BMI's Executive Summary

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Market Overview

The Indian IT sector is expected to continue on an upwards path through 2008 and beyond driven not only by continued growth in offshoring, but also by a growing domestic market for hardware and solutions. The total size of the IT market is forecast by BMI to increase from US$11.8bn in 2007 to around US$21.7bn in 2012, with drivers including new tax incentives for hardware manufacturers, falling computer prices, and the government's ambitions to connect the vast rural areas to the outside world. However, there are a number of risks to our forecast scenario. India's legal regime for patent protection remains flawed, while measures to encourage the domestic hardware sector have had mixed results, and the important BPO sector faces a strong challenge from other market including China.

BMI forecasts IT-market CAGR during the next two years of our forecast period of 13%, compared with expected GDP growth of between 7%-8%. 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. Mindful of increasing global vendor interest, a number of federal and local government initiatives to encourage hardware production have been designed. Despite a number of 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.

Industry Developments

The government has proposed to roll out a new programme of IT Investment regions (ITIRs) as part of its plan to help the hardware sector. The proposed ITIRs will be modelled on Special Economic Zones (SEZs) and will offer a range of financial incentives to investors. The government estimates that consumption of hardware is currently about double the level of domestic production, and IT Investment regions are being seen as the answer to this problem. Each proposed investment region will have separate units for the IT enabled services (ITES) sector and Electronic Hardware Manufacturing Units (EHM) sections.

Meanwhile, the government is currently leading a major drive to attract investment to new regions, setting a national target of attracting US$40bn of investment into IT over the next three years. Several states are now competing to emerge as new 'IT hubs'. Kerala is one of those trying to catch up, with some major projects including a Smart City and 'Technopolis' IT Park. Gujarat, which was recently described by Union Science and Technology Minister Kapil Sibal as 'lacking' in the IT sector, has also been outlining several steps to catch up with IT leaders, pointing to strong government support. Meanwhile, Chennaistate is expecting to attract nearly US$8-10bn worth of investment in the IT sector over the next three years.

Competitive Landscape

Software vendors are pursuing the growing opportunity of the SMB segment by launching new business models. Microsoft recently released its Office Professional 2007 Prepaid Edition in India making it available on a six month subscription basis to the SMB segment, and has adopted the same approach with its Dynamics ERP suite. For its part IBM has launched its Express Advantage programme with a number of cross-industry solutions specially designed for SMBs. Meanwhile, Indian companies such as Hyderabad-based giant Satyam are also adopting similar easy payment schemes for smaller companies. Moving to services, domestic company demand for IT services is increasing rapidly. In 2007 HP won a seven year contract from United India Insurance to manage an IT solution to offer its products and services online. The INR100crore project will connect around 1,300 offices. In 2007 IBM also landed big deals such as the US$750mn 10-year contract as well as a US$620mn contract from mobile telecoms operator Ideal.

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. 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. HP is the market leader in all domestic market segments, ahead of local company HCL and Chinese giant Lenovo. Toshiba is a strong performer in the notebook segment. Other current drivers of PC penetration include the growing popularity of LCD/TFT monitors and other entertainment features and accessories. The mobile phone revolution has raised consumer aspirations, while earlier reforms of duties and tariffs helped to drive affordability.

Software

Combined software and service CAGR for 2007-2012 is expected to be in the region of 15%. The tax free status of software firms, which has done much to fuel local sector performance, is due to end in 2009 and industry analysts will be watching to see what impact this has. However, the IT Ministry is lobbying the Finance Ministry to extend the exemption for another ten years. Another issue is India's relatively inefficient legal protection system for patents. 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. Other states such as West Bengal are expected to follow Karnataka soon. With software piracy in India at around 72% the moves are a boost for foreign vendors of packaged software.

The local market is likely to sustain vendor investment, with small and medium firms becoming 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. 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 with India with United India Insurance, and by the deal by which Idea Cellular agreed to outsource IT infrastructure and other services to IBM. The deal, which is for ten years and also covers billing and customer management, has a reported value of up to US$80mn. The current trend is 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 being accompanied by a conscious move on the part of large players to migrate from just 'cost plus' advantage to that of value–added service provider. The high spending Telecoms industry has particular opportunities for IT services vendors, with huge increases in capital expenditure budgeted by most service providers. A recent report by industry association NASSCOM found that China was unlikely to catch up with India's lead in global IT outsourcing in any significant manner over the next 3-5 years.

E-Readiness

Broadband subscriber numbers are consistently falling behind target in India, with only 3.4mn subscribers by the end of 2007, according to BMI figures. The main reason for the slow uptake is thought to be insufficient demand and 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 improvingbandwidth availability. Government plans to encourage WiMax network deployment may have some impact on penetration. Broadband penetration is currently expected to exceed 40mn by 2011, while the number of internet subscribers will rise to more than 450mn within the same period.

Contents

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Chapter 1 - Executive Summary

Market Overview

Industry Developments

Competitive Landscape

Computer Sales

Software

Special Focus: Software Services

E-Readiness

Chapter 2 - SWOT Analysis

India IT Sector SWOT

India Business Environment SWOT

Key Issues For Investors:

Asia Regional IT Markets Overview

IT Penetration

Market Growth and Drivers

Sectors And Verticals

Chapter 3 - Market Overview

Government Authority

History And Market Structure

Table: Exports From India By Service Line

Hardware

Software

Services

End-User Analysis

Industry Developments

Chapter 4 - Industry Forecast Scenario

India IT Sector

Chapter 5 - Macroeconomic Forecast

Momentum Maintained (do we have anything more recent on file??)

Table: GDP And Population

Chapter 6 - Country Snapshot: India Demographic Data

Section 1: Population

Table: Demographic Indicators (2005)

Table: Rural/Urban Breakdown

Section 2: Education And Healthcare

Table: Education

Table: Healthcare: Vital Statistics

Table: Healthcare: Expenditure

Section 3: Labour Market And Spending Power

Table: Employment Indicators

Table: Consumption And Stratification

Table: Wages Per Annum

Chapter 7 - Competitive Landscape

Company Profiles

IBM India

Wipro (India)

Microsoft India

Chapter 8 - Tata Consultancy Services

Chapter 9 - How We Generate Our Industry Forecasts

BMI Forecast Modelling

IT Industry

Forecasts

Sources

Chapter 10 - Appendix: Regional Demographic Data

Table- Manufacturing Wages (ave per annum), US$

Table: Population

Household Spending Per Capita, US$

Private Consumption Per Capita, US$ PPP

Market Size, GDP, US$bn

Competitive Landscape for Asia Information Technology: Sample of  
Companies Ranked

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Company profiles, including SWOT (strengths, weaknesses, opportunities and threats) analyses, business activity, leading products and services. BMI forecasts for all headline macroeconomic indicators, including real GDP growth, inflation, fiscal balance, trade balance, current account and external debt. Company profiles and SWOT analyses covering competitive positioning; leading products, services and brands; annual sales and share of domestic hardware, software and components markets; headline financials and M&A; pan-regional expansion strategies and strategic partners. Companies covered include:

Network of Information Technology Sources

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BMI's Asian Telecommunications Reports are based on an extensive network of multilateral organisations, government departments, IT industry associations, chambers of commerce and company reports. Information sources include: