WHITE PAPER MNCs' ICT Strategies for the Emerging Economies: A Tactical Approach to Enhance Competitiveness in the Region Sponsored by: KDDI Corporation George Hoffman Akiko Kawakami March 2012 James Eibisch Melanie Posey IN THIS WHITE PAPER IDC Japan 3rd Floor, Hulic Kudan Building, 1-13-5 Kudankita, Chiyoda-ku, Tokyo 102-0073 P.81.3.3556.4760 The rapidly growing emerging and developing economies are presenting critical ICT challenges and opportunities for both regional and global multinational corporations (MNCs). MNCs establishing new production facilities in low-cost emerging and developing markets need to source, buildout, interconnect, and manage both corporate networks and related IT systems. In addition, in order to tap into the growing affluent local end-user markets, the need of MNCs to ensure the local access and backbone networks connecting end-users to their Web sites are running with low latency enabling top-quality user experiences leading to purchase. This White Paper draws on the results of recent end-user surveys of WAN managers in the United States; Europe, Middle East, and Africa (EMEA); and Asia/Pacific regions to provide insight into key ICT-related issues and strategies of MNCs expanding their business operations in emerging economies. In addition, this White Paper aims to present guidance and considerations for MNCs when selecting networks and technologies, as well as service providers to build out and manage their ICT infrastructure and environment. SITUATION OVERVIEW The following sections provide a summary of the economic outlook of the emerging and developing economies, analysis of the MNC's ICT demand trends, and service provider selection strategies based on IDC research. Robust Growth of the Emerging and Developing Economies Drives MNC ICT Investments Following the economic crisis between 2008 and 2009, the emerging and developing economies have been the main impetus for growth of the global economy. According to the Worldwide Economic Outlook April 2011 published by the International Monetary Fund (IMF), the demand in many emerging and developing economies has experienced a strong rebound and is showing robust and sustainable growth. In addition, output has reached precrisis levels, suggesting the recovery is complete and the expansion under way. According to the IMF study, output for all emerging and developing economies has reached 2% above precrisis trends. In addition, the study forecasts the total gross domestic product (GDP) of the emerging and developing regions will account for 39.9% of the total by 2014, representing a 5.9 point increase from 2009.
In addition to the strong domestic demand, a major driver sustaining this economic growth is the robust capital flow into the emerging and developing regions. Figure 1 provides an overview of total IT spending trends in the emerging and developing markets between 2009 and 2013. While the Brazil, Russia, India and China (BRIC) regions will continue to lead the emerging and developing economies, IDC estimates IT spending trends in most developing economies will grow at double-digit rates during the forecast period. A major driver of IT spending in both the emerging and developing markets is the MNCs establishing or expanding production facilities and other business operations. FIGURE 1 Postcrisis Opportunities: BRIC, VISTA, and Others 180 160 24% 23% 25% US$ billions 140 120 100 80 60 15% 14% 20% 19% 12% 17% 14% 20% 16% 15% 10% 2013 IT spendng 2009 2013 CAGR 40 20 4% 4% 5% 0 0% Brazil Russia India China Vietnam Indonesia South Africa Turkey Argentina Mexico Poland Saudi Arabia Source: IDC's Worldwide Black Book, 3Q11 Understanding MNCs' ICT Challenges in Emerging and Developing Economies In order to remain competitive, MNCs of advanced economies and some from emerging economies are increasingly shifting their production operations to low-cost regions of developing markets. Drawing on the results of end-user surveys conducted in Japan, the EMEA region, and the United States, this section aims to provide insight regarding MNCs' ICT challenges, the technologies they are deploying, and factors that are important when choosing their service providers as they expand operations in emerging economies. According to a recently conducted survey on WAN managers of Japan MNCs regarding ICT challenges on their overseas offices, 28.4% out of a survey base of 829 companies had indicated that IT cost reduction was the most important factor or problem. Aside from this need, two of the three most important issues, as well as a 2 #202302 2012 IDC
