2006 JETRO Bangladesh Seminar

2006 JETRO Bangladesh Seminar The Strategic Approach to tojapanese IT ITOutsourcing Market Trend of ofoffshore Software Development in injapan and Challenge to tojapanese IT ITmarket December. 2006 TM Consulting Mamoru TSUDA 1

Table of Contents 1. Japanese IT Service Market 2. Trend of Offshore IT Outsourcing in Japan 3. Lessons from Experienced Projects 4. Challenge to Japanese IT Market 5. Recommendation 2

1. Japanese IT Service Market 1) IT Service Market in Japan Total Sales: 16,000 K\ 14,000 No of Workers 600,000 500,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1991 Total Sales(K\) No of Workers 1993 1995 1997 Source:METI 2005 Total Sales(2004) 1999 2001 2003 2005 => 14,555,500 MJ (132,323 Mus$) No. of Workers: => 573,000 400,000 300,000 200,000 100,000 0 Year Comparison with another industry industry(year) IT Service (2004) Texistyle (2000) Steel (2003) Automobile (2002) Electric & Electronics (2004) Total sales (M ) 1,455 810 1,200 4,320 4,500 No. of Workers 573,000 680,000 210,000 719,000 1960,000 3

1. Japanese IT Service Market 2) Worldwide Market Share of Japanese IT Service Industry - USA:40.2% - JAPAN:13.3% Others 20.2% USA 40.2% Netherlands 1.4% Korea 1.7% Canada 2.5% FRANCE 4.3% UK 5.5% Germany 5.7% Japan 13.3% Italy 3.1% CHINA 3.1% Source:WITMA(Digital Planet 2004) 4

1. Japanese IT Service Market 3)Japanese IT service Market World's Second-largest Market Total sales (2005):: 14,555,500 MJ -Customized software 6,839,700M J (46.3%) -Software product 1374100 MJ (9.44%) High Quality High Productivity Excellent process control Advanced software development power 5

1. Japanese IT Service Market 4)Occupation Category in IT Service Industry Researcher Researcher 1% 1% sales sales / / Mnagement Mnagement 17% 17% Others Others 16% 16% Programmer Programmer 21% 21% Systems Systems Engineer Engineer 45% 45% Source:JISA 2005 6

1. Japanese IT Service Market 5) Structure of Japanese IT Service Market 13% 19% 2% 2% 8% 9.4% 46.3% Total Sales(2004) : 14,555,500 MJ (132,323 Mus$) /110J Customized Software Software Product IT Proccessing Sercvice System Management & Operation Database Service Various Research Others Software Development = Customized Software & Software Products : 55.7% =>73,704 Mus$ Source:METI 2005 7

1. Japanese IT Service Market 6) IT Service Industry IT ITService industry = Information service industry + Software Industry Information Service Industry -According to customer needs, provide the service of planning,designing, igning, constructing the information system and operate it. -Progressed as an agency industry of the data processing service using of large scale computer. -Has a role of business solution provider or infrastructure solution provider. Software Industry -Provide added values through the packaged product of software by using production and distribution scheme like manufacturer. -Embody the Functional parts model. -Has an industrial characteristic similar to the parts manufacturing industry -Expected to play a role of platform provider by tailoring a common on business basa to the platform. 8

1. Japanese IT Service Market 7) Importance of Embedded Software - Explosive Expansion of Embedded Software Market M us$ 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 132,323 73,762 24,818 Total Sales IT Service Total Software Development Embedded Software Software size built into Digital appliances(source code) -Mobile Phone:5,000 K lines -Car Navigator:3,000 -DVD Recorder:1,000 -TV: 600 Reference: - MS Windows 3.1 :3,000 - Windows 2000: 60,000 - Linux(Redhat):30,000 9

1. Japanese IT Service Market 7) Importance of Embedded Software - Examples of embedded software: From Rice cocker to Space satellite Consumer electronics:rice cocker, Microwave oven, Air Conditioner, Refrigerator, TV, DVD Recorder, Digital Camera Entertainment: Game, Music instrument Personal equipment: Car navigator, PDA, Electronic dictionary Computer peripheral: Printer, Scanner, Disc, POS terminal Communication:Telephone, Mobile phone, Network Device [PBX,Router,Hub] Transportation: automobile, Aircraft, Ship, Railway car, Elevator/Escalator Industrial equipment: Plant equipment, Industrial Robot, Machine tool Medical equipment:sphygmomanometer, Electrocardiograph, CT scanner Aero space: Rocket, Space satellite 10

