Emerging Markets Top 30 Software Companies - PwC

Advantages of emerging-market companiesEmerging-market software vendorshave other advantages. Whereasin the past, a consumer softwaremarket might have been non-existentand an enterprise software marketlimited, that’s no longer true. Mobiledevices are Internet-enablingconsumers in every emergingmarket, from Kenya to Korea. Thatopens up huge opportunities, bothfor consumer applications and forcustomer-centric applications thatallow consumers to access back-endinformation.“Once you start moving awayfrom an enterprise platform stacktoward applications, the local aspectbecomes more relevant for emergingmarket companies,” says US-basedNavin Budhiraja, senior vicepresident and head of architectureand technology at India’s Infosys(#20). “They’re closer to customersand have more empathy for them.They can differentiate themselvesversus a global competitor, becausethey’re right there” (See interview).Budhiraja points to Flipkart, India’sversion of Amazon, as a companythat’s taken advantage of this insight.“In the US, we’re used to using ourcredit card on Amazon, but fewpeople in India have credit cards andfewer are comfortable using themonline. They prefer cash-on-delivery,which meant that Flipkart has tohave a system that allows its deliverypeople to collect cash. It was a lastmile issue they had to solve.”8The strength of these markets alsoderives from burgeoning millennialpopulations, most of which feel morecomfortable with mobile devices,and many of whom might never haveowned a computer. They representsignificant market opportunities.Proximity helps even in legacysituations. According to JimKlein, TMT industry leader forPwC Central and Eastern Europe,another company from the region,1C (#6), benefitted from creatingenterprise applications focused onSoviet-style accounting practiceswhich are still widely used.Infosys’ Budhiraja concurs,citing his company’s success withfinancial services software (Infosysbegan as a software and servicesvendor). “Banks usually customisethe software, so they need someonethat understands the local domainand its regulations.”Wynyard Group, based in Auckland,New Zealand, develops governance,risk, and compliance (GRC)software; according to productdirector Scott James, the companyinitially based its product on anAustralian financial standard, whichturned out to be globally viable.Wynyard’s facility with localstandards enticed global companiessuch as Carnival Cruises andMcKesson to seek out its product,which helped Wynyard expandEmerging Markets Top 30 Software Companiesto almost every continent. Today,the proportion of Wynyard’s GRCrevenues are almost evenly dividedamong North America, EMEA,Latin America and Asia/Pacific.There are other advantages, ofcourse, the biggest of which is coststructure—an obvious advantagefor emerging market companies. AsNeusoft’s Liu notes, “The softwaredevelopment cost [in emergingmarkets] is comparatively lower,which makes companies morecompetitive in the global market.”PwC’s Klein adds that in EasternEurope, “You have a deep pool ofpeople with strong skill sets, butthey’re not expensive, especiallyon a dollar basis. If you get thesame talent for half the cost, andyou can sell the product in thewestern market, you’ll have agreat revenue return.”However, emerging-marketcompanies may experience issueswith higher-level managementneeds, says Marek Panek, vicepresident, group and internationaldevelopment at Warsaw-basedAsseco Group (#13), an IT softwareand services company. “We havegood programmers, but projectmanagers and other high-levelexecutives are also important. Thisis the problem in our country, butover time, we are solving that bygaining more experience.”

The cost differential is even anadvantage in places like NewZealand, according to Wynyard’sJames. New Zealand’s academicsystem turns out highly educatedgraduates, and “our costs give us agreat advantage. They are lowerthan North America and Europe,though not as low as India.”Finally, there are cultural andregulatory issues that give emergingmarket companies an advantage.Joshua Yulish, CEO of TmaxSoft(#25), a company founded in SouthKorea and now based in Chicago, saysthat his research and developmentstaff in Seoul is made up ofextremely talented engineers whowork autonomously. He also citesa culture of entrepreneurship andrisk taking in South Korea, inspiredby companies such as Samsung,Hyundai, Kia and LG, all of whichstarted locally and became globalleaders in their respective industries.Emerging-market advantagesCostDeveloper salaries are low in comparison to moremature economies.PopulationEmerging markets have high levels of tech-savvymillennials who are likely to adopt mobile applicationsquickly.ProximitySoftware vendors can establish a foothold by becominginvaluable in the local market and then expanding.EducationExcellent educational systems (think math and science inEastern Europe) help them tackle complex software, suchas security.CultureEmployees in many emerging-market countries arehard workers as they strive to improve their economicconditions.TrailblazersEntrepreneurs are inspired by existing successes: India’sInfosys, China’s Alibaba, South Korea’s Samsung.On the regulatory side, Infosys’Budhiraja cites the example ofnuTonomy 5, which debuted selfdriving cabs picking up passengersin Singapore in August 2016, amonth before Uber launched asimilar service in Pittsburgh. “Localregulations may allow start-ups todo certain things that aren’t allowedelsewhere,” he says, adding thatthat’s an opportunity for emergingmarket companies in a variety offields: consider the ability to do stemcell research or gene sequencingthat’s forbidden elsewhere.“The local aspectbecomes morerelevant foremerging-marketcompanies.”Navin BudhirajaInfosys5 ePwC9