number of others, referred to problems associated with the local access networks: MNCs are not able to source the network capacity they need (26.6%) and the quality of the local access networks is unreliable (22.1%). In addition, 17% of the survey base indicated they would like to deploy IT (teleconferencing services) to improve communications with the head office; however, the quality of such real-time based services will gravely depend on the quality and speed of the access network. Around 14.2% had indicated they would prefer to outsource IT altogether as they struggle to maintain and manage their ICT systems. As MNCs' operations grow in scale, geographic coverage, and complexity, IDC believes an increasing number of MNCs will choose this model, driving the demand for outsourcing and managed services. ICT outsourcing will also address, at least partially, issues regarding security policy enforcement and the lack of skilled IT staff at local offices. Adoption of Key Technologies by Multinational Corporations Similar trends are evident in other regions of the world, including EMEA. IDC conducts a survey of around 1,500 medium and large multisite companies in EMEA each year and Figures 2 5 show a selection of the results from the latest survey conducted by the end of 2011. The first result to note, as shown in Figure 2, is that enterprises in EMEA are enthusiastically adopting new technologies and services. Over half of companies, for example, are either currently using or are about to start using unified communications (UC) and immersive videoconferencing (telepresence) services. These services can provide some clear strategic benefits to enterprises and IDC believes that their adoption is growing strongly because of benefits such as increased employee productivity, more efficient communications with customers and suppliers, quick decision making, and of course, significant cost savings. In addition, enterprises have to cope with a rapidly changing technology landscape and many are treating the switch from on-premises PBXs to hosted UC services; for example, as an opportunity to address issues such as the explosion of diversity in employee devices and growing demands from employees and customers for more flexible and expressive communications. Similar imperatives are driving the growth of cloud services. According to this survey, one-third of the companies in EMEA are currently using cloud infrastructure (infrastructure as a service [IaaS]) or software (software as a service [SaaS]). This is an extremely high adoption rate, given that cloud services have only been in the mainstream for a short time, and indicates that companies are quick to recognize the benefits that cloud services can bring such as flexibility in deploying IT, self-service, and the cost efficiencies generated by the pay-as-you-go cloud billing model. With these benefits in evidence, as well as the ways in which equipment manufacturers and service providers are developing their portfolios, IDC believes that services and ICT consumption models such as UC and cloud will become the norm over time, as opposed to a novel alternative. 2012 IDC #202302 3
FIGURE 2 Usage of ICT technology Source: IDC EMEA WAN Manager Survey, 2011 In addition to telepresence, we asked companies about their use of other forms of videoconferencing. Figure 3 shows the most popular form of videoconferencing at present is hosted and Web-based services such as WebEx and Live Meeting, and they are expected to remain the most popular choice over the medium term. They are simple to set up and use, flexible at a low cost, and are perfectly adequate for other needs. For higher quality or for more formal occasions, many companies retain a traditional room-based videoconferencing system. The numbers of companies that choose to manage in-house systems as opposed to using a third-party service reflects the long-standing division between in-house IT management and outsourcing, as a consistent result of IDC's surveys. 4 #202302 2012 IDC
FIGURE 3 Deployment Model of Videoconferencing n = 1,450 Source: IDC EMEA WAN Manager Survey, 2011 Multinational Corporation's Selection Criteria for Network Service Providers As indicated in the abovementioned WAN manager survey, reducing IT-related costs is the top concern for Japan MNCs and this finding was reflected in the survey of EMEA companies. Figure 4 shows the characteristics of network service providers that companies put in their top 3 criteria when selecting a new provider. As would be expected, pricing is among the top 3 criteria for most, but by no means all, companies. Of particular importance are also quality of service (QoS) and support (an area that customers have been particularly critical of in the past, and in which IDC has seen network providers make visible improvements in recent years) and geographical coverage (reflecting the increasing globalization of companies of all sizes). 2012 IDC #202302 5