1. Japanese IT Service Market 7) Importance of Embedded Software -Scale of embedded software Windows 2000 60 M Linux(Redhat) 30 M Windows 3.1 3 M 11

1. Japanese IT Service Market 8) Characteristics of Japan s s IT Service Industry Characteristics of Japan s IT service industry - Centered on domestic market - High share of customized software development Special features of customized software development Short delivery times Detailed specifications are often not established at the start of a project There are often specification changes after the start of a project Demands concerning quality are rigorous Demands concerning price are rigorous Development takes place on a Japanese-language base Response of the software vendor in order to meet these needs - Builds relations of trust with the customer over a long time - Accumulates abundant work knowledge over a long time - Promotes development through close ties with cooperative companies 12

1. Japanese IT Service Market 9) Needs of Offshore Software Development in Japan Situation - Increasing of Personnel expenses in Japan - Challenging for Lower Development Cost - Constant Shortage of Software Engineers Offshore Software Development Important Factors Cost Technical Skill Language Skill ( Japanese ) Reliable Software Development Process of ISO9001, CMM/CMMI Business Customs Software Development Infrastructure Access from Japan 13

2.Trend of Offshore IT Outsourcing in Japan 1) Areas of Offshore IT Outsourcing 1 2 3 4 Area Software Development Business Processing Operation & Services Data Preparation Others Customized Software Embedded Software [Digital home appliances, Mobile phone, Industrial systems] Software Products [Application Package, Middle ware, Software tools] Software Conversion & Maintenance Business Process Operation [Accounting, Personal Affair, Sales Management] Call Center Data Transcriptions [Medical, Legal.] Engineering Drawing: CAD-CAM Operation [Plant, Machinery, Ship Building, Construction..] Making of Multimedia Contents Consulting, Research Category Note ; Excluded Entertainment : Animation, Game 14

2.Trend of Offshore IT Outsourcing in Japan 2) Offshore IT Outsourcing in Asia ASIA Pakistan India Nepal Korea Myanmar Chinese Taipei Bangladesh Thailand Malaysia Vietnam Sri Lanka Mongolia China Singapore Indonesia Philippines JAPAN USA EU Russia Easter Europe Hungary, Rumania) South Africa Ireland Israel Mexico Brazil Costa Rica Venezuela 15

2.Trend of Offshore IT Outsourcing in Japan 3) A History of Offshore IT Outsourcing in Japan 1st Step: Korea, Chinese Taipei - Similar Culture Background - Japanese Speaking Engineers - Lower Cost 4th Step: Vietnam, and Others - Expanding to Other Countries 3rd Step: China, India Software Development in Japanese Language Base - Japanese Language Ability - Partnership with a Japanese Firm - Preparation of Business Infrastructure 2nd Step: India, Philippines Software Development for Global Market [English Version] - Following American & European Offshore Outsourcing Movement - Talented and Well-educated Manpower - English Speaking Engineers - Lower Cost 1980~ 1990~ 2000~ 2010~ 16

2.Trend of Offshore IT Outsourcing in Japan 4) Experience of Overseas Transaction or Employment of Foreign Engineers Total Samples : 251 Planning Depends on situation No plan N/A Total Yes 48% No 52% Direction 11(8.4) 64(48.9) 35(26.7) 21(16.0) 131(100.0) Expanding Depends on Situation Maintaining Decline/disusing N/A Total Direction 51(42.5) 45(37.5) 19(15.8) 1(0.8) 4(3.4) 120(100.0) Source : A Survey of Overseas Transactions and Employment of Foreigners in Japan. July 2004 (JEITA,JPSA,JISA) 17

2.Trend of Offshore IT Outsourcing in Japan 5) Required Technology & Skill No 1 2 3 4 5 6 7 8 9 Java C/C++ Project Management Project Administration Network Technology Security Control Others N/A Technology & Skill Communication Language [Japanese, English ] No. of Firm 53 39 36 28 25 Note: Results of 120 Firms [Plural choice up to 3] 19 11 27 6 Source : A Survey of Overseas Transactions and Employment of Foreigners in Japan. July 2004 (JEITA,JPSA,JISA) 18

