Mizuho 1038 it services


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Mizuho 1038 it services

  1. 1. Japan Industry Outlook / 38 2012 No.1 Table of Contents1, Comprehensive Industry - Japan 15, Broadcasting (Japanese only)2, Iron and Steel - Japan 16, Marine Shipping (Japanese only)3, Non-ferrous Metals - Japan 17, Logistics - Japan4, Paper and Pulp (Japanese only) 18, Electric Power - Japan5, Cement - Japan 19, City Gas (Japanese only)6, Chemicals - Japan 20, Retail - Japan7, Pharmaceuticals - Japan 21, Food and Beverage - Japan8, Petroleum - Japan 22, Food Service Industry - Japan9, Automobiles - Japan 23, Construction (Japanese only)10, Shipbuilding (Japanese only) 24, Real Estate and Housing - Japan11, General Machinery (Japanese only) 25, Travel and Tourism - Japan12, Electronics - Japan 26, Nonbank (Credit Cards & Credit) (Japanese13, IT Services - Japan only)14, Telecommunications - Japan 27, HR Service Industry (Japanese only) Contact: Industry Research Division Mizuho Corporate Bank, Ltd. mizuho.ird@mizuho-cb.co.jp
  2. 2. FY2012 Japan Industry Outlook (IT Services) IT Services Summary ■ After negative growth in the first and second quarter of FY2011, the IT services market is expected to achieve positive growth for the first time in four years in and after the third quarter, due to active investment in software, mainly in the manufacturing and financial industries. Gradual recovery is also expected for FY2012, and growth is estimated to continue. ■ According to the above reasons, IT services companies are expected to report an increase in both sales and operating profit in FY2011. This growth trend in sales and operating profit is expected to be continued in FY2012. ■ However, room for growth in the domestic market will be further limited due to the uncertain prospects of the economy and smaller investments in domestic software, with user company advances into the international market. In order to achieve the sustainable growth of business, initiatives must be taken to explore and cultivate new business areas such as the “domestic demand of NIES countries,” the “public services and public welfare sectors,” and the “effective use of large-size data” through business partnerships crossing borders between countries and industries.I. INDUSTRY TRENDS1. Overview of the recent IT services market IT services sales With the serious slump of corporate performance caused by the Lehman Shock have started to in FY2009, the IT services market (sales of the IT services industry) show positive significantly dropped to JPY 10,322.6 billion, reporting a 5.5% year-on-year growth on a single-month decline. The market shrunk to JPY 9,978 billion in FY2010 (a 3.3% basis, and year-on-year decline) and the trend continued in the first and second quarters of annual growth is FY2011 (a 3.1% and 3.5% year-on-year drop, respectively), the declining trend expected for all of the market seems to be continuing with reluctance in making IT investment of FY2011. due to uncertain prospects of the economy. On the other hand, when looking at each single month in and after the third quarter, sales are showing a year-on-year increase (2.7% up in October, which was the first positive month in 29 months, and a 4.3% increase in November). This may be a sign that business demand for new IT system development, IT system replacement, etc. has been recovering, and we may see the situation that the annual FY2011 sales achieves their first year-on-year increase in four years (see Figure 13-1 and Figure 13-2). 1 Mizuho Corporate Bank, Industry Research Division
  3. 3. FY2012 Japan Industry Outlook (IT Services) Figure 13-1: Sales growth rate in the IT services industry (long-term) (%) 20 18.1 16.8 15 9.2 9.6 10 10.1 9.3 8.6 7.3 6.1 3.8 5 2.2 1.4 3.6 0.9 2.9 -0.1 0.4 0 0.4 0.2 -4.4 -3.7 -3.3 -5 -8.1 -5.5-10 (FY) 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Estimate Forecast Source: Compiled by MHCB Industry Research Division based on the Ministry of Economy, Trade and Industry’s “Survey of Selected Service Industries” (FY2011 and FY2012 are based on MHCB Industry Research Division forecasts.) Figure 13-2: Sales growth rate in the IT services industry (short-term) (%) 15 15 Y-o-y monthly growth rate 10 10 Y-o-y quarterly growth rate 5 5 0 0 -5 -5 -10 -10 -15 -15 04 1Q 04 4Q 05 3Q 06 2Q 07 1Q 07 4Q 08 3Q 09 2Q 10 1Q 10 4Q 11 3Q Source: Compiled by MHCB Industry Research Division based on the Ministry of Economy, Trade and Industry’s “Survey of Selected Service Industries”The consignment of Meanwhile, when looking at the sales and sales growth rate breakdown bythe managementand operation of sector for the IT services industry (Figure 13-3 and Figure 13-4), thesystems has “Consignment of outsourcing and the operation of systems, etc.” remains at thebottomed out. Now,we must wait for same level as the previous year, both for the first and second quarter of FY2011.the full recovery of It seems that the declining trend of demand has somewhat bottomed-out. Thesales fororder-made “Consignment of outsourcing and the operation of systems, etc.” is a segmentsoftware, which that responds to the operation and maintenance of the IT systems of usercomprises amajority of the companies, for which demand is considered to be relatively stable, and that ismarket, until the why the numbers bottomed-out at first. On the other hand, “Order-madesecond half (2H) ofFY2011 or later. software,” which accounts for the largest portion of the market, has recorded negative year-on-year growth, both in the first and second quarter of FY2011. Although system development demand such as that for the replacement of IT 2 Mizuho Corporate Bank, Industry Research Division
  4. 4. FY2012 Japan Industry Outlook (IT Services) systems, which was postponed due to the Great East Japan Earthquake, seems to have started to grow, it is still considered that it would take some time for IT service providers to book the revenue, which means that the robust recovery of sales may not been seen until nearer to the end of FY2011. Figure 13-3: Sales breakdown by sector Figure 13-4: Sales growth by sector Order-made software100% 9% Other (%)15 Software products 9% 8% 8% Information processing for calculation operations, etc. 13% 14% 14% 14% 10 Consignment of management and operation of systems, etc.80% 6% 6% 7% 7% Consignment of management and 5 13% 12% 12% 11% operation of systems,60% etc. 0 Information processing for calculation40% operations, etc. -5 59% 60% 60% 60% Software products -1020% -15 Order-made software 0% -20(FY) 07 08 09 10 (FY) 07 08 09 10 11 1Q 11 2Q Source: Figure 13-3 and Figure 13-4 were compiled by MHCB Industry Research Division based on the Ministry of Economy, Trade and Industry’s “Survey of Selected Service Industries” 2. Software investment trends and the IT services market outlook for FY2011 and beyond FY2011 domestic FY2011 domestic software investment plans are significantly higher than the software previous year (a 9.0% year-on-year increase) for the entire industry including investment plans financial institutions, according to the December BOJ Tankan Survey (see are 9.0% higher than the Figure 13-5). While software investment has shown a year-on-year decrease for previous year. three consecutive years since FY2008, due to reduced spending by user companies with a cost reduction approach through the suspension of projects as necessitated by their poor financial performance after the Lehman Shock, the size of investment is expected to be significantly bigger than the previous year in FY2011, and actual investments are estimated to be even bigger than the plan (which is already higher than the previous year by 4.5%), according to the March 2011 Tankan Survey. The major reasons for this significant year-on-year increase seem to be: (1) latent demand such as that for system replacements, which have been postponed since the Lehman Shock and which have now become a real necessity, and (2) unlike the situation of FY2010 in which software investment was driven only by global large enterprises whose financial performance improved faster than smaller enterprises, the current situation is that domestic demand-oriented large non-manufacturing enterprises and financial institutions whose financial performance has been improving are also increasing their software investments. 3 Mizuho Corporate Bank, Industry Research Division
  5. 5. FY2012 Japan Industry Outlook (IT Services) A breakdown by Looking at a breakdown of FY2011 domestic software investment by size/type size/type of of company, large manufacturing enterprises still maintain their motivation for corporation domestic software investment, which shows a 10.2% year-on-year increase. shows large manufacturing However, they made some downward revisions since the last Tankan Survey in enterprises, large September considering the uncertainty of the global economy, such as the non-manufacturi financial concerns in European countries and the impact on profitability from ng enterprises, the recent strong yen (Figure 13-7). Willingness for software investment is also medium-sized enterprises, and high at large non-manufacturing enterprises, which reported a 7.1% financial year-on-year increase in the December 2011 Tankan Survey. The reason for institutions are upward revision since the June 2011 Tankan Survey seems to be the all planning a commencement of strategic IT development projects that are being carried out year-on-year increase in by some