FIGURE 4 Criteria to Select Network Service Provider n = 1,450 Source: IDC EMEA WAN Manager Survey, 2011 Preference for Telco to Use Cloud Services In Figure 2 above, we saw that around a third of medium and large companies in EMEA are currently using a cloud infrastructure or software service. We asked those companies, as well as companies that are planning to use cloud services in the next year, whether they would be more or less likely to buy cloud services from network service providers than from other types of provider (e.g., specialist cloud providers or traditional IT services companies). Responses varied according to types of cloud services. For cloud-based communications (e.g., UC provided as a cloud service) and desktop services (i.e., desktop virtualization), companies are likely to use a network provider as any other type of provider. However, network providers are clearly the most popular choice for cloud infrastructure (cloud-based servers and storage). On the other hand, they are currently less likely to be chosen for cloud SaaS. Telcos and carriers are clearly expert at providing infrastructure services and are recognized as capable of higher level services such as value-added communications applications and desktop management. IDC believes they will also be seen strong contenders for cloud software services, driven by the convergence of networks and IT. As the telcos and carriers expand their expertise beyond commodity services and move further up the cloud stack, they will be able to bring in particular strengths to the 6 #202302 2012 IDC
cloud market such as reliability, secure networks, and considerable experience in utility-style service delivery and billing. FIGURE 5 Preference for Telco to Use Cloud Services n = 746 Source: IDC EMEA WAN Manager Survey, 2011 Strategic Importance of Web-Based Applications Delivery (Targeting End-Users in Emerging Markets) In addition to providing a base for low-cost manufacturing, with their rising GDP levels, the emerging and developing economies represent new market opportunities for MNCs. To that end, the Web is an essential tool for MNCs to reach these new target segments. However, the Web's performance is the critical factor. In order to effectively increase their presence and subsequently their business volume in the emerging and developing economies, the MNCs need to make sure the performance of their Web sites and Web-based applications are fast and reliable, leading to high customer experience. In order to achieve this, the quality and performance of the backbone network becomes key. According to the U.S. WAN Manager Survey 2011 (see Figure 6), 33% of the 405 MNCs responded they are currently using either WAN application or WAN optimization solutions. This percentage increased significantly to 82% when MNCs "planning to use within 1 year" were included. When asked about the reasons for implementing either solution, 49.2% of the MNCs responded they wanted to improve the performance of applications over the WAN. This was the most important reason identified, more than to "reduce bandwidth costs" at 37.9%. Furthermore, over 30% of the respondents had indicated both "accelerate electronic software delivery/downloads" and "accelerate end user's access to public Web sites" were important. This is indicative of the strong need to improve and enhance the customers' experience at their Web sites. 2012 IDC #202302 7
FIGURE 6 Reasons to Use WAN Optimization or WAN Application Acceleration n = 132 Source: IDC U.S. WAN Manager Survey, 2011 KDDI Global ICT Strategy KDDI is a leading Asia/Pacific integrated service provider with a robust and highly reliable "five-9" backbone network with low latency and worldwide coverage. KDDI's global network and managed service offerings, which target MNCs, include the following: Resilient global backbone networks. KDDI owns high capacity global networks enabling lower costs for its customers, high availability, and faster delivery. The U.S.-Japan Unity cable provides 4.8Tbps capacity, while the SJC (Southeast Asia-Japan) cable (scheduled for service launch in 2013) will provide robust capacity of 17.6Tbps within the Asia region. In addition, KDDI has expanded the capacities of both its RJCN (Russia-Japan) and TEA (Transit-Europe-Asia) cables to 640Gbps, enabling the lowest latency route between Japan and Europe. 8 #202302 2012 IDC
