But they have been successful in some others. NTT Data acquired US-based IT services firms Keane International and the US-based Intelligroup in 2010, and Hitachi Consulting acquired another US IT company called Sierra Atlantic in January 2011. Over three-fourths of employees in these companies are based in India.
“In the next 18 months we could expect a lot more action from Japanese companies,” said Partha Iyengar, V-P at research firm Gartner. According to IT industry body Nasscom , the Japanese IT services market, pegged at $108 billion, is the world's second largest after the US.
A shortage of skilled manpower and increasing cost pressures are driving the Japanese IT majors to explore cheaper offshore buys in India. The demand for IT services in Japan is driven by the banking, financial services and insurance (BFSI) and manufacturing industries, which together account for over 40% of the IT services market. Local companies like Fujitsu, Toshiba , NEC and NTT Data and US-headquartered IBM are the top players in Japan.
According to Raja Lahiri, director - transaction services at KPMG India , Japanese companies are looking at acquiring mid to large sized IT services companies in India. “It makes sense to have a presence in India to service global clients, as also the large Japanese market. With an ageing population they lack the manpower skills that India can offer,” he said.
Most Japanese enterprises continue to operate the legacy mainframe and more than 53% of Japanese IT services constitute customized software development. These applications, developed using IBM family architecture, require extensive manpower skills.
Japanese firms are beginning to migrate their applications in view of the high maintenance cost, low flexibility and non-availability of legacy skills. As Japanese vendors who developed these systems will get biggest pie of migration opportunity, it makes sense to have centres in nations like India to gain scale and cut costs.
There's also another reason why the Japanese are interested in Indian IT. As Sameer Dhanrajani, country head of Fidelity National Financial India, points out, Japanese companies have been primarily servicing the APAC, China and South Korean regions due to cultural affinity.
They miss out on large opportunities in the more lucrative European and US markets. India has a first mover advantage in capturing the US and European offshoring markets. Thus acquiring Indian companies with blue-chip clients is an attractive option.
“However they now realize that as countries like China and India threaten to eat into their own client base at home as well as globally, not having an offshore presence in India puts them at a disadvantage,” Gartner's Iyengar added.
Fujitsu president Masami Yamamoto recently said that the company intends to increase its focus on IT services through acquisitions of software firms particularly in the area of cloud computing.
A paper titled The competitiveness of Japan's software industry' by Tatsuo Tanaka , a faculty fellow at the Research Institute of Economy, Trade and Industry (RIETI) in Japan, indicates that Japan excels in producing custom and embedded software, but lags when dealing with packaged business and online software. Custom software is said to be inefficient in terms of cost and quality because it can't derive economies of scale and compete globally against packaged business and online software.
Fidelity's Dhanrajani added that Japanese companies are involved in high-end software development, engineering and R&D work. They do not have the IT services capabilities at the lower end of the value chain, which constitutes the mass segment of IT services demand. “To offer services across the value chain it becomes essential for them to make acquisitions in India,” said Dhanrajani.
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