'Indian IT companies should become the next IBM'

Q&A: Eisuke Sakakibara

who joined the Wipro board in 2001, is a classical Japanese high-flier. He went to Tokyo University, joined the ministry of finance, served with the International Monetary Fund as an economist, taught at Harvard and also served as a Japanese minister.

He spoke to Business Standard about the Japanese economy and the prospects of Indian IT firms doing more business with Japan.
Excerpts from the interview:

What is the state of the Japanese economy?

A global recovery has created a good environment for Japanese manufacturers. Japan will probably grow 2.5 to 3 per cent in fiscal year 2003 and at the same rate in fiscal year 2004. I also think the recovery is sustainable.

Since the late 1980s, the earnings of Japanese corporations on an average had come down consistently until 2001 when earnings even became negative. But in 2003, we saw a dramatic V-shaped recovery that continues.

Export-oriented Japanese companies, such as Toyota, Canon, Matsushita have engaged in radical restructuring from 1999, not necessarily in terms of laying-off but by various cost-cutting measures. By cutting their costs dramatically, their earnings have started to improve.

Second, the technology has moved "" particularly in the IT industry "" from basic technology that companies like Microsoft and Intel dominated, to applications technology where Japanese companies are quite strong.

Now, they are coming up with various television sets, digital cameras, third generation telephones and even watches connected to the Internet. The technology they traditionally had has been combined with various softwares to come up with new products.

The traditional understanding was that it was not the export sector that was the problem for the Japanese economy but the domestic industries that did not face sufficient competition.

That is still true, but even the export-oriented sector, with companies like Toshiba and Matsushita, was affected in the late 1990s. Of course, we have always had Toyota and Sony. But many semiconductor producers like NEC and Fujitsu, which were down, are now back in the fray.

That's the reason the Japanese economy is growing. It would get better if we have major structural reforms in domestic manufacturing and service economies.

What is Japan's continuing agenda for domestic reforms?

Reduction in subsidies and deregulation "" probably almost the same things as India. We are deregulating but the pace is slow. But the export-oriented private-sector companies have undertaken major structural reforms that have had an impact on construction, distribution and real estate companies.

Reforms are not coming from the government but from the private companies. With these reforms accelerating growth, it should have the government take notice too.

There is a perception that Indian manufacturing is becoming competitive, which is also creating confidence. Comment.

I think it is justified. The big Japanese manufacturing companies are now eying the Indian market as the next manufacturing outlet. They have been relocating to China and countries like Vietnam as a part of the restructuring that I talked about.

Now, they are looking at India as the next manufacturing site. There are good possibilities, especially if Indian infrastructure improves. Then, given the deregulation, there will be many Japanese companies coming to India to set up their manufacturing units here or to have joint ventures with Indian manufacturing companies. And, of course, India has its IT industry.

The Indian IT business would be substantially derisked if the excessive reliance on the US market were reduced. What are the prospects of doing more business in Japan?

One reason I accepted to become a director of Wipro is that it is a proposition that is mutually beneficial. Japan is still a difficult market, particularly in IT where hardware vendors are selling the software as well. It is a very rigid market. However, things are changing.

Traditionally, the applications have been developed by the hardware vendors and these were the old IBM models.

That's right. But now, these vendors are inclined to have the new IBM-type model or have joint ventures with Indian software companies. I think the opportunity in Japan is huge for a company like Wipro. And when you combine that with the east Asian market, which includes China, Korea and Thailand, it makes a huge market for IT applications, outsourcing and so on.

What do Indian IT companies have to do to address this market?

There are language and cultural issues. The Japanese market has traditionally needed front-loading investment and relationship management. I think the timing is right for such an investment.

The second issue is that of localisation. You need to localise your operations, particularly in Japan, France and Germany. Joint ventures with Japanese hardware companies and cooperation with manufacturing companies could help. However, creating genuinely-Indian companies in Japan is difficult. The joint venture route could be effective. The same applies to China, too.

Is there scope for tapping the outsourcing potential in Japan through a China development centre?

Of course. But since many Japanese manufacturing companies are going to China, they need new IT systems there. The kind of ties that these manufacturing companies have with the Japanese hardware vendors is not there in the Asian market. There was one case of Wipro and Sanyo where it created an Asia-Pacific system for Sanyo because Sanyo has gone into China in a big way and has operations in Thailand also.

There is a hard core of hardware vendors who have sustainable relationships with major Japanese manufacturing companies. But when these manufacturing companies go into China, India and other Asian countries, a new system needs to be built. And it probably needs to be done in English. Companies like Wipro have an advantage there.

So you suggest a two-pronged strategy: using China to overcome the language barrier in Japan and joining the Japanese companies in using English to address southeast Asian countries.

You can even combine the Chinese operation with the Asean operation because you cannot use Japanese in China. A common language like English is needed there. There are two possible strategies.

First is an offshore centre or system for those Asian operations, or some joint operation/joint venture within the Japanese market. Japan is going to be integrated with the rest of Asia. Intra-Asian trade has been increasing dramatically and that would probably include India in the years to come.

And a kind of complementary relationship exists between Japan and India. You have IT technology and personnel here and we have technology in hardware. Our application technology in hardware, TV and cellular phones could be combined with your IT technology.

What do the top Indian IT companies need to do to become truly global players?

They are now at the threshold of becoming major global companies. They need to probably change their organisational structures. More multinational staffing is necessary and more operations in countries like Japan and Europe are needed.

Essentially so far, Indian companies export IT operations. Now they have to become global companies operating in many areas. They should become the next IBM "" a challenge for companies like Wipro.

A suggestion I have is forming joint operations between Japanese hardware companies and Indian software companies. If you are to become a global operator you need to deliver the hardware as well, but you don't have to manufacture it yourself.