Global VPN services. KDDI provides a broad range of business network services with global reach. KDDI's Global IP VPN service is available in over 170 countries. In addition, KDDI's Layer 2 Global Powered Ethernet service is available in major markets including the United States, United Kingdom, Germany, China, Hong Kong, Singapore, and Taiwan. According to IDC's Japan Global Telecommunications Services Business Trends Analysis 2010, the total global WAN Ethernet services market size in Japan had amounted to 2.74 billion yen in 2010. KDDI was the leading service provider with 64.5% market share. TELEHOUSE datacenters. KDDI is one of the pioneers in the datacenter services market and its TELEHOUSE brand is well recognized among major corporations in the United States and Europe markets. As of January 2012, the carrier had established 43 datacenters in 12 countries (total floor space over 222,000 sq m), mainly in strategic locations where MNCs are based. Application optimization. KDDI's application optimization service detects the traffic volume of individual applications running on the user's network and manages the quality of each application by setting QoS levels based on the individual application and level of importance. Cloud services. In December 2011, KDDI introduced its cloud-based IaaS and virtual server services in the United States and Singapore, and plans to expand its coverage to other key markets including United Kingdom and China. KDDI telepresence service. In November 2011, KDDI introduced its high quality, multilocation conferencing system based on Cisco's TelePresence Exchange System. KDDI was the first to introduce this service in the east Asia region. KDDI's Services Targeting Business-to-Business and Business-to- Consumer Mobile application development. Leveraging the explosive growth of the smartphone market in China, KDDI's Hong Kong based systems integration subsidiary DMX developed a mobile solution platform for SaaS based mobile services targeting companies in the Asia Pacific region. In July 2011, the company introduced a mobile phone based retail sales and inventory management system. Global content delivery network (CDN) service. In order to enhance its global Internet services' strategy, KDDI acquired CDN service provider in Korea, CDNetworks, in October 2011 and introduced its global content acceleration service in February 2012. Through CDNetworks and its cache servers distributed in 80 cities in 30 countries, coupled with KDDI's global IP backbone network, the carrier is able to provide global coverage. More importantly, KDDI is now the only global CDN service provider in China that owns and manages its point-ofpresence (PoPs) and operations units. In addition, as shown in Figure 7, KDDI offers servers in a hosted and cloud model, which provides significant cost savings to the end user, in addition to its CDN service. One-stop support and system integration (SI) capabilities. KDDI has highly skilled local support personnel who are able to plan, install, and integrate local ICT systems, as well as develop security strategies and manage LAN and WAN environments. In addition, KDDI is able to provide local administrative support 2012 IDC #202302 9
needed when establishing or moving to new offices or production facilities. Administrative support services range from the procurement and setup of PCs and printers to arranging drivers for local transportation. FIGURE 7 KDDI's Total Solution for Optimization of Web Delivery Source: KDDI, 2012 Enhanced Service Delivery Capabilities Established relationship with local and regional carriers. For over 50 years KDDI has been building on its relationships with local and regional carriers to enable faster and reliable service. KDDI is the only Japan carrier that has been a member of the Pacific Partners since its inception and continues work with its partners on issues such as QoS, interconnectivity, technical support, and measures against wide-scale failure. Investing in its infrastructure. For more than 5 years, the number of networks KDDI has deployed in China has continued to grow at double-digit rates. In addition, network delivery delays have dropped from over 20% in 2005 to nearly nothing today. In order to quickly address local access network issues in China, KDDI has increased the number of local experts at its operations center in Tokyo, as well as in its Beijing, Shanghai, and Guangzhou offices. The carrier regularly conducts meetings with its local partners to review recent network enhancement activities and as a result, service availability has improved reaching 99.99%. 10 #202302 2012 IDC
Strategic investment in China. Through its acquisition of CDNetworks, KDDI is now the only global CDN service provider with its own PoPs and operations units in China, enabling significantly faster response times compared with competing CDN service providers. CHALLENGES AND OPPORTUNITIES Challenges KDDI has been able to successfully build brand awareness for its TELEHOUSE datacenters; however, the general awareness of KDDI remains low. In general, when MNCs procure services for international WAN connectivity or managed services, they tend to issue Request for Proposal(RFP)s to carriers with which they have existing relationships with, or those with strong brand recognition. In order to effectively increase its awareness among the MNCs, KDDI should plan and organize activities targeting C-level executives