In 2004, the Japanese IT outsourcing market was $15 billion, according to IDC. In comparison, offshoring advisor TPI estimated that the total outsourcing market (IT and BPO)in the UK was worth $14 billion, followed by Germany at about $8.7 billion. That makes Japan the second biggest IT outsourcing market after the US.

Yet, most studies on outsourcing almost ignore this huge market. The American and the Indian media (the two forces that shape perceptions in this industry) are not interested in it either.

The reasons are not difficult to understand. Language has been the major issue. And that does not make life difficult for researchers and journalists alone; it makes life difficult for Japanese managers as well, who are unable to take advantage of offshoring.

The Indians, who are flooded with opportunities in English- speaking markets, do not want to spend their business development dollars there yet. The majority of American companies are busy formulating survival strategies to counter the Indians who are attacking them on their home turf.

Till very recently, the only nearshoring option for Japanese companies or global-services companies serving the Japanese markets (such as Accenture, IBM, and Gecis) was Dalian in China. Though that location has developed, it is not the perfect one, considering the bitter feelings that many Chinese still have towards Japan.

Enter Vietnam.

Yes, it is Vietnam, the country, unfortunately, known more for the Vietnam War than for anything else. Of late, Vietnam has come out as a strong destination for the Japanese market. American companies, too, have offshored to Vietnam, but the industry there has taken a conscious decision to do aggressive business development in Japan.

Out of the top ten outsourcing vendors in Vietnam, seven have active Japanese clients. Most have their sales offices in Japan. And for many, Japan is the only sales presence outside the US.

Most Vietnamese software makers exporting to Japan recorded growth of 100 percent on average over the past year. In fact, the Corporation for Financing and Promotion Technology (FPT) has posted an amazing 690 percent increase in its exports to Japan.

On its part, the Vietnam Software Association (VINASA) has stepped up the country’s marketing, with support from the Vietnamese government. VINASA hopes that the industry would be able to secure 10 percent of Japan’s software outsourcing market and a turnover of $350 million by 2010, at an annual growth rate of 80-100 percent.

On July 22, the Vietnamese Embassy in Tokyo organized a symposium to help Japanese business people learn more about changes and progress in Vietnam’s investment environment. Vietnam is going to host the Asia-Pacific Economic Cooperation in 2006, for which they have already invited Japan.

It is not just a case of where Indians don’t go. Japan prefers Vietnam for its cultural similarity, close governmental relationship, and the country’s cheap yet efficient labor pool. Japan is the third biggest investor in Vietnam.

Vietnam and Japan established diplomatic relations in 1973, and their ties have become stronger ever since. Japan has been its top donor since 1995.

Japan is well aware of the fact that Vietnam has a strong pool of skilled human resources that can respond to the intense international competition. The country’s education system has an implicit bias towards mathematics and logic that creates a ready warehouse of raw talent for the IT industry. Though processing this raw manpower into deployable resource remains a work in progress.

Trusted Partners

FPT software is the biggest vendor in Vietnam (according to VINASA). Its client list is impressive and comprises NTT-IT, Hitachi Software, Sanyo Electric, NEC, and NISSEN.

Says Susumu Ichinose, executive vice president (IT Solutions Business Division), NTT-IT, “FPT Software has proved itself as a leading company in Vietnam with its young, dynamic, and creative people. We are very happy to co-operate with FPT Software and hope that we can go further in future.”

Top Ten Outsourcing Vendors
Company	City	Number of Employees	Major Customers
FPT Software*	Hanoi	700	IBM (Japan), IBM (France), Harvey Nash (UK), ProDX (USA), Amb- bient (USA), NTT-IT (Japan), Hitachi Software (Japan), Sanyo Electric (Japan), NEC (Japan), NISSEN (Japan), SILVERLAKE (Malaysia)
TMA*	Ho Chi Minh City	520	Nortel Networks (Canada, USA), Lucent Technologies (USA), NTT-Data (Japan), Critical Path (USA, Canada, Ireland), Telephony@Work (USA), EasyLink (USA)
PSV	Ho Chi Minh City	420	Witness Systems, RWD Technologies, TEDS Inc., Outstart Inc.
SilkRoad	Ho Chi Minh City	400	PowerPhone (USA), IPC Information Systems (USA), SKYPATH NETWORKS (USA), Aglow Technologies (USA), Private Business Networks (Canada), CMG Asia (Hong Kong), Cantor Fitzgerald (UK), Critical Hosting (UK)
Global Cybersoft*	Ho Chi Minh City	250	IBM (USA), Yokogawa Electric Information (Japan), TTK (Japan), Esmertec (France), 6 Wind (France)
Quantic*	Ho Chi Minh City	60	Nortel Networks (Canada, USA), Omron (Japan), NTT-Data (Japan), ISB (Japan), Digital Research (Japan)
NCS*	Ho Chi Minh City	84	CyX (Japan), IPL (Japan), Shinko Mex (Japan), Tenda (Japan), UP (Japan)
Pyramid Software Development*	Ho Chi Minh City	70	JustDeals.com, Renesas, Novellus, GIT Japan, Fogbreak, Data Agent, Highland Coffee
Viet software	Hanoi	120	IBM (USA), Toyota (Vietnam), MPDF (IFC)
Sang Tao*	Ho Chi Minh City	55	NEC Soft (Japan), AXISSOFT (Japan), Sorimachi (Japan), Trinity Security Systems (Japan), Communication Technology (Japan), Contour Japan (Japan)
* These companies have customers in Japan		Source: Vietnam Software Association (VINASA)

Cost is certainly one of the factors that has caught the eye of Japanese companies with offshore development supply chains. According to neoIT, ITO salary report 2004, entry-level average annual salary for an IT professional is $3,276 and that of a manager is $8,571 in Vietnam. Average costs come out half of those being charged by Indian software developers. Low wages and strong mathematical skills as a combination has made Japanese experts believe in Vietnam’s potential to become an outsourcing destination.

Another driving force for Vietnam’s IT industry in Japan has been the role of overseas Vietnamese living in Japan. Having worked there, this unique band of individuals are forming a crucial link between Japanese customers and Vietnam-based developers.

Says Hoang Lan, CEO, AC Co Ltd, Tokyo, “AC Co Ltd is a Japanese business consulting company. We are not a full-fledged IT company but software outsourcing is one of our business areas. We are serving as a bridge between Japanese customers and NCS Corporation, our main outsourcing partner in Vietnam.”

New Century Soft (NCS) is among the top ten vendors in Vietnam that is serving to Japanese companies.

English- language skills pose a significant challenge to companies outsourcing to Vietnam, although, English is on the national curriculum.

Japan and Vietnam have been in good terms since the 7th century. The countries have many similarities such as religions-Confucianism, Buddhism, and Taoism, and eating habits such as rice and chopsticks. These similarities work as a cover for Vietnam, against other biggies such as India.

“The specialty of NCS is that they can fully communicate in Japanese with our customers and that gives NCS an A++ mark for the Japanese market.” says, Hoang Lan, CEO, AC Co Ltd.

Though Vietnam lags behind India, China, and South Korea in terms of IT business with Japan, single-minded focus on the Japanese market is expected to make the local industry mature in handling the difficult Japanese customers. With India busy scaling up for the US and the UK, and Korea being a high-cost destination, China is the only threat to Vietnam in capturing the Japanese market.

Vietnam could leverage on its stronger political ties with Japan as well as its better quality manpower. It is Hanoi and Ho Chi Minh City-and not Dalian-that could emerge as Japan’s Bangalore.