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The Indian software & services industry group generated total revenue of $64 billion in 2008.It contributed over 5.5 % of the overall GDP of India.
It has been growing with an annual rate of 28% since 2001.
IT Exports accounts for 35% of the total exports from India.
The Market capitalization of IT shares is around U.S. $ 225 billion.
The Indian IT industry can be broadly divided into two markets: domestic market and exports market.
The exports market constitutes the largest segment accounting for 62-66% of the total revenue generated by the Indian IT industry.
Export constitute a major part of IT revenues
PHASE II : JAPANESE IT PERSPECTIVE
India’s share of IT exports to Japan is less than $2Bn a year
Penetrating the second biggest IT services market in the world continues to be a major challenge for the Indian IT companies.
Indian companies looking to de-risk themselves from dependence on the US/European markets market have long tried to establish themselves in this market.
Indian players have found nominal success. Only breakthrough being in the embedded systems space where they could work directly with the end customers
India, with its large technically qualified manpower base and IT service delivery expertise, has a big role to play as the aging Japanese economy makes choices to stay competitive in global markets.
Japan recognizes and respects India’s prowess in IT
SIZE OF THE OFFSHORING MARKET
Japanese IT services market at USD 108 Bn is the second largest in the world. India’s share in the market is between USD 1 to 1.5 Bn
Offshoring is limited to 8-10% of the total market
China is the biggest offshoring partner
KEY FINDINGS – IT LANDSCAPE IN JAPAN
IT usage has focused on improving the business efficiencies in administrative and intra company transactions. Only small portion of companies have utilised IT for strengthening competitiveness of the firm.
Low overall IT spending. Spend/ sales ratio is around 1-1.5% for most industries as compared to around 3.5- 4% in the US
KEY FINDINGS – IT LANDSCAPE IN JAPAN Strong traditional preference for custom built applications Increasing demand for package products
Reasons for preference to custom built applications:
The innate “closeness” of Japanese businesses stressing on maintaining the uniqueness of processes.
Relatively less cases of corporate takeovers and mergers with low need for integration
More than 53% of Japanese IT services constitutes customised software development
Drivers for change : COBOL skills shortage, need for increased flexibility and cost pressures
Highly fragmented ERP products market. Top 3 vendors occupy only 40-50% of the market share.
Most Japanese companies continue to operate legacy mainframe
KEY FINDINGS - WHO SERVES THE MARKET IN JAPAN? The Japanese IT Services Pyramid
PHASE III : SOFTWARE AS EXPORTS
EXPORTING SOFTWARE – THE PROCEDURE Successfully exporting software requires consideration of the following:
type of software
intellectual property security
the destination country
TYPES OF SOFTWARE Packaged software is generally available to the public and is sold from retail stock or mail order. It is installed by the consumer and additional technical support is minimal. Customized software differs considerably from packaged software because it is designed or modified for a specific end-user and frequently installed by the vendor who may provide extensive technical support. Customized software tends to be higher in value than packaged software.
DELIVERY Express Package Delivery: Packaged software is typically mailed and can be controlled by the package carriers who adhere to a system of ―clearing goods for import and export. International shipments absolutely require a commercial invoice and possibly an EEI (Electronic Export Information). Electronic Software Delivery: ―Shipping software via the Internet offers tax/tariff advantages and an immediate delivery. However, it is affected by the seller’s and buyer’s Internet capacity to send, receive, & use the software. An EEI is not required for "intangible exports of software and technology, such as downloaded software and technical data, including technology and software that requires an export license and mass market software exported electronically. For example, two types of intangible software products which are typically downloaded: Demo version Updates
TAXES AND TARIFF The specific country to which your buyer is importing the software will decide the tariff or value-added taxes involved. In order for Customs officials to assess duty correctly, the value of the medium should be indicated separately from the intellectual property on the commercial invoice. Generally, software valuation can be based on the value or cost of the carrier medium (usually a CD) rather than the intellectual property embedded on the medium. For example, software that includes sound, cinematic or video recordings, game software, etc., may be subject to a separate valuation policy. India breaks out entertainment software, healthcare software, and telecom software differently than standard software. If the buyer’s country’s tax rules treat the payments from the license as ―royalties and they subject royalties to a withholding tax, the foreign user will have to withhold (and pay to the foreign government) the percentage of the payment due under the license agreement. On the other hand, if the foreign country’s tax rules treat the software licensing payment as sales or regular business income, the payment typically will not be subject to a withholding tax. The U.S. company may owe income tax to the foreign country on the payment if the company has a ―permanent establishmentor is otherwise treated as engaging in business in the host country.
PROTECTING INTELLECTUAL PROPERTY Guarding against piracy is difficult. There may be some older references implying that software is not patentable, but consider the following: Invented software is protected if it meets other patentable criteria. If your software does something in the real world‖ which is not easily clarified, then you can patent how it does it. Operating systems for computers may or may not be patentable, i.e. mathematical algorithms or mental steps, but the ways data is compressed or transmitted have been patented. Copyright your software in the countries where it will do the most good. This is still the way to protect ―copying program code without mention of novelty or obviousness of the code. Have agreements with your partners to protect trade secrets. Naturally, you should avoid exposing the source code at all and there are ways to avoid providing it for your copyright. Source: Brown & Michaels Law See VEDP Fast Facts on ―Intellectual Property Rights‖.
RESTRICTIONS, REGULATIONS, AND COMPLIANCE Export controls are meant for national security, to support foreign policy, to protect against proliferation and short supply, and in some situations to carry out U.S. obligations internationally. The U.S. Departments of State, Treasury, and Commerce each have their own lists of denied parties and maintain independent systems of export controls. The intention of the federal government is not to hinder international trade, but to control sales of encryption products which may be used to subvert U.S. interests. Software export controls are determined by the strength of encryption which is measured by the key lengths of algorithms.