and conduct aggressive marketing campaigns targeting end users in strategic geographies and market segments. KDDI's backbone networks cover an extensive geographic territory; however, network coverage including CDNetworks is largely focused on Asia/Pacific, with PoPs mainly distributed throughout the Asia/Pacific region. KDDI's robust coverage in Asia is a significant strength for targeting MNCs expanding in the Asia/Pacific region. Notwithstanding, strategies to address the lack of "on-net" coverage in other key growth regions such as Latin America and Africa needs to be defined. According to the results of the previously mentioned end-user surveys, MNCs are more inclined to adopt cloud IaaS provided by telcos and in order to address this demand, KDDI's cloud strategy needs to be defined clearly. Presently, the carrier provides a lineup of cloud virtual server services and a range of "Telecloud" services. In contrast, the cloud branding strategies of competing service providers appear more comprehensive and organized. Cloud services are provided globally from centralized mega-datacenters and service providers continue to invest heavily into both the network infrastructure and service development. Opportunities One of the key market segments that MNCs are targeting is the increasingly affluent end-user market in China; and the strategic channel that MNCs employ to reach this user base is the Web. Unfortunately, the quality of the Internet in China is often unreliable, which can make accessing the MNC's Web site an unnecessarily frustrating experience. This issue is mainly due to the poor interoperability between two major ISPs in China: China Telecom and China Unicom. A possible solution to this problem is the use of CDN services. The quality of CDN services is largely dependent on the number of CDN PoPs deployed in China. As noted earlier, KDDI is the only global CDN service provider with a large number of PoPs and operations units within China's borders. The use of such a CDN service is likely to provide improved performance for MNCs and enhanced customer experience for end users. Organizing and setting up new offices and production facilities in emerging and developing economies is a daunting and time-consuming endeavor. IDC believes KDDI's one-stop support service, which includes local support to deploy and manage the end user's ICT environment and provide logistic and administrative support is an important differentiator for MNCs needing to establish their businesses quickly. 2012 IDC #202302 11
CONCLUSION In order to increase competitiveness and search new opportunities, MNCs are accelerating expansion into emerging and developing economies. Needless to say, the environment in these markets, such as regulations, social infrastructure (i.e. utilities, roads), and ICT-related issues (i.e. market structure, business practices) vary significantly from one country to another. As such, it is important for the MNCs to accurately select ICT partners that they can trust and rely on in order to establish and grow in these regions. According to our survey results, when MNCs select service providers, "QoS and support" is the second most-important factor following "pricing." QoS and support includes factors such as the carrier's backbone network capacity and the number of PoPs (for network coverage), or it may refer to the distance between the end user's site and the datacenter or server (for cloud services). In most emerging and developing economies today, the network infrastructure is often inadequate, with unreliable local access. In order to best address this network quality issue, on-going cooperation between the international service provider and the local access provider is critical. As such, it is important for MNCs to clearly understand the relationship between global and local service providers, and what measures have been put in place to monitor and manage service quality and support. Last, as previously mentioned, regulations and local business practices vary significantly depending on the country. MNCs will need to handle numerous administrative and IT-related tasks when setting up shop, including but not limited to choosing and negotiating with local service providers and IT vendors, consulting with regulators and lawyers, and deal with office and building management companies. In order to efficiently and effectively manage the numerous tasks involved with setting up operations in the emerging and developing markets, IDC believes it is worth exploring the prepackaged local support outsourcing services provided by potential ICT partners. Copyright Notice External Publication of IDC Information and Data Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason. Copyright 2012 IDC. Reproduction without written permission is completely forbidden. 12 #202302 2012 IDC