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Isamu Nitta, a former Japanese diplomat in Sri Lanka and the United States, clearly enjoys setting out a map of the world and pointing out where Japanese strategic interests lie.

“This is a sea lane,” he says, pointing from Saudi Arabia, around Sri Lanka, through Indonesia and to Japan. In his younger days, part of Nitta’s job was to protect this oil route through solely diplomatic channels. “We cannot protect this route militarily. Diplomatic methods are the only way we are allowed.”

Now, from his office on the 32nd floor of the Toshiba skyscraper in Tokyo’s Minato Ward, Nitta is protecting Japan’s interests again, but this time it’s in software, not oil.

While more than 90 percent of Japan’s nongame software imports come from the United States, a growing amount — increasing more than 60 percent annually for the last five years — is coming from India.

Because of Indian companies’ high-quality software and cheap prices, Nitta, adviser to Toshiba Corp., says he is increasingly looking toward Indian software companies to provide his firm’s software needs.

“Indian software has very good quality,” Nitta says.

As a stamp of approval, Toshiba already uses three Indian software vendors — Infosys Technologies Ltd., Hughes Software Systems and NIIT Ltd. — to provide the programming guts for such products as its cutting-edge ISDN telephone system and its in-house quality assurance software.

But more than for just his company, Nitta says he thinks Japan needs the influx of Indian software goods.

“I think the importation of software with high quality and a reasonable price is very important to revive the Japanese economy,” says Nitta.

Nitta cites the fact that India has many of the highest-rated software companies in the world, according to the Capability Maturity Model developed by Carnegie Mellon University in Pittsburgh.

According to its latest list, India is home to 18 of the 29 firms that have been awarded the top Level 5 rating.

The top Japanese firms on the list score only a Level 2.

Minimizing costs offshore

Although Infosys is a multimillion-dollar, multinational corporation, Venakataraman Sriram is one of only two sales representatives in Tokyo. As Infosys’ associate vice president and head of business development in the Asia-Pacific region, he shares his reception staff at a small office in Chiyoda Ward with over 20 different firms.

When asked to meet a reporter, he says, “I’m sorry, someone’s booked the conference room,” and leads the way to a bustling meeting area. Sriram says his company’s cost savings come from minimizing sales staff and bringing engineers to Japan only when they have to work directly with clients.

“See, today, we have about 45 people in Japan working on various projects. But for every one person we have, we may have four to six people in India. So one-fifth to one-sixth of the cost is in Japan, which is an extremely expensive country to work in.”

Through this so-called global delivery model, he said, “We have found that it is possible to give between 20 percent to 30 percent savings vs. a project that is done completely here.”

As evidence of the success of its model, Infosys in Japan has doubled its revenues every year since it arrived in 1997, and the branch now accounts for 4 percent of the company’s worldwide revenues, or about $8 million of the worldwide $203 million in 1999-2000.

“The aim is to take the Asia-Pacific region from the current levels to about 15 percent of company revenues in the next three- to five-year time frame. And Japan will be a significant part of that.”

Other Indian software companies, such as Tata Enterprises firms, Wipro Corp. and Japan India Information Technology Pte., Ltd. — a company half-owned by Japanese software giant CSK Corp. — have built businesses in Japan on similar offshore working models.

Says Tata Elxsi’s associate manager of business development, Raghavan Manoj, “After two or three years of . . . making presentations, finally, we did get work. (Now) almost 30 percent of our business comes from Japan.”

While Nitta acknowledges Indian engineers are sometimes “brilliant,” he says the benefits of working with Indian engineers are lost if they are brought to Japan.

“We have engineers, but we do not have good working people with less salaries,” he says. “In order to make the specifications, we need engineers, right? And they work together with the Indian engineers. Joint work. That is absolutely necessary. But we need good workers to code the specifications. They should be much less salaried. Otherwise, the product will be very expensive. So (we go) offshore.”

Raj Kishore Singh, a consultant with the Electronics and Computer Software Export Promotion Council, agrees on this point. “There are areas where Japanese workers don’t want to work. They’re not into the repetitive type of work we are doing. So it is in this perspective that we have to see what is to our mutual advantage.”

Tax rules not favorable

Although it all sounds rosy, there is a thorn in Nitta’s side.

Unlike any other country that Japan trades with, the tax treaty between Japan and India says that a 20 percent withholding tax can be imposed on “technical services” and, if broadly applied to Indian software, could have a major impact on Japanese companies trying to keep production costs low.

Since Japan’s national tax authorities began applying the rule in 1998, business groups have become concerned.

“Take MRI,” Nitta says, foreseeing a problem in Toshiba’s planned production of magnetic resonance imaging scanners. “Medical equipment of the highest quality. We produce it. GE, General Electric, produces it. We compete in international markets. Both have software inside. Both are developed in India. Ours is more expensive by 25 percent because of that issue, because of the tax. . . . We cannot win.”

Nitta chuckles ruefully, “We always lose the war to the United States.”

Singh adds, “This withholding tax is standing in the way of our Indian exports.”

But tax officials from the Finance Ministry say the clause was an Indian initiative that would permit the taxation of technical work by Japanese engineers in India.

“We don’t want to tax any software imports or exports,” says Hiroyuki Iguchi, deputy director of the international tax affairs division. “That’s not our policy.”

He says the tax can only be applied to the portion of work attributed to Indian engineers in Japan, not on the work done by the Indian software company as a whole.

However, there is a dispute on how the tax should be applied and Japanese tax authorities are waiting for a response from their Indian counterparts on how to resolve the problem.

Culture — the usual barrier

Even if the tax problem is solved, most supporters of Indian IT say different business practices, India’s late emergence in Japan and language barriers are bigger obstacles to cooperation.

Takashi Shimada, president of the Indo Business Center in Tokyo, says the person who can overcome those obstacles will find his fortune in Indian software.

His name card is adorned with “Ganesha,” the elephant-shaped god of Indian business, but he says trying to find clients for Indian software has been difficult.

“When you say you’re going to use Indian people, or foreign labor, problems arise. It’s very difficult to get people to think that they should overcome their problems and build a new era. Japanese people just weren’t brought up that way.”

Genesys Corp. President Yukio Nishiyama, whose company links Indian software companies with Japanese clients, says of potential Japanese clients, “In general, they don’t know Indian software companies’ capabilities.

“As of now, Infosys is a famous company,” he says, but adding that for Japanese companies, it is a stranger.

Thanglura Darlong of the Indian Embassy says India focused its booming software exports on English speaking countries like the United States, and as a result, its share of the Japanese market is disproportionately small.

“In Japan, they came quite late. Only one or two Indian companies came around 10 years ago. . . . Usually, the Japanese business style is a little slow. So I think it comes slowly.”

Tunao Tokuhara, managing director of Tata-Hitachi Sales Japan, says Japanese reliance on subsidiaries has hampered some of the growth of Indian software companies.

He also says it’s a shame so little excellent Japanese-made software — such as Hitachi’s bullet train ticket reservation and sales system — is exported because of language and cultural differences.

“It’s a waste. But if we work together with India, producing a Japanese version and a foreign version at the same time . . . we can truly make international software products.”