Can Infosys do a Toyota?

The Japanese are known for the cars they make -- they're well-built, fuel efficient and reliable. In other words, whether it is a Toyota or a Honda, you will get great value for money. Indian IT firms seem to be cast much in the same mould.

An Infosys, TCS or a Wipro has taken on many a critical assignment for the most demanding of clients and delivered. That speaks volumes for their reliability. Not only is their work technologically sound, it comes at a great price. So, it is real value for money. And all of them boast fairly robust margins, which means they're efficient.

It may seem like we are comparing apples and oranges but a comparison between the evolution of the Japanese automobile industry between 1960 and 1985 and the growth of the Indian IT industry, starting 1995, throws up some striking similarities. And one day perhaps Indian IT firms will get there.

James Abraham, director of the Boston Consulting Group, agrees. "There's no reason not to believe that the Indian IT industry could have as significant an impact on the global IT industry as the Japanese have had on the automotive industry."

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A recent study by BCG tried to draw a parallel between the two and came up with some interesting insights. The results of the study were made available exclusively to Business Standard.

The players

The leaders in the global auto arena at the time (1960-85) were the US majors General Motors, Ford and Chrysler. The challengers were the Japanese automakers Nissan, Toyota, Honda and Mitsubishi.

Similarly, in the late 1990s, the IT space was ruled by players like IBM, Accenture, EDS, HP and CSC. In contrast, Indian IT firms such as TCS, Infosys, Wipro, Satyam and HCL were much smaller.

The cost arbitrage

In the early stages, exports of the Japanese auto firms grew, driven primarily by cost advantages. Labour rates at the time were 60-70 per cent lower than that in the US and the Japanese made full use of the difference to manufacture more affordable cars.

That their strategy paid off was reflected in the soaring exports, which grew at a compound annual growth rate of 40 per cent between 1960 and 1970 (in units).

Similarly, the Indian IT firms used the large number of engineers available at significantly lower salaries (70-80 per cent) to their advantage. Software exports from India grew at a CAGR of 40 per cent between 1995 and 2004.

Help from outside

A couple of external factors also helped the Japanese car makers. A steep rise in the price of crude oil increased the need for fuel-efficient cars in the US. The Japanese were only too glad to oblige -- they had come up with small, fuel-efficient cars for their home market, which they now exported.

The Japanese automakers also took advantage of capital account liberalisation in Japan and and restructured. For instance, Toyota joined hands with Hino and Daihatsu while Nissan took over Prince.

On the IT front, companies worldwide demanded more returns from their tech spend, which resulted in a huge demand for high quality offshore services from India. Moreover, distracted by the Internet boom, US IT firms did not focus on offshore activity. This provided Indian firms an opportunity to scale up and reach critical mass.

Key differences

Of course, it's not just about similarities. There are some significant differences between the evolution of the Japanese auto industry and the growth of the Indian IT industry.

The Japanese companies had a large protected home market that helped them acquire scale and competencies before they started competing with US firms. They also enjoyed greater protection.

The US auto companies could not fully leverage the Japanese market thanks to entry barriers for foreign players. Also, the IT industry today is more fragmented than the auto industry was in the 1970s. However, the study notes that differences notwithstanding, learnings from the globalisation of the auto industry are still relevant for IT players.

The value proposition

With time, the Japanese automakers added more cars to their garage, built up customer contacts and improved their production processes. They soon covered the spectrum of car categories, making both high-end and low-end passenger cars. Manufacturing systems became leaner and practices that are today accepted globally, such as Just In Time and Kaizen, were introduced.

Besides, they beefed up the sales network, setting up teams in different geographies. In the span of 15 years, there was quite a transformation.

While in 1970, the Japanese were churning out low-end passenger cars on a mass scale, sold by franchisees in various countries, by 1985 they were flaunting a far wider range of products sold by a global sales and marketing team.

Similarly, Indian IT firms started out by doing application development and maintenance and gradually moved up the value chain doing systems integration, BPO and IT consulting.

Initially, much of the work was onsite but with time they gained the confidence of their clients and were able to move the work offshore, building in the process a global delivery model.

The result: revenues of Japanese automakers climbed steadily between 1970 and 1985; and revenues of Indian IT companies have also risen smartly in the decade since 1995.

In 2003....

Japanese challengers were still smaller in size, but had stronger profits than the incumbents. Consider some numbers: That year, Toyota's revenues were $128.9 billion, against GM's $185.5 billion. But Toyota had profits of $6.3 billion, compared to the American company's $2.8 billion.

In the IT space, the global giants are far larger than the domestic companies: Accenture had net revenues of $ 3.67 billion (Rs 59,000 crore) for the year ended August 2004 and a net profit of $691million (Rs 3,005 crore). Revenues at Infosys for financial year 2005 were Rs 7,130 crore (Rs 71.3 billion) and profit stood at Rs 1,846 crore (Rs 18.46 billion).

But can they get there by 2015 or 2020? BCG's Abraham thinks they can. "The pace of change in the IT sector is going to be much faster than it was in the automobile industry. All the players, both global and local have, therefore, to build their business models more quickly and innovatively. The Indian players cannot afford to be complacent because the foreign players recognise the threat to them and are responding aggressively," he says.

Quickbite

Toyota and Infosys are conservative companies that believe in maintaining the firm's "fabric" throughout the growth period.

Toyota created a difficult-to-replicate manufacturing process (the Toyota production system); Infy is working on a difficult-to-replicate service process (the global delivery model). Toyota has a P/E of about 18, compared to under 10 for GM; Infy has a P/E of about 39, compared to 21 for Accenture and 18 for EDS.