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Software: Europe beckons - Views on News from Equitymaster
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  • Sep 6, 2002

    Software: Europe beckons

    For a long time the domestic software industry has derived over 65% of its export revenues from the US markets. The optimism generated by the GDP growth seen in 1Q has died down and post the new set of economic numbers that have come out, there are now fears about the possibility of a double dip recession. With sales slowing down due to the uncertain economic environment, domestic software companies have been forced to increase their selling efforts in other markets like Europe, Japan and the Latin American countries.

    According to Business Software Alliance (BSA) a leading European software consultancy, the western European software market is expected to grow to US$ 119 bn (Rs 5,786 bn) in 2005 from US$ 58 bn (Rs 2,803 bn) in 2000 an aggregate yearly growth rate of 14%. Indian software exports to the European region have been growing at a faster rate than those to the US. The compounded annual growth rate (CAGR) in software exports to the European region in the past three years (FY00 to FY02) has been 18% compared to 11% for the US markets. Consequently, Europe’s share of total exports has been steadily inching up. Of course, it has to be taken into consideration that the base is much lower. Thus, the opportunity in Europe is immense.

    Demand drivers of the European software industry remain strong. European software services demand originates mainly from demand for CRM and ERP packages. Another segment, which holds a lot of potential, is the area of E-Government initiatives at national and EU level to improve services and reduce bureaucracy costs. Wipro, Infosys and Mastek have taken the initiative to reach out to the European markets and have established a noticeable presence in these markets. For example, Thames Water, the largest water and wastewater service provider in UK, recently announced that it had selected Wipro Technologies as a key strategic outsourcing partner for application development, support and maintenance of its applications. Infosys recently won an assignment for the UK-based National Health Services to help focus on information and service aggregation, aimed at reducing transaction costs.

    Company Exports to Europe as a
    % of total export
    Mastek 63%
    Infosys 20%
    Wipro 36%
    Satyam 12%

    * Revenues from Wipro Technologies only

    While Indian software companies have already established a toehold in the European markets, they need to move fast as competition from European IT companies who are expanding their offshore centers is increasing. Europeans have traditionally been quality conscious and hence, it becomes imperative that the domestic companies project more of their quality aspects. A hindrance that Indian companies could face is the fact that historically European countries have been used to living in a protective environment which brings in a reluctance on their part to outsource service needs from non European countries. Domestic software companies have to keep in mind all these nuances in order to make an impact on the European markets.

    If India is to achieve the target of $ 50 bn worth of software exports by 2008 then it has to explore a whole set of markets. Indian software companies have just exploited a fraction of what the European markets have to offer. Thus, there is a sizable opportunity in the offing.



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