Disadvantages of emerging-market companiesThese advantages, however, facecounterweight disadvantages. All isnot rosy. If anything, their odds forsuccess are not high, for a numberof reasons. Although the Top 30have proven their staying power,one question regarding emergingmarket startups concerns theirlong-term viability—can they movebeyond their start-up phase?“These players face risk in the longterm,” says PwC’s Jansen. “Theircustomers and partners have totrust that they’ll be in business nextweek.” Indeed, given that developedcountries tend to default to namesthey know and companies theytrust, emerging-market companiesmay suffer from lack of visibilityand brand awareness. That said, weare seeing new niches, due to lackof trust. The Indian e-commercesite Paytm has capitalised on thelack of trust in telecommunicationscompanies to provide a pre-paidway to add value to phones; itsmarket valuation is now in excessof US 1 billion.Other issues, mostly economicand financial, also plague them.PwC’s Jim Klein cites the problemonce known as ‘brain drain’—thatis, the predilection of the mosthighly educated workers to look forwork in more developed countries.“Some governments have not madethe same level of investment inuniversity that they did in the past,especially in scientific areas,” hewarns, adding that even though10countries like Poland suffered littlefrom the last economic downturn,migration patterns show sometalented people still seek betteropportunities elsewhere.Bitdefender CEO Talpes disagreeswith this assessment, though.He sees a diminishing trend inprofessionals moving overseasbecause of narrowing wagedifferentials. “Twenty years ago,the gap in salaries could be tenfold.Today, it’s no bigger than twofold,”he says, adding that the cost ofliving—much higher in the USand Europe—must also be takeninto account. PwC’s Klein addsthat while brain-drain is countrydependent, some countries, such asRomania, have been able to counterthe effect with generous tax breaksto industry that allow companies, inturn, to offer higher salaries.A bigger issue is access to capital.Places like Silicon Valley and NewYork have a distinct advantagewhen it comes to access to venturecapitalists, angel investors andhedge fund managers with cashto invest; they also have networksamong established business andeducational institutions where newideas and entrepreneurs might exist.It’s not just a question of money,either. One of the US’ greatestglobal strengths remains thematurity of the financial sectorand intellectual property laws.Emerging Markets Top 30 Software Companies“We are short on an ecosystem forfunding,” says Bitdefender’s Talpes.“We don’t have a friendly stockexchange, so we have to go abroad.”That creates challenges, accordingto Klein, thanks to the chequeredhistory of the region. There’s beentoo much corruption and too fewtrusted financial intermediaries. “IfEastern European start-ups go toEurope for financing, investors won’taccept Russia or Ukraine as court oflast resort,” says Klein. “That makeseverything more complicated, andcomplexity drives cost.”Analysts concur that governmentsupport is crucial—but manygovernments don’t alwaysoffer long-term financialsupport. Jianbin Gao, PwCChina’s Technology, Media, andTelecommunications Leader,insists that China is an exception:“The focus on innovation in Chinais alive and well,” he says, notingthat between 2007 and 2015,China increased its in-country R&D“Twenty yearsago, the gap insalaries could betenfold. Today,it’s no biggerthan twofold.”Florin TalpesBitdefender

