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Czars on the cutting-edge

Surajeet Das Gupta

It isn’t the most famous name in the Indian software industry and it doesn’t make the stock markets sizzle. But Bangalore-based Ishoni Networks has clearly caught the attention of chipmakers in Europe, who are scouting for cheaper ways to access the Internet.

That’s why a powerful suitor came calling a few months ago. The ardent suitor was Royal Phillips Electronics NV — a wing of the giant Phillips group — that has snapped up a 51 per cent controlling stake in Ishoni for $25 million.

Why is Ishoni such hot property in the cyberworld? It makes chips and software that will dramatically cut the cost of the Internet access device needed for sending voice, video and data on the net. The current cost of such devices is $1,500. Ishoni, by contrast, can turn out the device for a mere $200.

Ishoni’s India unit managing director Vivek Mansingh reckons that by 2004 there could be a market worth $5 billion for these devices: “Currently, each of these boxes consists of 10 chips. But our all-in-one single chip platform will considerably reduce the cost of the box.”

Ishoni is one of a clutch of new Indian stars, that are making their presence felt in the cut-throat global market. These new stars aren’t giants with size and financial muscle like a Wipro or an Infosys. But they’ve mastered key cutting-edge technologies that make them valuable properties by any reckoning.

What do these sizzling stars offer the world? It could be anything from chip designing for large semi-conductor companies to comprehensive e-security solutions. Or, they may offer a variety of services and products from specialised healthcare to film animation or even mapping software. One company even makes Bluetooth software to enable wireless connectivity at home.

The big boys don’t have to look over their shoulders yet. But these niche software companies, according to Nasscom, already account for over 10 per cent of the country’s software services turnover.

And they are carefully choosing areas where the big global players are either conspicuous by their absence or where global competition is limited.

For instance, Sasken Communication Technologies specialises in telecom software solutions and is a big player in the mobile phone chip-designing arena.

It has a 70 per cent market share of the software, which is embedded on the chip used in wideband CDMA phones — where it is the undisputed market leader. Says Rajiv C Mody, chairman and CEO: “We just have one competitor in the WCDMA field and expect this market to go up to $100 million in the next two years.”

Sasken believes that the sky is the limit and it also wants to grab 30 per cent of the embedded software market (it now has a 10 per cent share globally) on chips, which go into GSM and GPRS phones.

A similar story is unfolding at Delhi-based SecureSynergy that provides comprehensive e-security solutions (like a 24-hour online anti-virus update) to customers. The anti-virus market is still dominated by giants like McAfee and Norton, but SecureSynergy appears to be carving out a niche for itself. It has already found buyers in India and now it is pushing into the Gulf markets.

Says Anil Menon, senior vice-president: “We are the only company in Asia that provides online security solutions. Our aim is to change the market that has been product driven by offering security solutions. After all, with viruses hitting every day, you cannot wait for months for an update any more.”

Engineering skills have helped Hyderabad-based Pramati Technologies to survive in the cut-throat application server business (based on Java technology and used to run a spectrum of businesses).

Says Jay Pullur, founder and company CEO: “Earlier, we had 50 players in the global market but after the IT slowdown we are left with only six competitors. We expect only two or three of them to remain in the race. Those with solid engineering skills have survived.”

Or, look at how Bangalore-based Ionic Microsystems is bravely moving into the unwired world of wireless Internet. Ionic has developed a Bluetooth-enabled “Home Gateway”, which uses WAP protocol, and enables devices to access the Net directly at home.

“Home networking will work on a `no-new wires’ concept,” says CEO G Mohan. Ionic is trying to licence the product to OEMs and earn royalty rather than attempt to get into the marketing rat race in the US.

There are others who a finding niches in even overcrowded software markets. Take Tarang, which is in financial services software, a space dominated by much bigger players. But it is amongst only 10 companies across the globe to create a software product that allows customers to view several accounts by opening a single web page.

Similarly, in healthcare (where bigger players have focused on general hospital management software), Kshema has smartly chosen to concentrate on critical care information management.

That’s a software system for bedside monitoring of a patient who comes out of intensive care. Kshema has already become a sizeable player on the global scene in this arena.

Says Anand Mutalik, co-founder and executive vice-president: “We have tied up with a Finnish company that has an 80 per cent share of all the specialised instruments needed for bedside monitoring. They sell the instruments and we do the software. We are amongst the top three globally in this arena.”

Inevitably, many of these smaller players have realised that it is smarter to join hands with the larger foreign players rather than fight them on their own turf. Take Mumbai-based Geometric Software Solutions, which makes programs for product lifecycle management.

