2008-09-25 03:19:02 -
India Information Technology Report Q3 2008 - a new market research report on http://www.companiesandmarkets.com www.companiesandmarkets.com/Summary-Market-Report/India-Informat ..
The Indian IT market is projected by BMI to reach a value of around US$11.8bn by 2012, growing at a CAGR of at least 13% over the 2007-2012 forecast period. Despite the likelihood that India’s economic growth will continue to moderate, falling PC prices, continued investment in the IT-BPO industry, and the large number of first
time PC buyers will make India a key market for vendors. Notebook sales will power PC growth, as domestic and global vendors seek to penetrate lower-income segments, smaller and medium businesses and new geographic regions. Many first time buyers are now purchasing notebooks.
The potential of India’s IT market is plain: less than 2% of people in India own a computer, about one-fifth of the level in China, meaning particular potential in the lower-end product range. Significantly, 45% of India’s population is under 25, which should boost PC and IT usage. Despite potential difficulties, including regional imbalances, low incomes and a possible demand slowdown, India should therefore confirm its potential as a key emerging market over the forecast period. However, there are a number of other risks to our fast growth scenario. India’s legal regime for patent protection remains flawed, measures to encourage the domestic hardware sector have had mixed results, and the important BPO sector faces a strong challenge from other markets, including China.
The federal government has taken recent action in some of these areas. Industry Developments The Finance Ministry has extended the tax holiday scheme for software companies by one year. The tax exemption had been due to expire in March 2009, and an extension was heavily lobbied for by the industry. The effective tax rate on export-oriented software companies of 8-10% would otherwise have risen about 10%. The extension particularly benefits these smaller software companies which can’t afford to relocate to Special Economic Zones. Meanwhile, the government plans to nurture the development of the IT-BPO industry by establishing a series of new IT institutes. Industry body Nasscom has submitted a ‘detailed project report’ to the Ministry of Human Resource Development concerning the establishing of twenty new Indian Institutes of Information Technology (IIT). According to Nasscom’s suggestion, each will be set up as a fully autonomous institution through a public-private partnership model.
Debate still continues over measures to stimulate the development of the hardware sector. According to the IT Manufacturers Association, India currently produces only 22mn PCs a year, as compared with over 100mn TVs. However, the government has claimed results for its range of incentives launched last year to promote chip manufacturing in India.
Competitive Landscape
HP is the leader in the PC market including PCs and notebooks. Local giant HCL takes second place thanks largely to its strong performance in desktops. HP’s desktop strength is mainly in the consumer retail segment, while HCL does better in the business segment. Chinese vendor Lenovo is third overall, with around 10% of the market. Much of the growth is now fuelled by notebooks. Vendor attention is particularly on the lower end of the market. Vendors are also entering the low-price ultra portable PC market, which is seen has having great potential with certain demographics.
HP and Dell are both scheduled to launch ultra portables in 2008, both priced at below US$500. HCL has been promoting its MiLeap laptops, which are priced at INR13,990 upwards. Moving to services, and one trend is that the Indian IT Service giants are now paying much more attention to the domestic market. Recently Infosys set up a division aimed solely at Indian customers. For the moment India constitutes only 3% of revenues, but Infosys wants to increase that to 5% in the near future. For its part, Tata plans to add 30,000-50,000 employees this year.
Computer Sales
According to BMI figures, sales in India’s hardware market will be worth around US$7.3bn in 2007, up from an estimated US$6.5bn in 2007, with expected tax breaks and subsidies for hardware manufacturers expected to support growth. In the first half of fiscal 2007-2008, notebooks were the main driver of growth according to industry association MAIT (Manufacturer’s Association of Information Technology). Key segments such as government, telecoms, financial services and education played an important role. Big company sales were less than expected, but this was compensated for by strong demand from smaller and medium businesses.
