As 2013 begins, the Indian IT services companies can perhaps look back with some degree of satisfaction at 2012, at least as far as the European markets are concerned. For the market leader Tata Consultancy Services, the quarter ended September 2012 was very strong and while Infosys was still suffering and churning out an under-par performance, HCL Technologies has emerged with surprisingly strong results throughout the year, making it a strong challenger for the position currently occupied by Infosys and Wipro as the number three and number four players in the Indian IT services market, behind TCS and Cognizant Technologies.
For all the companies, one of the key markets impacting their performance was Europe and unlike the predictions in 2011, the economic crisis in the Eurozone did not translate into a drought of business for the Indians. It turned a positive factor, instead. Even markets such as Germany or France, that have traditionally been more reluctant towards offshoring, there are signs of opening up to the idea of outsourcing IT services to India as a way to keep their costs under control and gaining greater flexibility in light of the increasingly volatile markets in the Eurozone and beyond.
And not surprisingly, the last quarter of 2012 has seen a fair bit of activity by the Indian Information Technology services companies in continental Europe, notably the DACH countries. It began with Infosys, the third largest player that has been going through a rough patch since 2010, acquired Zurich-based Lodestone for $350 mn. Lodestone brings more than 200 clients across industries including manufacturing, automotive and life sciences, to the Infosys pool of over 700 clients. Post-acquisition, the combined consulting practice focusing on SAP programmes will deliver revenues of more than $1 billion, firmly establishing Infosys amongst the global leaders in SAP consulting. And last week, Cognizant, the number two player, announced its own deal, the acquisition of six IT consulting and services firms belonging to the Hamburg-based C1 Group, with a focus on manufacturing and logistics, energy and utlilities, and financial services. The acquisition strengthens Cognizant’s presence in Europe, giving it a bigger footprint in Germany and Switzerland.
The trend of accepting offshoring in Europe is expected to become stronger and more widespread in 2013 as the year looks set to be the worst period for the Eurozone since the crisis began in 2008 and hence pushing businesses throughout the zone to take more drastic measures to stay afloat. Most Indian IT companies seem to have understood this reality and are trying to come up with strategies and ideas to capture this new business that promises to shore them up even while the US economy begins to come back on rails.
Of the three key European markets – Germany, France and the UK – the best growth opportunities exist in the first two countries. The UK already contributes significantly to the overall revenue base for most Indian IT firms. It must be pointed out that the Indian firms continue to bag fairly good-sized deals from the public and private sector as well. Notable among these is the multi-year contract that TCS bagged from the UK government’s Home Office Department to manage the technology requirements of its newly-formed Disclosure and Barring Service (DBS). The value of the contract, with an initial tenure of five years, is worth nearly $230 mn and hence could make it one of the largest deals the company has bagged in Europe in recent years. Other players of varying sizes have also reported deals from this market.
Lured by these deals, for over three decades now, the Indian IT companies have been too focused on the US and the UK markets. But this has come at the expense of other equally promising markets, notably Germany and France in the European Union. The investments and focus put by the Indians in the UK are many times larger than the investments made in the other large economies of the EU. As the economic crisis has hit the world, the Indian IT has found their growth limited due to the over-dependence upon the two principal markets. Now, the growth opportunities for Indian IT service providers in the UK market do seem rather limited, simply from the perspective of the market penetration and saturation levels for the Indian companies. Moreover, the UK economy is headed for a another difficult year and the Conservative-led coalition government has been making strong noises about protecting British jobs and cracking down on immigration and even short-term employment visas. Hence, the Indians may struggle to maintain the share of business coming from the UK in their overall revenue stream in the year 2013.
Over the last five years or so, the Indian IT firms have begun to look more seriously at the opportunities in Germany and France, mainly in an attempt to hedge against the US and UK. Hence, the share of revenues from UK, as part of overall European revenues, has been declining since 2010, while continental Europe has been increasing its share. For instance, for TCS, continental Europe generated nearly $1 bn last year while UK accounted for $1.5 bn, narrowing the gap between the two markets.
Even if UK remains for Indian IT players key in their revenues (more than 50% in Europe), in PAC’s point of view, in future, the real growth opportunities for the Indian players lie in Germany and France. While Germany is already becoming a sizeable market, with several companies raising nearly 5-6 percent of their total revenues from EU’s largest economy, France is still way behind and accounts for around 0.5-0.75 percent of the total revenues and hence they can potentially increase the revenues from Germany and France several times the current levels. What is needed for both the countries is a better strategy, coupled with appropriate investments and the right local talent which can really swing the market for the Indian players. The acquisitions made by Cognizant, Infosys and HCL clearly point towards this trend as through the acquisitions, these companies gain immediately a bit of all the three elements currently missing from their portfolio.
Among the key sectors where Indians are strong are manufacturing (strongest vertical for Wipro and Infosys) and financial services (HCL). Compared to the market size, all Indian IT players are also very well positioned in Telco and Retail.
To advance in both Germany and France, for the Indian players, acquisition remains one good way to gain traction and market share in the Eurozone and they are taking the steps, albeit still rather slowly. This may just be the start of the buying season for the Indian IT and we can reasonably expect to see more deals in the year 2013.