non-manufacturing companies in the marketing sector, etc., with software growing domestic demand due to stable consumer consumption (Figure 13-8). investment. In addition, medium-sized enterprises also planning a 10.1% year-on-year increase (Figure 13-9). It is considered that their financial performance has improved to some extent with the recovery of domestic demand, just like large non-manufacturing enterprises. Financial institutions also plan a high level of software investment, at a 10.1% year-on-year increase as of the December 2011 Tankan Survey. This is considered to be driven by development projects toward the integration of businesses in such areas as banks and consumer loan companies, along with other system replacement needs (Figure 13-10). Figure 13-5: Rate of change YOY for Figure 13-6: Comparative breakdown of software investment software investment (all sectors/all industries) 100%(%)15 21% 20% 19% Financial 23% 10.0 institutions 9.0 80% 10 7.4 5% 6% 5% 5% 4.5 Small- to medium- 5 15% 15% 11% 11% sized 60% 0 Medium-sized -5 40% 40% 40% 47% 41% Large (non- -10 manufacturing) -15 20% Mar. June Sept. Dec. Estimate Actual Large 20% 20% 16% 21% (manufacturing) (Mar) (Jun) 2007 2008 2009 0% 07 08 09 10 (FY) 2010 2011 Source: Figure 13-5 and Figure 13-6 were compiled by MHCB industry Research Division based on the Bank of Japan’s “Short-term Economic Survey of Principal Enterprises in Japan” (Tankan Survey). 4 Mizuho Corporate Bank, Industry Research Division
  6. 6. FY2012 Japan Industry Outlook (IT Services) Figure 13-7: Rate of change YOY for software Figure 13-8: Rate of change YOY for software investment (large enterprises/manufacturing) investment (large enterprises /non-manufacturing) (%) (%) 20 10 13.7 7.6 7.1 15 10.3 10.2 8 10 6 4.0 5 4 2.2 0 2 2.3 -5 0 -10 -2 -4 -15 -6 -20 -8 -25 -10 -30 -12 Mar Jun Sep Dec Estimate Actual Mar Jun Sep Dec Estimate Actual (Mar) (Jun) 2007 2008 2009 (Mar) (Jun) 2010 2011 2007 2008 2009 2010 2011 Figure 13-10: Software investment change YOY Figure 13-9: Software investment change YOY (financial institutions) (medium-sized enterprises) (%) 20 (%) 35 15 11.3 10.9 10.1 30 10 25 5 20 5.7 13.2 0 11.2 11.5 15 10.1 -5 10 -10 5 -15 0 -20 -5 -25 -10 Mar Jun Sep Dec Estimate Actual Mar Jun Sep Dec Forecast Actual (Mar) (Jun) (Mar) (Jun) 2007 2008 2009 2007 2008 2009 2010 2011 2010 2011 Figure 13-11: Production/business facilities DI Figure 13-12: Supply & demand for the DI information services industry(Excess - shortage) Large (all) 40 Large (manufacturing) Domestic supply & demand DI (Excess demand – excess Large (non-manufacturing) 30 supply) 35 Medium-sized Employees DI (Excess – shortage) 20 30 Financial institutions 10 25 0 20 -10 15 -20 10 5 -30 0 -40 -5 -50 -10 -60 11 4Qe 05 2Q 05 4Q 06 2Q 06 4Q 07 2Q 07 4Q 08 2Q 08 4Q 09 2Q 09 4Q 10 2Q 10 4Q 11 2Q -15 07 1Q 07 4Q 08 3Q 09 2Q 10 1Q 10 4Q 11 3Q Source: Figure 13-7 through to Figure 13-12 were complied by MHCB industry Research Division based on the Bank of Japan’s “Short-term Economic Survey of Principal Enterprises in Japan” (Tankan Survey). 5 Mizuho Corporate Bank, Industry Research Division
  7. 7. FY2012 Japan Industry Outlook (IT Services) The market Regarding the IT services market in FY2011, it is considered that many user growth rate is companies postponed development projects in the first and second quarter due predicted to see a to the impact of the Great East Japan Earthquake, and thus the market 0.4% increase year-on-year for continued to shrink. However, in and after the third quarter, reasonable FY2011, with a recovery in demand is estimated, although careful attention must still be paid 1.4% increase to corporate business performance, considering the prospective orders for for FY2012. system development from user companies that are showing recovery in their business recently, and the need for the replacement of legacy systems and the increasing demand for new system development that contributes to an increase in corporate revenue and sales which exists in many user companies. Therefore, the IT services industry’s sales growth rate for FY2011 is predicted to see a 0.4% year-on-year increase, which is the first increase in four years. Also for FY2012, as moderate growth of demand is estimated, a 1.4% year-on-year increase is predicted.II. CORPORATE EARNINGS Both sales and With the market environment mentioned above, sales of 31 IT services operating profit companies in FY2011 are estimated to show a 3.5% year-on-year increase, and are expected to operating profit is also estimated to see a 9.6% year-on-year increase due to grow in FY2011. improvement in operating rates, with an increase in earnings and further cost reduction. Gradual As for FY2012, sales are predicted to increase 3.1% year-on-year, and recovery of operating profit is predicted to show a 10.0% year-on-year increase. Even with corporate economic uncertainty, further recovery is expected for the financial earnings is also expected for performance of user companies, including large enterprises, which accounts for FY2012. about 60% of all IT-related investments, and a reasonable size of latent demands seem to exist, as the IT-related investment amount of user companies is still at 90% that of FY2007, due to a significant shrinkage of the market immediately after the Lehman Shock. Considering these factors, the possibility is high that the earnings of IT services companies will increase. 