spending by 79%. “At the same time,overall private equity and venturecapital investment in the first halfof 2016 represents almost 75% ofthe total for all of 2015; that’s astrong indicator of entrepreneurshipand innovation.” Indeed, the mostrecent PwC Strategy& GlobalInnovation 1000 report noted thatChina is closing in on the UnitedStates as the largest countrydestination for imported R&D.Even so, the question of poorprotection of intellectual propertyremains. Neusoft CEO Liuacknowledges the issue, saying,“Customers have insufficientintellectual property awareness,and customers’ recognition of [thevalue of] software products andservices is also insufficient.”Conventional wisdom sees this asa China issue, but PwC’s Jansenargues that copyright infringementhappens almost everywhere in theworld. That creates a problem: whenend-users become too accustomedto low-cost pirated software,they’re unwilling to pay more forauthorised software. It helps, Kleinadds, to have a unique product that’shard to replicate; that explains thehigh ranking of a security-softwarecompany like Kaspersky on the list.For an emerging-market companytrying to establish itself globally,sales efforts represent a challenge,even in these days of video chatand instant messaging. “Eventhough we can establish a remoteconnection from anywhere, it’sstill hard to meet face-to-face fora lot of things,” says Wynyard’sJames. Even after the sale is made,support is also difficult when you’reexpanding. “In the beginning,” saysJames, “there were a lot of 3 a.m.calls with clients.” Now, Wynyardhas offices on most continents.Finally, any nimbleness emergingmarket companies have will comein handy. Liu warns, “Due to thequick change of emerging markets,the life cycle of software is short.Software companies will constantlyface challenges to update theirmaintenance services.”Emerging-market leader does not mean start-upWhile they may be located in emerging markets, the Top 30 companies are a long way from being start-ups.In fact, five cantrace their roots to the 1980s. The youngest was founded in 2002.1980s1990s2000s5196Source: PwC analysis of IDC dataPwC11

Getting tractionSo how do emerging-marketcompanies get traction? If theyhave any level of ambition, theymust go global, argues TmaxSoft’sYulish. “If you’re not capturinglarge economies like the UnitedStates, Europe and even Brazil,you won’t be able to evolve intoa global powerhouse.” TmaxSoftmoved its headquarters to Chicagoin 2015 as part of its transition.Yulish notes that the company getsa great talent base without dealingwith the costs inherent in SiliconValley or New York.But what tactics underpin thatstrategy? PwC’s Jansen cites theexample of a Cambodian start-upusing the so-called ‘freemium’model. It offers free accountingsoftware, which drives customerusage and loyalty, but it chargesfor add-on modules relating toinvoicing or other features.Asseco Group uses a different tack:acquisition and federation. Since2004, it has acquired 60 companiesand now has 20,000 employeesglobally. “We’re not like othertechnology conglomerates like IBMand Hewlett-Packard that ownsubsidiaries outright,” says Panek.“We call ourselves a federation. Weacquire usually from 51% to 70%of a company that already has aproduct base and managers runningthe business.”It’s an intriguing strategy, because,as Panek notes, “Local people aremuch better prepared to run abusiness in local markets. Theyknow the environments, andthey have the relationships withcustomers.” It’s also successful:Asseco Group racked up 1.7 billionin sales revenues in 2015 and is thesixth-largest software vendor inEurope.6 Furthermore, the strategyallows them to make iterativeprogress in their expansion.“Thanks to our experience in moremature countries, we can play therole of advisors in other [emergingmarket] countries to help thembuild modern systems,” Panek adds.While an acquisition strategy isone option, more traditionally,companies must have a solidchannel strategy. Yulish says,“The route to new markets andbrand awareness goes throughpartnerships.” His companyis working with big systemintegrators and doing joint go-tomarket strategies and programmeswith IBM, Infosys and others.Increasing visibility in the valueadded reseller channel throughtrade shows and partnerships, helpsTmaxSoft become familiar to users.“People have to see the value thatyou can bring,” says Yulish. “Youhave to emphasise what’s in it forthem, not you.”Emerging-market companies musthave a willingness to learn aboutbusiness, says Bitdefender’s Talpes.“We’re not weak on innovation,”he says, “but we needed to buildknowledge about growing anddoing business in mature markets.We focused on learning fromconsultancies and partners in maturemarkets like the US and Germany.”Wynyard’s James concurs withthis strategy. As a New Zealandcompany, partnership arrangementshelped mitigate its distance issues.As Wynyard gained accounts inspecific regions, it made senseto establish sales offices in thelocations where it was doing themost business. “Establishing thoseoffices required an influx of cash,but it was the partnerships thathelped us get started,” says James.When it comes to having thewherewithal to go global, emergingmarket companies have moreoptions than before. The opensource software movement benefitsthem because they can developapplications less expensively. Atthe same time, TmaxSoft’s Yulishsuspects that “enterprises are gettingfed up with legacy companies’licensing schemes, and open sourceis making them more amenable tonew solutions that don’t requirea closed architecture.” That givescompanies like his an opening.6 ng Markets Top 30 Software Companies