2.Trend of Offshore Software Development in Japan 6) Promising Countries & Regions for Offshore Development No 1 2 3 4 5 6 7 8 9 10 China India Korea Vietnam Chinese Taipei USA Hong Kong Thailand Singapore Philippines Country No. of Firm 173 76 64 34 20 Note : Results of 251 Firms [Plural choice up to 3] 15 10 6 5 4 Russia Myanmar Canada Mongolia New Zealand Malaysia Australia Israel, Germany Pakistan Others Source : A Survey of Overseas Transactions and Employment of Foreigners in Japan. July 2004 (JEITA,JPSA,JISA) 19

2.Trend of Offshore Software Development in Japan 7) Issues on Overseas IT Outsourcing n/a 3 Others 5 No Issue 25 Price 3 Customer's understanding 9 Security 12 Getting Entry VISA 16 Engineer's Rgsignation 19 Quality 26 Cutting out of Offshore segment 39 Communication(Japanese) 48 0 10 20 30 40 50 60 Note : Results of 251 Firms [Plural choice up to 3] Source : A Survey of Overseas Transactions and Employment of Foreigners in Japan. July 2004 (JEITA,JPSA,JISA) % 20

2.Trend of Offshore Software Development in Japan 8) Expected Effect of Off-shoring Expansion of global bisiness 5% Others 5% High technology 22% Cost reduction 68% Source : A Survey of Overseas Transactions and Employment of Foreigners in Japan. July 2004 (JEITA,JPSA,JISA) 21

2.Trend of Offshore Software Development in Japan 9) India and China: Scale of the IT Service Industry and Exports 2003 25,000 INDIA 2003 Breakdown of Exports M us$ 20,000 Total Sales Export 19,439 Japan 2% Europe 21% Asia Pacific 6% Laien America 3% USA 68% 15,000 16,000 10,000 5,000 0 12,200 2,005 CHINA 2003 USA 12% Southeast Asia 21% Europe 6% Others 1% Japan 60% India China Source:Nikkei Computer NASCOM and Others 22

2.Trend of Offshore Software Development in Japan 10) India and China: Offshore Software Development Sources for Japan Based on 2003 Total Sales [M us$] Total Export [M us$] No. of Software Firm No. of CMMI 5 obtained Firm No. of IT Professionals English Speaking Engineer Japanese Speaking Engineers No. of applicants for Japanese language exam. Level 1 India 16,000 12,200 Over 3,300 73 650,000 All Not so many 143 China 19,439 2,005 Over 10,000 12 400,000 Many Many 31,698 JAPAN 132,323 89 5,500 9 573,000 - - - No. of Students in Japan [Share %] Major Export country [Share %] 243 [0.3%] USA [68%] 58,533 [61%] JAPAN [60%] - - Source:Nikkei Computer NASCOM and Others 23

2.Trend of Offshore Software Development in Japan 11) Reasons for China s s Success in Japan-Bound Offshore Development 1. Development on Japanese-language base 2. East-Asian similar cultural zone 3. Access from Japan 4. Abundant human resources with higher academic backgrounds 5. Lower costs 24

3. Lessons from Experienced Projects 1) What are the results? - Issues lying in the shadows of the many success stories Not completed on time Delayed delivery Stop in project due to sudden resignation of engineers Finished product differs from expectations Mixing of wrong function Poor quality Unsuitable to practical use and has to be remade Finished but no economical merits Much re-doing work and more expenses More additional explanations and reviews that scheduled consumed time and expenses. 25

3. Lessons from Experienced Projects 2) Issues to be resolved on offshore vendor 1. Different recognition on quality and delivery time between Japan and offshore vendor 2. Resignation of engineers in charge on the offshore vendor 3. Inclusion of wrong elements in the program through the arbitrary interpretation of unclear specification 4. Weakness of project management capability 5. Inadequate Japanese-language proficiency 6. Technical competence 26

3. Lessons from Experienced Projects 3) Issues to be resolved on the Japanese side 1. Unclear specifications 2. Differences in software development process 3. Poor Management on offshore development process 4. Attention focused on price only (Wrong selection of offshore vendor) 5. Additional costs on offshore development 6. Understanding of language differences 7. Replacing of project manager on the Japanese side, leading to confusion as the continuance of technology could not be maintained 27

4.Challenge to Japanese IT Market 1) A Offshore Development Trend of Major Japanese IT vendors Company Name NEC Fujitsu Hitachi NRI [Nomura Research Institute] NTT DATA Hitachi Software Engineering TIS Total: 628(2005 2005) 2005 Est. 2004 Result 224 (197) 135 (92) 121 (77) 75 61 37 (19) 27 (18) 9 (8) Offshore Ratio:% 6 ~ 8 10 12 Source : Nikkei Computer 2005.5.30 Unit: 107 /$ 8 9 2 3 Unit: M us$ Share of China 80 Over 90 75 Over 90 98 85 80 28