6 Mizuho Corporate Bank, Industry Research Division
  8. 8. FY2012 Japan Industry Outlook (IT Services) Figure 13-13: Rate of the increase and decrease Figure 13-14: Rate of the increase and decrease of of the consolidated sales of major enterprises consolidated operating profits of major enterprises(%) (%) 10 7.6 30 22.9 8 25 4.1 20 14.4 6 3.5 3.1 10.0 4 2.9 15 9.6 10 7.1 2 0.3 0.1 1.9 5 0 0 -2 -5 -1.0 -3.8 -4 -10 -3.8 -6 -15 -8 -7.0 -20 -20.1 -10 -25 (FY) 04 05 06 07 08 09 10 11 12 (FY) 04 05 06 07 08 09 10 11 12 Estimate Forecast Estimate Forecast Source: Figure 13-13 and 13-14 were complied by MHCB Industry Research Division based on financial statements. (FY2012 is based on MHCB Industry Research Division forecasts.) Note: Aggregation of the major enterprises in the IT services industry; the figures for FY2012 are based on MHCB Industry Research Division forecasts. Major IT services enterprises: NTT DATA, Nomura Research Institute, IT Holdings (before consolidation: TIS and INTEC Holdings), ITOCHU Techno-Solutions, Nihon Unisys, NEC Networks & System Integration, NEC Fielding, NS Solutions, Net One Systems, SCSK (before merger: CSK and Sumisho Computer Systems), FUJISOFT, JBCC Holdings, Information Services International-Dentsu, DTS, KANEMATSU ELECTRONICS, MITSUI KNOWLEDGE INDUSTRY, Panasonic Electric Works Information Systems, INFOCOM, INES, NSD, JBIS Holdings, SRA Holdings, JFE Systems, Saison Information Systems, FUJITSU BROAD SOLUTION & CONSULTING, NIPPON SYSTEMWARE, Core, TDC SOFTWARE ENGINEERING, Hitachi Business Solution, YASKAWA INFORMATION SYSTEMS, OTSUKA * Companies that have been delisted or that experienced particular causes for earnings fluctuations have been omitted from the calculations for the fiscal year in question and the previous fiscal year. III. TOPICS: Prospective business areas in the mid-term Japan’s IT services industry has been transformed into an industry where Conventional continuous growth cannot be expected with a conventional business model approaches will not work in (which depends on software development outsourced by user companies), due growing business to the combination of cyclic factors (i.e., the completion of major large-scale in the IT services development projects by user companies and weaker motivation for software industry. investment, reflecting the difficult economic environment in Japan) and structural factors (i.e., more IT spending in overseas countries due to user company advances into the international business environment and a decline in unit prices caused by price competition between IT services companies). On the other hand, as this is a typical industry that is dependent on domestic demand, it is inevitable that companies that cannot respond to changes in the external environment are selected and reorganized. 7 Mizuho Corporate Bank, Industry Research Division
  9. 9. FY2012 Japan Industry Outlook (IT Services) The mid-term Faced with such circumstances, it will be absolutely necessary for IT prospective areas services-related companies to spend their management resources in business are the areas where new IT demands are expected to be generated, naturally with “domestic measures to beat foreign companies in supporting Japanese companies demand of NEIS countries,” the operating overseas, in order to achieve continuous growth. The high potential “public services business areas for IT services industry seem to include: (1) the application of and welfare Japanese IT to NIES countries, (2) the improvement of the level of IT in the sectors,” and the public services and public welfare sectors, and (3) the effective use of “effective use of large-size data.” large-size data. “Application of Regarding the first opportunity, the “application of Japanese IT to NIES Japanese IT to countries,” there already is a scenario that is packaging the software assets NIES countries,” developed for and introduced by Japanese user companies and rolling them out meaning in China and other NIES countries in Southeast Asia. With the increased transforming the software assets penetration of communications infrastructure and PCs, it will be possible to in Japan into transfer the technologies and business models developed in the Japanese market business to the NIES countries where a high-level IT environment is being established. opportunities in There is also the possibility that the software assets developed in Japan before NIES countries other countries—which can be used for general purposes overseas considering the impact of regulations in the financial sector, etc., and the business features in the logistics sector, etc.