That’s a good niche to be in because PLM is fast becoming a new buzzword in the corporate world. PLM includes programs that are used to more effectively manage the lifecycle of a product (anything from cars to shampoos) — from the design stage all the way to withdrawal.

Geometric realised even before it got into the game that it would be futile to cross swords with the international players. So it has tied up with international giants in the PLM area as strategic partners.

Says Manu Parpia, managing director: “We do not have the marketing muscle to approach end-user customers directly, so instead of competing with well-established players like Solidware, Autodesk and Dassault, we have teamed up with them and offer value to their offerings.”

But why is forming a niche company an attractive proposition? Says Sunil Mehta, vice-president, Nasscom: “There are pressures on the margins of pure vanilla IT companies. The new software companies are finding it important to get into a niche that is more easily defensible rather than going all over the place.”

Secondly, the niche players with exclusive products to offer can command better margins. Gross margins in niche software companies vary from 40 per cent to as high as 60 per cent, depending on area and specialisation.

By contrast, the large IT companies earn margins of between 25 per cent and 30 per cent. Agrees Mutalik: “Gross margins in our kind of business will be much higher as they require specialised knowledge.”

What’s more, these new players have put their early mover advantage to good use. They have domain knowledge and intellectual capital that can’t be matched quickly by potential rivals.

Says Mody: “It will take two-and-a-half years to three years and over 70 software engineers to replicate what we have done in WCDMA and as much as one-and-a-half years and over 40 men to replicate our work in multimedia applications.”

Adds Pratul Shroff, president and CEO of Ahmedabad-based e-Infochips, a chip designing house: “It takes two years to train people with the expertise to be able to design microchips so you cannot begin from scratch.”

It is, of course, cheaper to work in India and many foreign players are exploiting that to the hilt. Take the global chip manufacturers, which have moved large amounts of their labour intensive design and validation work to India. Obviously, the attraction of moving to India has increased after the hi-tech slowdown.

Says Shroff: “Revenues of global chip companies have fallen by 20 per cent to 30 per cent and they have had to look at outsourcing more and more work to India and save on costs.”

That’s understandable because as much as 60 per cent of the cost of making a new chip is on manpower and, therefore, Indian companies have a key advantage on that score.

Argues A Krupakaran, vice-president in Bangalore-based chip design company Spike Technologies: “The cost should roughly be 20 per cent to 30 per cent of the cost that is incurred in US or Europe in terms of man hour costs.”

It shouldn’t be a surprise, therefore, that the market for chip designing software from Indian companies is expected to grow from $150 million to over $800 million by 2005.

A similar story is repeated in other niche areas of the software market. Take a look at companies that convert maps into digital formats — these are known as geographical information systems. These companies have a huge cost advantage.

“We are cheaper by at least 40 per cent to 50 per cent, which is an important advantage,” says B V R Mohan Reddy, managing director of Hyderabad-based Infotech Enterprises.

The lower costs of working in India are still a key factor for all these companies. Pramati Technologies, for instance, is offering its application server software at around $2,000. Bigger companies in the field like BA Systems or IBM are likely to charge about $10,000 for a similar product.

Says Pramati’s Pullur: “Our USP is to address the lower end of the market consisting of small-scale enterprises that cannot fork out large sums.”

Similarly, SecureSynergy is battering the point home to potential customers that their security solutions are dirt cheap as compared to anti-virus products and solutions from the market. Says Menon: “Our price is more than 80 per cent lower than if you had to buy a Norton or a McAfee. That is the advantage.”

It might be said that bigger companies, which use financial muscle and hire engineers who understand the domain, could push out these homegrown niche players? So what stops them?

Says Menon: “Most of the larger Indian companies are too bulky and do not have the speed or the initial reach to respond to an emerging technologies market. They would prefer to milk existing areas where they are the leaders, rather than entering emerging areas of business.”

There are other dangers, of course — the fortunes of these niche companies are tied to the fortunes of their industry. So when the telecom companies were battered last year, so were the niche telecom software companies.

Says Mehta: “You always have the danger of your fortunes being dependent on the health of the industry for which you sell software. That could be a risk factor.”

But for the time being that is not a major cause of concern. What is clear is that the IT industry is changing dramatically and the players riding on emerging technologies could well become a force to reckon with in the not too distant future.

Additional reporting by K Giriprakash, Subir Roy, Vasanth Kumar and Sanjay Pillai

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