedwithoutincurringanydatacharges.14CompaniesinAsiaareincreasinglyusingsocialmediamonitoringandmarketingtoolstoengagewiththeircustomers.

Location-basedmobileservicesshouldalsoenjoystronggrowthinAsia,asconsumersintheregionincreasetheiruseofsearch,mapsandnavigationservicesthatrelyonlocationinformation.StrategyAnalytics,aresearchfirm,forecaststhatglobalconsumerandadvertiserexpenditureonlocation-basedserviceswillreachUS$10bnby2016,withAsia-Pacificaccountingfor20.5%ofthatmarket.15

13“Asia’sfirst“CloudReadinessIndex””.AsiaCloudComputingAssociation.Sep7th 2011

14“IndiaFacebookUsersGrowingFast,MayOvertakeIndonesia”.Penn Olson.Aug16th2011

15“The$10BRule:Location,Location,Location”.StrategyAnalytics.May20th2011

Case study: TIBCO Software

TIBCO Software: Niche services, broad opportunitiesTIBCOSoftwareisanAmericanproviderofinfrastructuresoftware

thatenablescompaniestocaptureandprocesstime-sensitiveinformation,aidingtheirdecision-makingprocesses.Asiacontributesabout10%ofTIBCO’sglobalrevenues,andisthefirm’sfastest-growingregiontoday,withyear-on-yearrevenuegrowthof45%in2010.

Inrecognitionoftheregion’spotential,TIBCOhasgrownitspresenceinAsiarapidly.From2006to2010,itsheadcountinAsiadoubled.AlmostaquarterofitsglobalworkforceisnowbasedinAsia.“Someofthemostcutting-edgeandworld-classstuffthatwedotodayisinAsia,”saysNeerajShaabi,managingdirectorandregionalvicepresidentforTIBCOinAsia.

AccordingtoMrShaabi,thisispartlybecausemanypartsofAsiadonothavetoworryaboutlegacyinvestments.“Greenfieldprojectsheredonotgetencumberedbyconsiderationsaboutpastinvestments,”hesays.“Theycaneasilyadoptcutting-edgetechnology.”

Forinstance,TIBCOhasdoneworkforRelianceTelecommunicationsinIndiatohelpitbetterunderstanditspre-paidmarket.“Theyhavenorelationshipwiththecustomerbecausethereisnomonthlybill—thereisnocustomerprofile,”hesays.Asaresult,traditionalCRM(customerrelationshipmanagement)softwareandanalyticsdonotwork.

“Wearehelpingcompaniesbecome‘realtime’andwefindthatfirmsinAsiaaremoreopenandwellpositionedtomakethatleapforward,”saysMrShaabi.HecontrastsyoungAsianfirmswithothercompaniesthatmaybeoverinvestedinlargedatacentresanddata-miningtechnologies,whichhebelievesis“thetwentiethcenturywayoflookingatthings”.

GivenTIBCO’snichefocus,ithasnotreallyfacedmuchcompetitioninAsia.“Giventheuniquerealtime,event-drivennatureofourproducts,wedon’treallyseeintensecompetitioninourspace,”MrShaabisays.Infact,TIBCO’schallengeisinmakingsureithasthenecessarycoverageacrossdifferentAsianmarketsinordertobidforallthecontractsoutthere.

Inparticular,MrShaabisaysthatTIBCOhashardlyanyAsiancompetitors—itsmaincompetitorsarethelikesofIBMandOracle.Nevertheless,hebelievesthebroaderITservicesmarketisexperiencingintensecompetition,partlyduetothecommoditisationofcertainservices.AllthatcouldeventuallyaffectTIBCO,because“muchofITisacatch-upgame.Weareuniquetoday,butwemaynotbeuniquetomorrow.”MrShaabiaddsthatthebigITservicesfirmsarealreadymakingthenecessaryinvestmentstoimprovetheircapabilitiesinTIBCO’sspace.

Tostayahead,MrShaabibelievesthatTIBCOwillhavetocontinuouslyfindwaystotransformitsclients’businesseswithitssoftwareservices.



Outlook

AlthoughtheITservicesindustryinAsiahasbeengrowingrapidly,profitabilityhasbeenonadownwardtrendoverthepastfiveyears,largelyduetoincreasedcompetitioninthesector.Facing

slowergrowthinthedevelopedWesternmarkets,andfendingofftheadvancesoflower-costproviders,ITservicesfirmswilleitherhavetomoveupthevaluechaintomaintainprimacyinthedevelopedworld,createscaletocompeteinhigh-volumeservices,orshiftemphasistotakeadvantageofthehighergrowthintheemergingmarkets.