—will be employed by user companies abroad after some localization. The Japanese IT services-related companies may well consider opportunities to respond to the needs of growing NIES countries by taking inventories of their own software assets and development performance and by developing and selling products for overseas customers through collaboration with local IT services-related companies. Response to the The second opportunity is the response to the “improvement of IT in the public “improvement of services and public welfare sectors.” The prospective areas regard social IT in the public infrastructure sectors, such as electricity and water supply, which are receiving services and public welfare substantial attention in society regarding such new technology as smart grids, sectors” through along with the health care sector, in particular. In both sectors, information the vertical controlled by user companies (such as power companies and hospitals) is integration of expected to become more and more diversified and complicated, considering hardware and software the introduction of dispersed power sources and the further aging of society. In such circumstances, it is expected that a system that can instantly and exhaustively collect and analyze the information that must be controlled by the user company will become absolutely necessary. In addition, considering the variety of devices used for collecting information (e.g., smart meters) and the interface with information systems such as ERP, 1 the so-called “opening of control systems”—in which general purpose products such as Windows and1 ERP (enterprise resource planning) means the technique to achieve efficient business management by integrally controlling andallocating any management resources in the company (employees, physical assets, funds, or information) in the areas of production,sales, human resources, and accounting, or the information systems used to achieve this. 8 Mizuho Corporate Bank, Industry Research Division
  10. 10. FY2012 Japan Industry Outlook (IT Services) standard protocols are used—is expected to be broadly required. In order to capture opportunities to respond to the improvement of the level of IT in the public services and public welfare sectors both in Japan and abroad, the IT services industry must be able to provide solutions to the issues faced by central governments and user companies in the public services & public welfare sectors in a vertically integrated manner. To make this happen, collaboration that crosses the border of industries (between equipment manufacturers and software vendors for example) will be necessary.Creation of new The third opportunity is the “effective use of large-size data.” As discussed inbusiness models the paragraph regarding the control system, the data that must be processed bywith the the information systems in the future for such areas as smart phones and“effective use of sensing technology will be “high capacity,” “non-standardized,” and inlarge-size data” “real-time.” New values are expected to be generated by integrating and analyzing such large-size data. There are various examples of the use of such data here and abroad, such as systems that develop the most optimum farming operation by collecting and analyzing the information sensed by cameras and sensors installed at a farm, along with a system to evaluate the risk of acquiring diseases by monitoring and analyzing the physiological data of patients (such as body temperature, heart rate, and blood pressure). However, as the use of large-size data is still in the beginning stage, the return on investment (ROI) for a user company has not been clearly presented in some cases. Thus, the IT services-related companies will be required to consider themselves a business partner who develops services which contribute to enhancement of earnings of user companies, not a conventional vendor who just works on an outsourced job. Yuichi Sano yuichi.sano@mizuho-cb.co.jp Youhei Yonei youhei.yonei@mizuho-cb.co.jp IT Services and Telecom Team Industry Research Division Mizuho Corporate Bank, Ltd. 9 Mizuho Corporate Bank, Industry Research Division