What market leadersshould considerThe cloud reduces software vendors’upfront costs as well. By offeringSaaS solutions exclusively, softwarevendors can reduce deploymentand maintenance costs. While thecloud strategy is technically sound,it has some cultural drawbacks.Klein warns that in EasternEurope, customers are loath to paysubscriptions if it means giving athird party access to their bankaccount or locking in long-termsubscription rates (again, it’s thetrust issue). Asseco Group’s Panekconcurs, but for a different reason.“Our customers are more interestedin more-traditional licensing models,because we are mostly focused onmission-critical applications. Thereare also concerns about security,especially in the government sector.”Established software companiesin mature markets need to keepthe following in mind when theythink about competing against,partnering with or acquiringemerging-market softwarecompanies: Stay aware of their progress.You never know when a smallcompany is going to finally gettraction and explode upon theworld stage. Take advantage of theiradvantages. They can hiredevelopers for less money; theycan help you with follow-thesun development; they haveproximity to markets that youmay not.Even so, the question of cloudversus on-premises doesn’t seemto be slowing emerging-marketcompanies down. A majority ofTmaxSoft’s revenues come fromon-premises software, andWynyard’s revenues are split70% licensing, 30% subscription.One additional note about theadvantages and challenges of beingan emerging-market softwaredeveloper: One might think thatglobal exchange rates are an issuefor emerging-market companies,but they’re not, because so manycompanies do business either in USdollars or a variety of currencies.Executives from emerging-marketcompanies acknowledge thatcurrency concerns have been anissue for them in the past, but itlessens as they expand the kind ofcurrencies they accept. Capitalise on theirknowledge. They knowregional regulatory requirementissues better than you do.When it comesto having thewherewithal to goglobal, emergingmarket companieshave more optionsthan before.PwC13

Looking forward in a changing worldIndeed, as globalisation continues,we’ll begin to see a rationalisationof all these issues. It will befaster and cheaper for emergingmarket companies to establishthemselves. Bitdefender’s Talpeșsays, “Along with lower developercosts, infrastructure as a service(IaaS) brings democratisation ofhardware capabilities to companiesin emerging markets, putting themon more-equal footing with othercountries.” The doors have openedto a global base of knowledge, ofmarkets and digital marketing tools,he maintains. “This opens the doorfor more people to innovate andwe’re seeing more innovation fromthe emerging markets.”PwC’s Jansen concurs that in fiveyears, the software world will becompletely different. Winners willbecome prominent, regardlessof their country of origin. Asenterprises look for cheaper, morereliable software—even without itbeing rich with features—they willlikely consider options they mightnot have previously.14As the world enters the next chapterof technological disruption led bytrends in the Internet of Things,artificial intelligence and cloudcomputing, the software industrywill witness new leaders emergingand the potential disruption of wellestablished players. Perhaps thebiggest challenge for emergingmarket companies, warns Neusoft’sLiu, will be their ability to adapt.“The emerging market is changingand developing, [with] socialpatterns and business patternscontinuing to break tradition,” hesays. “Software companies need totransform themselves from a purelytechnical company to one with acomprehensive view regardingits political, economic, social andresource issues.”Having those characteristicsbeyond technology will beespecially important, because,even as vendors in emergingmarket countries will capitaliseon their advantages, they willstill face competition from majorsoftware vendors in the developedEmerging Markets Top 30 Software Companiesworld. Those established vendorswill remain relevant and are likelyto use their vast economic wealthand strong global network to fillthe void in their portfolios throughacquisitions. While softwarecompanies in emerging markets willcertainly play a significant role inthe transformation of the industry,either as standalone entities or apart of a bigger company, the majorestablished software companies willmaintain influence and power. Scaleand revenue still matter.

MethodologyThe PwC Top 30 Emerging MarketsSoftware Companies is based oncorporate financial statements(GAAP-based where applicable),other public sources and estimatesfor privately held companies, ascompiled for PwC by the GlobalSoftware Business Strategies Groupat International Data Corporation.The ranking is based on year-to-yeargrowth rate in software revenuefrom 2013 to 2014, the most recentyear for which complete data wasavailable. Due to variances in fiscalyears, the results were ‘calendarised’for both years.Currencies were converted to USdollars using the average historicalinter-bank rate for 2014 as the rate ofexchange. The historical rates usedcan be found at www.oanda.com.By “Emerging Markets” we meanmarkets less developed than NorthAmerica, Western Europe and Japan.Most, but not all, of the compani

The Emerging Markets Top 30 Software Companies represent a mere 1.4% of global software industry revenues, and have revenues equal to 1.9% of the Global 100 Software Leaders revenues. Their software revenues range from US 44M to US 695M. Global 100 Software Leaders US 272.2B Total software industry US 385.3B Emerging Markets Top 30 US 5.3B