Withmanyglobalcompaniesheadquarteredindevelopedmarketsstillseekingtocontrolcostsandestablishefficientoutsourcingarrangementsfortheirbusinessprocesses,theymayshifttheirbusinessawayfromtraditionalcentressuchasIndia,wherewagesarerising,towardslower-costcountriesinAsiaandotheremergingregions.Forexample,theUSisbeginningtoseemoreallureinthesizeabletalentpool,serviceableinfrastructure,andimprovinggovernmentsupportofLatinAmericancountriessuchasMexico.GartnerconsidersplacessuchasBulgaria,theCzechRepublic,Egypt,Hungary,Mauritius,Morocco,Poland,Romania,Russia,Slovakia,SouthAfrica,TurkeyandtheUkraineaspossibleoutsourcingalternativesforWesternfirms.16

Ontheproductfront,traditionalindustryleadersmaybeabletogrowprofitmarginsbyprovidingnewtechnologiessuchascloudandmobilecomputing.Forcompaniesoperatingindevelopedmarkets,theyareperhapsmorelikelytobuildcompetitiveadvantageinthefuturethroughtheuseofhigher-qualityratherthanlower-costlabour.

Inparticular,companiesthatarelosingtheirlabourcostadvantagebutwishtocompeteindevelopedmarketswillneedtoemployworkerswithnotonlytechnicalITskills,butalsosoftermanagementskills,suchasentrepreneurship,innovationandmarketing.Companiesthatwishtobreakawayfromgrowthdependentonabundant,low-costlabourwillneedtogenerateintellectualpropertyanddevelopnewplatformsforservicedelivery.Amongotherthings,ITservicesfirmswillneedtocontinuetoinvestintrainingandcollaboratewithuniversitiesinordertoensureaccesstoskilledlabour.

16“Gartner’s30LeadingLocationsforOffshoreServices,2010-2011”.Gartner.Dec20th2010



Currenttrendsintheindustrysuggestthatsmallerfirmsaremostatriskfromthecompetitivelandscapethatisemerging.Sizeandscalebecomeincreasinglyimportantdeterminantsforglobalfirmsseekingoutsourcingpartnerstoenhancetheirownoperationalefficiencies.TheyarelikelytoseekITpartnerswhocanprovideafullrangeofcost-effectiveservicesinmultiplelocations.

Ontheotherendofthedemandspectrum,however,smallandmedium-sizedenterprisesaremorelikelytousecloud-basedservicesratherthanthird-partyITservicesplayers,forreasonsofcost.Asmass-market,cloud-enabledservicesbecomeubiquitous,priceswillfall,andthebestperformingfirmswillbeeitherthosethatcantakeonahighvolumebusinessinacost-effectivemanner,orthosethatcanprovideahighlyspecialisedornicheservice.

MrShaabiatTIBCObelievestherewillalwaysbeopportunitiesforsmallerfirms,partlybecausebigfirmstendtobecomedependentontheir“cash-cow”businesses,andmaynothavethecommercialmotivationtoventureintonichefields.“Smallfirmswhodonothavethesecashcowbusinessmodelsareabletoinnovatefurther,”hesays.Asia’srapidlyevolvingITservicesmarketislikelytothrowupopportunitiesforbigandsmallfirmsalike.



Barometer methodology

Toassesstheintensityofcompetitionandunderstandthechangingmarketdynamicsinkeysectors,theEconomistIntelligenceUnit(EIU)hasdevelopedtheAsiaCompetitionBarometer.Drawing

uponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.

Assessingauniverseof296publiclylistedinformationTechnology(IT)servicescompaniesacrosseightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapefortheITservicessector.

How do we define the IT services sector? WhilebothIThardwaremanufacturersandsoftwarecompanieshaveasignificantpresenceinthe

Asia-Pacificregion,itistheITservicessectorthathasattractedtheattentionofforeignanddomesticcompaniesinrecentyears.AstheITsub-segmentwiththehighestvalue-added,wewouldexpecttoseepronouncedtrendsinprofitabilityandmarketcompetitioninthecontextofAsia’sfast-changingeconomicenvironment.Inthecontextofthisanalysis,theITservicessectorincludesthefollowingsub-segments:17

softwaredevelopment,includingcomputergames;ITprogramming;ITconsultancy;ITfacilitiesmanagementservices;otherITandcomputerserviceactivities;dataprocessing,hostingandrelatedactivities;andwebportals.

