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SECTOR FOCUS: IT IN 2005
• Intel $1 bln, Cisco $1bln, Microsoft $1.7, AMD-SemIndia $3 bln… The Counting Continues
• Oracle Bought i-flex in $900 Million, India Inc. on an Overdrive of Shopping Abroad
• $60 Billion will be Offshored to India in 2010:NASSCOM-McKinsey Report
• TCS, Infosys Now Fight in the Big League to Compete Directly with EDS, IBM and Accenture
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India Inc. on a Shopping Spree:
It was the year of Foreign Direct Investment in reverse. Foreign companies continued to acquire Indian IT companies, but the Indian IT industry was more aggressive in shopping outside India. The move by the Indian IT and BPO companies has two clear strategic benefits: firming up front-end relationships, and acquiring delivery capability. Also, a company gets new clients, new service lines and new geographies by acquisitions.
- Oracle Corp acquired India 's banking software product company i-flex in a $900 million deal (August 2005)
- Deals by TCS
- Acquired Comicrom, a financial services software company of Chile , for $23 million (November 2005).
- Acquired FNS, an Australian financial software developer, for $26 million (October 2005)
- Bought out the life and pensions business processing division of UK-based Pearl Group. Expects revenues of $847 million over the next 12 years from this acquisition. (October 2005)
- Wipro acquired Austria-based NewLogic for $56 million (December 2005)
- Wipro acquired payment software maker mPower for $28 million (December 2005)
- Infinity Capital acquired 40% stake in Sify Ltd in $99.6 million (November 2005)
- IBM acquired Bangalore-based networking infrastructure company Network Solutions in a deal estimated at $75 million - $100 million by market sources (November 2005)
- Mahindra-British Telecom acquired Axes Technologies Inc., Texas , for US$54 million (November 2005)
- Satyam Computer bought Citisoft , UK in $39 million (April 2005)
- Satyam acquired Knowledge Dynamics , Singapore for $3.3 million (January 2006)
- Chennai-based OfficeTiger acquired Salt Lake City-based Mortgage Ramp
- (September 2005)
- WNS bought out Tucson ( Arizona )-based Trinity (November 2005)
- Genpact acquired Creditek (August 2005)
- Aftek Infosys acquire 49 pc stake in German Company Arexera Information Technologies for $10.5 million (December 2005)
- ICICI OneSource acquired healthcare, printing and publishing process company RevIT in $15-18 million (April 2005)
- ICICI Ventures acquired around 10% stake in Scandent Solutions for $62.3 million (October 2005)
- Intelenet Global acquired 51% of Sparsh, the domestic BPO business of Spanco Telesystems, for $21.7 million (November 2005)
- Pune-based Persistent Systems received $ 18.8 million funding from Norwest Venture Partners (NVP) and Gabriel Venture Partners (December 2005)
- Bangalore-based Telsima Inc. Series C round of funding of $20 million from NewPath Ventures, NEA, CMEA and JAFCO Asia (December 2005)
- Four Soft bought DCS Group's logistics unit for about $19 million (September 2005)
- Mphasis picked up US-based Eldorado in $16.5 million (March 2005)
- Mphasis acquired 43% stake in Princeton Consulting for $14 million (February 2005)
- Helios and Matheson (H&M) acquired vMoksha for $19 million (April 2005)
- MindTree acquired Link Software for $10 million (May 2005)
(Disclaimer on behalf of India Inc.: This is not the comprehensive list!)
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Microsoft, Intel, AMD, Cisco—No One Wants to Miss the Bus of India Growth Story:
Bill Gates, the chairman of world’s largest software company Microsoft Corporation, was on the tour of India in November for the fourth time in the last 5 years, not to see the Taj Mahal but to announce $1.7 billion investment in the country.
And just before Bill Gate’s visit, India was playing host to Intel Chairman Craig Barrett. Although the Government of India’s talks with the company for bringing an Intel chip plant to India didn’t materialize, India was not disappointed as Intel announced over $1 billion investment in India for R&D facilities and venture funding.
India’s plans of having a chip plant did move ahead but with Intel’s arc-rival AMD. SemIndia, a consortium of non-resident Indian technology entrepreneurs and professionals, signed a MoU with the government of India in partnership with AMD to set up a chip fab unit in India with an investment of $3 billion. AMD CEO Hector Ruiz was personally present in New Delhi to sign a technology transfer deal with SemIndia in November 2005. Interestingly, AMD has never earlier licensed its proprietary chip-fabrication technology to any other company. Even Intel has made it clear that if ever it comes forward with the plan to set up a chip plant in India, it won’t transfer the technology to India.
Cisco Systems, world's largest maker of networking products, has also announced an investment of $1.1 billion in India. US software EMC has announced an investment of $250 million in five years for its storage software solutions in Bangalore. Flextronics, the world's largest contract manufacturer of electronics products, will invest $100 million on a telecom hardware unit.
