 "TCS lays out strategy to get a foothold in Japan")
On Monday, the company announced it had signed a definitive agreement to merge its Japanese subsidiary with Mitsubishi Corporations’s IT arm, IT Frontier Corporation (ITFC), and form a single IT services unit, TCS Japan, valued at $300 million. The Indian company, which will pay $50 million to Mitsubishi, will hold a 51 per cent stake in the merged entity, while the Japanese firm will own 49 per cent.
The deal, expected to be closed by the end of June, is significant for two reasons. First, it gives TCS the desired scale and size to capture a bigger share of the market. This merger will take the merged entity’s revenues to $600 million — $100 million of TCS’ Japan subsidiary and $500 million of ITFC. Besides, the merged entity will have a total of 2,400 associates — perhaps the most by an Indian IT services player in Japan. Before the merger, TCS had about 1,000 or less people in that country.
Second, this entity will give TCS a strong local connect. Japan has been one of the toughest markets to break in, despite being the second-largest IT market. Its contribution to the Indian IT services industry’s revenue has been less than two per cent. One of the main reasons for this is Japanese firms’ preference to work with companies that align them culturally. So, these companies chose to work with their Chinese counterparts.
“With the new entity, TCS will have a good presence in Japan, along with multiple client relationships in the BFSI (banking, financial services and insurance), manufacturing, retail and hi-tech verticals, which will provide abundant client mining and offshoring opportunities. Mitsubishi Corp will be the largest client, contributing $250 million to the new entity’s revenue,” said Rumit Duggar and Pranav Kshatriya of Religare Institutional Research in a note to clients.
“We have been saying that Japan is a very important market for us and we are trying to see whether we can do something strategic. The transaction signifies our serious commitment to the Japan market. TCS will now have the scale, strong local presence and a full range of global capabilities to serve the Japanese corporations effectively and accelerate our growth in the Japan market,” said Chandrasekaran. TCS, which has been in Japan since 1987, set up a near-shore facility in Yokohama in 2002.
As part of the latest deal, the company will also have an option to increase its stake to 66 per cent after five years. It said it would engage in hiring for the new entity, depending on the ramp-up in business in coming quarters.
“This (Japan) is an underpenetrated market from the global delivery point of view. The deal will help us get both local Japanese clients and those with international operations,” said TCS Chief Financial Officer Rajesh Gopinathan.
On competition, he said, “We will deal with the competition. The market is primarily dominated by local Japanese players.”
“Japan is the second-largest market for IT services and Indian players have struggled to gain a foothold in the region. In that regard, the TCS move favourably opens the region for an additional source of revenue over the long term,” said Ashish Chopra, analyst at Motilal Oswal Securities.
Speaking about composition of the new entity’s board, Gopinathan said: “Since we will have a 51 per cent stake, the board composition will reflect that. We will, however announce these details by the end of this quarter.”
On who would head the newly-merged entity, he did not divulged much detail, but said: “A very senior person is being identified for the role to head this new entity but an announcement will come later.”
HARD NUT TO CRACK
TCS’ journey in Japan
- 1987: TCS sets up sales office in Tokyo
- 1992: Starts operations in Tokyo
- 2002: Near-shore facility set up in Yokohama
- 2008: Offshore unit set up in Yokohama
- 2012: Enters into JV with Mitsubishi to form Nippon TCS Solution Center
- 2014: Merges Japan arm with Mitsubishi’s IT subsidiary