BMI predicts the CAGR for the hardware sector as a whole will be around 11% between 2007 and 2012, with unit sales showing strong growth. The average price of a PC has nearly halved over the past few years to less than US$250. Desktops will still account for more than 80% of unit sales, a higher ratio than for many countries in the region. Combined shipments of desktops and notebooks have now comfortably exceeded the 5mn mark. Investments of more than US$18bn in hardware manufacturing in India (including telecoms hardware) have stoked expectations of a hardware boom. However, a high tax regime means that around 25% of the retail price of an average computer goes to the government, and there are fears that this may delay growth. Moreover, it will be difficult for India to catch up with Taiwan and mainland China, given the strong lead these two territories have.
Software
Combined software and service CAGR for 2007-2012 is expected to be in the region of 15%. In recent years the SMB market in India for hardware deployment has been growing, and this is now resulting in an increasing opportunity for applications. More demand for solutions and hardware is now coming from second and third tier cities. Industry reforms and privatisations, government regulations, and new global competition have encouraged SMBs to use more technology. These firms are likely to become more sophisticated in their demand for customised software and applications to increase business flexibility. A second major driver is the emergence of India as a global centre for outsourcing, with large US and European companies focusing on offshore software development to lower costs. Several sectors are leading the way in this respect, including auto ancillaries and pharmaceuticals.
The tax free status of software firms, which has done much to fuel local sector performance, has recently received a one year extension. In August 2007 the first IPR (intellectual property rights) court opened in Karnataka. The new court has been taken as a sign that the issue of illegal software is becoming a more central policy issue for the government.
Services
Domestic company demand for IT services is increasing rapidly and project sizes are increasing. This was demonstrated in 2007 by contracts such as HP’s seven year outsourcing tender in India with United India Insurance, and by the deal by which Idea Cellular agreed to outsource IT infrastructure and other services to IBM. The Idea deal, which is for ten years and also covers billing and customer management, has a reported value of up to US$80mn. This indicates that average project size, typically below the US$1mn mark, is now increasing and this has resulted in several projects exceeding the US$100mn mark.
This trend is attracting domestic vendors like Infosys and TCS to pay more attention to their domestic market. The high spending Telecoms industry has particular opportunities for IT services vendors, with huge increases in capital expenditure budgeted by most service providers. Meanwhile, a recent report by industry association NASSCOM identified China as a major challenger to India’s dominance in the ITBPO market, but found that China was unlikely to catch up with India’s lead in any significant manner over the next three-to-five years.
E-Readiness
Broadband subscriber numbers are consistently falling behind target in India, with only 3.5mn subscribers by the end of 2007, according to BMI figures. The main reason for the slow uptake is thought to be insufficient demand, although the government has taken some measures to reduce tariffs and encourage alternative forms of service provision. One brake on PC penetration is a poor dial-up internet home user experience, even in cities. If this is to change, the government must take the initiative in improving bandwidth availability.
Government plans to encourage WiMax network deployment may have some impact on penetration. Broadband subscribers are currently expected to exceed 48mn by 2012, while the number of internet subscribers will rise above 460mn within the same period. E-Government Some 26 e-government projects are planned to be implemented over the 2006-2010 period, as part of a national e-government plan. The estimated budget for these is INR23,000. The plan will be implemented at central-, state- and local-government levels. Most of the twenty-six so-called Mission Mode Projects (MMPs) will use a public-private partnership (PPP) model. One central initiative will see the construction of one lakh common service centres, providing access to frequently sought information such as birth certificates. During 2007, land records, income tax and excise departments were computerised.
Key Issues For Investors
Despite a cheap and well-educated workforce, India’s business environment is impeded by excessive government regulation. Foreign-equity holdings remain restricted in many sectors. Hiring-and-firing procedures, meanwhile, are governed by rigid labour laws under which companies employing more than 100 people need the permission of the local chief minister to lay off workers. Other concerns include the 670-odd industries reserved for small-scale producers; high import tariffs levied on foreign-made goods; failing infrastructure, and above all poor power supplies; and a corrupt bureaucracy needed to approve ‘permits’ for even the most routine tasks. India is now fast-tracking the creation of South East Asian-style ‘special economic zones’ (or SEZs) aimed at tackling some of these bottlenecks.
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