Kirk LaughlinReeling under debt and other macro concerns, the world economy is going through turbulent times. However, this is something to cheer up the Indian IT industry. In an interview to CNBC-TV18, Vineet Nayar, Vice Chairman and CEO of HCL Technologies said that bad macro-economic condition in developed world is good for the Indian IT industry.
Confident to stay afloat in a tumbling economy, HCL Technologies is seeing robust demand the US and Europe. Nayar reasoned that the customers have realised that economy will remain weak and in such a condition outsourcing goes up. He said that local vendors have lost market share to global players and this will see churn of deals within existing vendors.
Going ahead, the company is aiming to hike market share with investments and innovation, without sacrificing margins.
Below is the verbatim transcript of his interview with Udayan Mukherjee of CNBC-TV18.
Q: How is the demand backdrop as you see it because there has been a lot of commentary all around on things slowing down a bit, refuted in part by some of your peers, but are you seeing robust demand from US and Europe?
A: The answer is yes. Let me give you the reason. The macro economic indicators are not very good and that has been true for the last couple of years. The customers are realising that is the truth which will remain for the next couple of years. Therefore they are moving in two directions. Direction one, is to reduce their cost of operations. Direction two, is to transform their business operations so that on a structural basis they can deliver their services to their customers at a lower cost.
Therefore, that is driving total IT outsourcing deals in a way which we have not seen before. It is driving transformation deals when people have their capital to re-invest in their business. For example, retail banks are their cost income ratios are amongst the lowest in the world, they have no choice but to invest in back office engine so that the cost income ratios go up. That cannot be done by outsourcing that has to be done by a structural shift.
Same is with the pharma companies which are coming under significant cost pressures. On the cost of medical care and therefore they have to do a structural investment in reducing the cost of benefits they deliver to their customers, same is to the entertainment and telecom companies.
So the macro economic indicators being bad is actually a driver for growth of both outsourcing to drive lower cost and drive in transformation. Therefore what you saw over the last few quarters was deals are shifting. There is a lot of churn in the market. So it is moving away from existing vendors who are not able to meet the cost targets or have the transformation ideas to be able to help the companies so the churn is high.
Therefore, when you see TPI index or any of the reports coming in they say the following two things. Number one, the overall IT growth will be flattish for some period of time and I agree. However, the deals will come in the market and they will be a churn within existing vendors. It will go to more innovative vendors who will solve customer problems on cost and transformation. So the deal flow is good.
Q: That is an interesting point this churn that you are talking about. In the last two quarters have you seen market shares shifting around then between the top 4 or 5 players?
A: I think there is. If you look at the top, the last three years and then last few quarters there are two mega trends which we see in the market share change. First is, the local vendors who are not very big, have significantly lost market share both to large global players and to Indian IT service providers and that trend is huge.
The second is, the global IT players and some of the Indian players who have not been able to keep track of the new emerging trends or the new demands of the customers are also loosing market share to a more innovative global and Indian IT service players. So, you are right in terms of the overall IT budgets are not increasing.
Therefore if you quote the top five Indian and the top five global players together you will not see spectacular growth. However, when you see the churn in market share you will see some very interesting indicators of what is going to happen in the future.
Q: What is the situation in Europe? I take your point about the macro indicators not reflecting on IT service growth because of the need to downsize or reduce cost but sometimes when the macro begins to look very weak then people go on freeze mode as we saw a couple of years back — you don’t see a risk of that happening in Europe?
A: You are right. That is what my fear is — people will go into freeze mode and approach this from an illogical point of view rather than within a logical point of view. I think there are two reasons why I believe it may not happen- although I cannot give you an assurance.
Number one, they have learnt from the lessons of their freeze or panic reaction which happened in the past. It clearly indicated that was a wrong reaction.
The second is, there is a significant amount of competitive pressure and for three years people have been thinking through as to what happens if the macro economic indicators become worse and not better.
There is a third dimension to this which is a new dimension in terms of socially responsible behaviour of corporations in these countries, where they have to protect jobs or they are accountable and answerable to their governments on how they guaranteeing business continuity and jobs. Therefore, I do not see opportunities of knee jerk reaction most places in the world markets and continents in Europe compared to what we saw in the past.
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