India should grasp digital opportunities

By Roopen Roy Dec 02 2014

Tags: Op-ed

The myth that China is only good for “ch­eap” products and that India is an IT super-power ne-eds to be debunked for the sake of India’s software industry. India’s software industry is mostly services. It relies largely on cost arbitrage. Its growth is volume-led and export-driven. We are seeing green shoots of product companies and bright sparks of innovation but the critical mass is still some distance away.

According to NASSCOM, IT services exports will reach $52 billion in 2015. In 2014, our IT-BPM revenues were $118 billion. In these revenues we have counted the toplines of global captives like HSBC, American Express and GE. We have also added offshore facilities of global companies like IBM, HP, Oracle, Microsoft, Accenture and Deloitte Consulting. The industry in India is growing now at a slower pace — between 13 per cent and 15 per cent.

China’s story is different. They have turned the lack of proficiency in the English language into an advantage. The universal dependence on Mandarin of 1.35 billion people is a big plus. It not only creates a large captive market, it also acts as an entry barrier for “foreign” companies.

According to IBIS World, a US-based market research firm, the software development industry in China is expected to generate $551.3 billion in 2014, up 18.6 per cent from 2013. The industry has grown strongly at an average annual rate of 21.6 per cent over the past five years due to strong demand from downstream software users, the defence industry and the government. This industry’s development has been strongly supported and encouraged by the Chinese government. It employs 2.6 million people and has nearly 28,700 businesses.

The difference between the two countries lies in what constitutes software and how innovation is being promoted. Indian companies have focused on and perfected software services. We do not have many companies producing software products or ecommerce platforms. The largest Indian software companies are still very much into projects and services for global clients.

They have made minor acquisitions and attempted to rise up the food chain by offering consulting. As yet there is no story of spectacular success. There are a number of failures in consulting, particularly among the large Indian IT services companies. Although many have large cash reserves, few have dared to make bold acquisitions overseas in the arena of consulting services.

A look at the Forbes list of the richest individuals in China tells a story full of insights. The top three are not, as you might expect, from manufacturing sector. Nor are they from the mining sector or from real estate. The richest Chinese is Jack Ma. He is not from Beijing or Shanghai or Guangzhou. He is 50 years old former English school teacher from Hangzhou in Zhejiang province in eastern China. He shattered all records by offering a $21.8 billion IPO of his company Alibaba Group, an ecommerce powerhouse, in September in the New York Stock Exchange.

Jack Ma’s personal worth is $19.5 billion. In October the market capitalisation of Alibaba Group surpassed $250 billion compared with $246 billion of the largest brick-and-mortar retailer on the planet, Walmart. Just as a point of reference, Facebook market capitalisation is about $205 billion.

The second richest man in China is Robin Li from Beijing. He is younger, about 45 years old. He was educated in the US and started his company almost at the same time as Google. Robin Li loves ancient Chinese poetry. When he set up the search engine company which is far bigger than Google in China, Robin, the founder of Baidu (which literally means numerous times) was inspired by two lines of a romantic poem by Xin Qiji Last Night of the Lantern Festival. The two lines which are emblazoned on Baidu’s website (and guides its vision) are:

I searched for her again and again until my patience was wearing thin. Suddenly I turned back and Oh! There she was standing alone in the dim light of lanterns.

Baidu is betting on the growth of the wireless and mobile segments and will soon be offering voice and image recognition. It plans to challenge Google in the global market soon. His personal worth is about $14.7 billion and the market capitalisation of his Nasdaq-listed company is about $86 billion. Acquisition is part of its growth strategy.

The third richest man in China, Ma Huateng, is snapping at the heels of Robin Li. He is worth $14.4 billion and works from Shenzhen. He is 43 years old. He began his journey with online games but began offering free messaging services. His company’s name is Tencent and the messaging service he offers is called WeChat — a competitor of WhatsApp. WeChat mobile texting services have signed up about 440 million users. Its market capitalisation is higher than HP, Intel and Cisco and is around $159 billion. Thus, China is very much into software products and services.

The Indian software industry is at the cross-roads. It cannot continue to grow and prosper simply by playing the game of cost-arbitrage and offshore IT services. The advances in robotic automation will clearly impact the outsourcing industry as never envisaged before. Cloud computing is going to impact the way innovation will happen. Having large land banks and huge campuses may no longer be a competitive advantage or indeed an entry barrier. The world of apps and internet of things will change the way we work in a connected world.

As new waves of computing come in, India should prepare to be an innovation hub of the new age products in a connected, digital world. If US has dominated the PC era, if Europe has been the spawning ground of mobile technologies, why should India not aspire to be a key piece of the ecology of 26 billion connected devices and internet of things? Why should not the companies with large market capitalisations come from Indian digital industries? We should grasp these emerging opportunities with both hands.

(The writer is managing director of Deloitte Consulting, India. Views are personal )