4. Challenging to Japanese Market 2) Price competitiveness of Offshore Software Development 120 100 80 60 40 20 Relative Unit Price Some management cost and other cost should be added on the unit cost. 0 Japan Korea India China Vietnam 29

4.Challenge to Japanese IT Market 3)Wage level in each country in Asia Country(city) Worker Engineer Manager China(Shanghai) 109-218 269-601 567-1,574 China(Beijing) 79-139 121-266 314-1,382 China(Dalian) 96-129 171-224 380-579 Indonesia 133 229 608 India(New Delhi) 133-154 317-387 936-989 India(Munbai) n.a n.a n.a Malaysia 202 684 1,892 Mynmar 21-50 53-138 168-284 Phollipines(Manila) 170 255 619 Singapore 432-557 961-1,543 2,215-3,113 Sri Lanka 52-81 113-158 233-524 Thailand 184 327 790 Vietnam(Hanoi) 79-119 171-353 504-580 Vietnam(HCMC) 102-138 200-319 611-736 Bangladesh 40 121 360 Source:JETRO JETRO Sensor 2005.4 Unit:( (US $Month) 30

4.Challenge to Japanese IT Market 4)Japanese Language Proficiency Test 2004 (1Level 1~4 Total) 90,000 80,000 82,773 70,000 60,000 55,692 50,000 40,000 30,000 31,572 20,000 10,000 7,273 5,855 3,905 3,837 2,913 2,721 1,798 1,215 966 464 488 64 73 0 China Korea Chinese Taipei Thailand Indonesia Singapore India Malaysie Vietnam Myanmar Sri Lanka Phillipines Mongolia Nepal Pakistan Bangladesh 出 典 : 国 際 交 流 基 金 資 料 を 基 に 筆 者 が 作 成 Source: The Japan Foundation 31

4.Challenge to Japanese IT Market 5) Role and Required Skills of Bridge SEs degree of technical skill If assuming the role of field project manager, the following skills are necessary in addition to above Negotiation skills Project management skills Leadership Role To support two-way communication and accurately convey the specification demands, etc. of the Japanese side Required skills Japanese-language proficiency Understanding of Japanese ways of working and culture Communication skills A certain degree of work knowledge Project experience and a certain 32

4.Challenge to Japanese IT Market 6) Present Adaptability to Japanese Software Market China India Korea Philippines Vietnam IT Skills & Experience No. of Software Engineers Japanese Language Skill Cost Access from Japan Notes: :Excellent :Good :not enough 33

4.Challenge to Japanese IT Market 7) Target Area of Offshore Software Development Planning Development Operation & Maintenance Process IT Utilization Policy System Planning System Detail planning Definition of Requirement Basic Design Detail Design Programming Test Operation Maintenance Covered area of offshore development Current Future 34

4.Challenge to Japanese IT Market 8) Market Estimation of Offshore IT Outsourcing in Japan Results of 2003: Mus$ - China to Japan : 60% of 2,005 => 1,203 - India to Japan : 2% of 12,200 => 244 - Korea : 11,000M => 102 -Philippines: 4,000M => 37 - Others :? Estimated total : 1,586 =>1,600 Estimation of Japanese Offshore Market Japanese Software & IT Service Market : 132,323 Mus$ Customized Software & Software Products : 55.7% =73,704 Offshore Development Market 5 8 %? => 3,700 5,900 3,700 2.3~3.7 times 5,900 1 us$ =110 1,600 Data : 2004 Unit: M us$ 35

4.Challenge to Japanese IT Market 9) Key Factors to success Cost Software Engineering Technology Japanese Language Skill Project Management Adoption of a Japanese Software Development Method Mutual Communication Correspondence for Specifications Change Requests Quality Control & Management 36

5. Recommendation - Reinforcement of Offshore Development Business for Japan Japanese Market Estimation: Expecting Continuous Growth [ 1,600 M us$ 2.3~3.7 times ] - Building up a Long-term Partnership with Japanese Client - Improvement of Japanese Language Skill - Accumulation of the Development and Management Know-how Project & Quality Management Upbringing of Bridge SE (Japanese Speaking Engineer) Internal Education and On the Job Training 37

Thank you very much! Mamoru TSUDA @TM Consulting e-mail: mtsuda@mbc.nifty.commbc.nifty.com END 38