PHASE IV : PROCEDURE FOR EXPORTS
DECLARATION OF SOFTWARE EXPORTS Export of software is undertaken in physical form i.e. software prepared on magnetic tapes and paper media as well as in non-physical form i.e. direct transmission abroad through dedicated earth stations / satellite links. As far as export of software in physical form is concerned the procedure relating to declaration of shipments on GR/PP forms, handling of export documents authorised dealers and other allied matters is the same as applicable to export of other goods. Export of software, in non-physical form including Video/TV software and all other types of software products/packages, should be declared on SOFTEX form. Each set of SOFTEX form comprises three copies marked Original, Duplicate and Triplicate which carry an identical pre-printed serial number. All the three forms in each set should be completed and the entire set submitted for the purpose of valuation together with relevant documents to the officials of Department of Electronics (DOE), Government of India.
VALUATION OF SOFTWARE EXPORTS/CERTIFICATION OF SOFTEX FORM The valuation of export declared on SOFTEX form will be done by the designated official/s of the DOE at the Software Technology parks of India (STPI). The SOFTEX forms of the exporters located outside STPI as also forms in respect of export of Video/TV software shall also be certified by the designated official/s at the nearest STPI. DOE have made necessary arrangement for certification/valuation of the Video/TV Software declared on SOFTEX form with the Ministry of Information and Broadcasting, Government of India, once in a week at the STPI.
TIME LIMIT FOR REALISATION OF EXPORT VALUE The full value of the software exported as declared on the SOFTEX form or as certified by the official of Government of India at STPI, whichever is higher should be repatriated to India on due date of payment or within 180 days from the date of invoice, whichever is earlier in the manner prescribed in Rule 9 of the Foreign Exchange Regulation Rules,1974.
ELECTRONIC AND COMPUTER SOFTWAREEXPORT PROMOTION COUNCIL Electronics and Computer Software Export Promotion Council (ESC), sponsored by the Government of India is India’s largest Electronics and IT trade facilitation organization. How ESC Helps ? Acts as a link between the Government and its members and provides a platform for interaction on policy issues. Acts as a link between member companies and foreign companies in the business development process. Identifies prospective markets and buyers for specific products and services offered by members. Organizes promotional activities by way of participation in trade fairs and exhibitions, inviting foreign delegations, carrying on market surveys through delegations, sales and study teams and similar activities. Implements Government assisted programmes such as MDA and MAI.
PHASE V : ADVANTAGE INDIA
KEY FINDINGS – JAPANESE OFFSHORING EXPERIENCE
Only 8-10% IT services are offshored
China is the largest offshoring partner for the Japanese accounting for over 50% of the total offshoring.
Single biggest factor for choice of China for offshoring is the cultural homogeneity.
Concerns over offshoring to China:
Limited capabilities to manage large complex projects
Lack of high end domain and technical expertise
Concerns over data privacy and IP protection
India as offshoring destination is gaining popularity
China is a preferred partner today, only because of the lack of alternatives
KEYFINDINGS – INDIAN PRESENCE IN JAPAN
Indian companies have ventured in this market from as early as the mid nineties
Several of them have established Japanese desks and have made significant investments with local hires.
Prominent Indian companies in Japan : TCS, Wipro, Infosys, Zensar, Satyam, Mastek, Patni, NIIT Tech, KPIT Cummins, HCL Technologies
Most players have found success in embedded systems development where they have opportunity to deal with the direct customers rather than becoming part of the hierarchy.
KEYFINDINGS – CHALLENGES THAT INDIAN PLAYERS FACE IN JAPAN
Struggling to offer the right value proposition and positioning themselves
Barriers to entry in terms of language & cultural compatibility.
Low Japanese language skills available in India.
There are around 71,000 Chinese students enrolled in Japanese universities as against only 480 from India
Lack of focus: Far too busy serving US and UK
Struggling to cope with the perfectionist attitude of Japanese clients, long gestation periods and undefined project management practices
Keiretsu Japanese business model doesn’t encourages entry of new players
RECOMMENDATIONS - WHAT SHOULD INDIAN VENDORS DO?
Avoid opportunism. Have a strategic long term view of this market. Market is large and would need patience to develop
Establish right value proposition ; start small and build trust. Understand the business difference in contractual terms.
Showcase partnership based relationship for mutual advantage rather than client-vendor model. Target transformational change projects
Localise, localise, localise ; invest in understanding context
Develop strengths in Japanese language and be more sensitive to cultural issues
Japan market is a prospective alternative to Indian IT industry to reduce its dependence on US/European markets
Indian IT vendors are regarded high on technology & domain competence, with fast ramp-up capabilities, low on cost and with a better IP protection environment.
Japan and China also suffer with the historical mistrust amongst the nations. Most Japanese respect Indian culture and recognise the prowess of the Indian IT sector,
Indian IT companies have an opportunity to establish themselves as the high end service providers, with service offerings differentiated from the low end Chinese providers.
As with the US and the UK, the Indian IT sector would contribute immensely and help accelerate growth of the Japanese economy which is sagging since last decade
Reduce dependency on China as outsourcing partner
Make use of best practices while offshoring with rich Indian experience. Get associated with the best minds in IT in the world
India is first a natural partner for innovation led high end product development and then an IT outsourcing vendor
Japanese companies would be able to increase profitability by cutting costs , help the economy fight recessionary pressures and compete globally