Methodology TheBarometerhastwodimensions:profitabilityandmarketconcentration.

Profitability IndexToassesstheaggregateprofitabilityoftheITservicessectorinAsia,theEIUdevelopedacompositeindexoffiveratiosthateachrepresentadifferentaspectofacompany’sprofitability:

17BasedonNACE(nomenclaturestatistiquedesactivitéséconomiquesdanslaCommunautéeuropéenne)2.0classification.NACEisthestatisticalclassificationof economic activities in the EuropeanCommunity.



• EBITDA margin (%):Ameasureofacompany’soperatingprofitability.Itisequaltoearningsbeforeinterest,tax,depreciationandamortisation(EBITDA)dividedbytotalrevenue.BecauseEBITDAexcludesdepreciationandamortisation,EBITDAmarginprovidesaclearerviewofacompany’scoreprofitability.Anincreaseincompetitionmayputpressureonanindustry’sprofitmargins.

• Gross margin (%):Whenusedasamarketmeasureofcompetition,grossmarginmeasurestheprofitabilityconsideringonlythecostsofgoodssold.Thehigherthepercentage,themorethecompanyretainsoneachdollarofsalestoserviceitsothercostsandobligations.Anincreaseincompetitiontendstoreducefirms’abilitytoincreasepricesandtherebyincreaseitsgrossmargin.

• Return on capital employed (%):Ameasureoftheefficiencyandprofitabilityofacompany’scapitalinvestments.Returnoncapitalemployedalsoindicateswhetherthecompanyisearningsufficientrevenuesandprofitsinordertomakethebestuseofitscapitalassets.Anincreaseincompetitionmayrequirefirmstoemployadditionalcapitaltomaintainprofitability.

• Return on equity (%):Ameasureoftherateofreturnontheshareholders’equity.Itmeasuresafirm’sefficiencyatgeneratingprofitsfromeveryunitofshareholders’equity.Returnonequityshowshowwellacompanyusesshareholderfundstogenerateearningsgrowth.Ariseincompetitiontendstoputpressureonreturnsonshareholderfunds.

• Return on assets (%):Ameasureofhowprofitableacompany’sassetsareingeneratingrevenue,orhowprofitableacompanyisrelativetoitsassets.Returnonassetsdeterminesacompany’sabilitytoutiliseitsassetsefficientlyandeffectively.Highercompetitiontendstoputpressureonfirms’abilitytomaintainreturnonassets.

Weaggregatedcompany-leveldatafor296publicly-quotedITservicescompaniesandexaminedtheirprofitabilityratios.Toenableobservationoftrendsovertime,acompositeProfitabilityIndexwasdeveloped(whereyear2005=100).EBITDAandgrossmarginaregivenahigherweightingintheindexastheyspeakdirectlytobottomlineprofitability,whilethereturnoncapitalemployed,returnonequityandreturnonassetsratiosspeaktohowacompanymakeuseofitsvariousresourcestodrivereturn(i.eefficiency/productivity).

Profitability indicator Weight in Profitability Index

EBITDAmargin(%) 35%

Grossmargin(%) 35%

Returnoncapitalemployed(%) 10%

Returnonequity(%) 10%

Returnonassets(%) 10%

Market concentration Toassessmarketconcentration,theEIUcalculatedtheHerfindahl-HirschmannIndex(HHI)fortheITservicessectorinAsiafrom2004to2009.Ameasureofthesizeofcompaniesinrelationtotheindustry,



andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseof296listedcompaniesassessed.18HHIvaluescanrangefrom0to1.0,movingfromanextremelyfragmentedmarket(0)toamonopoly(1).HHIvalueshavebeenmultipliedby100toachieveascaleconsistentwithprofitabilityindicators.ArisingHHIindexgenerallyindicatesfallingmarketcompetition,whileafallintheHHIsuggeststhatcompetitionisincreasing.

18Orsummedforallthefirmsin the case that there are fewerthan50.

Whilsteveryefforthasbeentakentoverifytheaccuracyof this information, neither The Economist Intelligence UnitLtd.northesponsorofthisreportcanacceptanyresponsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions setoutherein.

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