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BPO, KPO or LPO, the outsourcing story continues:
NASSCOM, the 900 member industry body representative of India 's Information Technology companies, estimated that growth in India's BPO sector alone in 2005 would be around 40%, taking the IT-enabled services (ITeS) industry to $5.1 billion. The worldwide offshore BPO market is expected to grow to about $24 billion by 2007 of which India is expected to earn about $13.8 billion. |
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NASSCOM-McKinsey Report-2005—$60 billion to be offshored to India in 2010:
NASSCOM-McKinsey report-2005 suggests that the total addressable market for global offshoring is approximately $300 billion, of which $110 billion will be offshored by 2010. India has the potential to capture more than 50% of this opportunity and generate export revenues of approximately $60 billion by growing at 25% year-on-year till 2010. The report says that the offshore IT solutions business will grow at 25% to touch $35 billion in export revenues, and the BPO business will achieve a CAGR of 37% to account for $25 billion of the projected total $60 billion. Apart of that, the domestic market and product technology business will together account for another $20 billion by 2010. |
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It’s Not Only McKinsey:
A.T. Kearney's FDI Confidence Index survey has concluded that the Indian offshoring business, dominated so far by contact centres and IT services assignments, is likely to see more business in research and development and engineering, along with business process assignments. The survey finds that global firms have comprehensively voted in favour of offshoring assignments to India over other emerging destinations such as Eastern Europe and China during the next three years. In the survey that researched executives from the world's largest companies:
- 14% plan to outsource the entire business process, including human resource and finance assignments
- 10% planned to outsource R&D and engineering functions to India
- 40% CEOs indicated that they would be likely make R&D investments in India and Chine over the next three years
- 51% of the firms that are already off-shoring business functions said the work was up to their expectation, while 9% said it exceeded expectation. Only 17% said that it was below expectation.
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Multi-million Dollar orders:
Indian IT companies are now competing with global leaders like EDS, IBM, Accenture and HP to get the large-size outsourcing deals. The typical deal size for Indian company had been $20 million - $30 million so far, but the year 2005 saw the Indian companies (at least the top companies) to compete in the big league. In the $2.2 billion 5-year outsourcing deal of Dutch bank ABM Amro, 3 Indian companies TCS ($260 million), Infosys ($150 million) and Patni Computer shared the pie with IBM and Accenture. Till the AMN Amro deal, the biggest deal for Indian companies was the $100 million dollar General Electric-TCS contract.
For the mega IT outsourcing contract of General Motors (GM) that is expected to be finalized by first or second quarter of the calendar year 2006, all the top four Indian IT services companies TCS, Infosys, Wipro and Satyam are in the fray to compete with EDS, IBM, Accenture and HP.
- ABN Amro's $2.2 billion Deal in September 2005:
- TCS was awarded $260 million deal
- Infosys got $150 million chunk
- Patni Computer among the five selected vendors
- TCS bagged a $847 million back office outsourcing from British insurance and pension firm Pearl Group spread over 12 years (October 2005)
- HCL Technologies won a $50-100 million contract with CAD major Autodesk (November 2005)
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India itself is a big domestic market now:
Global market research firm IDC has predicted that the growth story would continue in 2006 keeping `the fastest growing IT market in AP region' crown for India, intact. IDC said that the Indian domestic IT market was estimated to grow at 19% over 2005.
A recent Business Standard report quoted unnamed government officials saying that Together, domestic production revenues of the IT and electronics sector are estimated to grow by 29% to $42 billion (Rs. 190,000 crore) in the financial year ending March 2006.
Manufacturers Association of Information Technology (MAIT), the hardware industry body of India, has estimated the calendar year 2005 sales at about 4.5 million, up 23% from 3.6 million in 2004.
For the year 2006, Gartner has forecasted desktop PC and notebook sales in India at 6.8 million units registering 41% year-on-year growth.
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Potential threats for IT Services and BPO industry:
NASSCOM-McKinsey report has suggested that offshore IT solutions business and the BPO business could contribute 1% per year to GDP growth, directly employ approximately 2.3 million people and provide indirect employment to another 6.5 million workers by 2010. But, the report says that supply projections indicate a potential shortfall of nearly 0.5 million qualified employees. A recent report by market research firm Gartner, Inc. also cautioned that a labour crunch and rising wages could spoil the party, eroding as much as 45% of India's market share by 2007. The skills and quality of the workforce need to be improved, since only 25% of technical graduates and 10%-15% of general college graduates are suitable for employment in the offshore IT and BPO industries respectively.
Emerging countries such as the Philippines, Malaysia, Vietnam and Eastern European nations including Hungary and Poland, are also starting to challenge India's leadership in offshore BPO. The emerging competition will also put pressure on margins. NASSCOM-McKinsey report suggests that companies must be able to continuously improve operational excellence, in addition to innovating and developing new service lines, to counter the pressure on margins.
Security to data, and to the employees has also become a major worry for the BPOs/KPOs. They need to take care that the security of their data and employees is not compromised; else their image could be impacted resulting in loss of business.
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