Services in China

China Software industry

Software

Intellectual Property Rights	Network Security Software	Market Segmentation
Major Players	Import and Export	Foreign Players
Future Outlook

With the support of government incentive programs, China’s software industry has been expanding steadily in terms of scale and is becoming a new growth point for the country’s overall economy. In 2007, the Chinese software industry generated revenues amounting to RMB 580.0 billion, increasing by 20.8% from the previous year.

In 2007, the Chinese software industry generated revenues amounting to RMB 580.0 billion, increasing by 20.8% from the previous year.

Within the industry, sales of software products reached RMB 201.7 billion, increasing by 22.5% from the previous year, while revenue obtained from the sales of system integration amounted to RMB 147.8 billion, up 16.0% from a year ago.

There were more than 13,000 software enterprises, of which 35 enterprises obtained sales revenue of more than RMB 1 billion from software products. Within the 2002 to 2006 period, the number of Chinese enterprises that yielded total sales revenues of RMB 1 billion from software grew from 12 to 35, while 396 enterprises achieved total sales revenues of more than RMB 100 million. There were also approximately 80 Chinese software enterprises with a total of more than 1,000 employees. Beijing is the leading province in terms of revenue gained from software services, software products and system integration. Other key provinces in the software industry are Guangdong, Jiangsu, Shanghai and Zhejiang.

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Intellectual Property Rights

In China, great importance is placed on the protection of Intellectual Property Rights (IPR) and technological innovations. In order to fulfill international protocols, the Chinese government has to work towards eliminating software copyright piracy, which is the chief culprit in lowering profit margins. The issue of software copyright piracy is regarded as the foremost bane of software companies in the country, with an estimated 82.0% of the market being plagued by illegal business software.

Microsoft, an international player within China’s software market, has been mired by the country’s software piracy issue. In a bid to minimize the narrowing of profit margins in an emerging market like China, Microsoft has inked several agreements with domestic firms to ensure the installation, distribution and sales of its licensed software within the country. Microsoft has since entered into a deal with Gome Electrical, a leading electronic retailer in China, and Lenovo and Founder Technology, the two largest personal computer makers within the country. As a result of anti-piracy campaigns for software products, Microsoft estimated a 20.0% increase in their sales within China.

According to joint research conducted by the Ministry of Information Industry (MII) and the CCW research center, the legal environment of China’s software IPR has shown significant improvement. However, piracy remains rampant in the nation. In 2007, the number of firms using copyrighted software increased by 53.0%. As a result, in an effort to curb the problem, the Chinese government ordered municipal authorities to purchase computers that have pre-installed licensed software.

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Market Segmentation

Software Management and Middleware Services

Within the industry, the growth of China’s management software market recorded a slowdown as the market matured into the industrialization phase. In 2007, the total volume of the market reached RMB 8.5 billion, driven by the expansion of SaaS (software as a service) model products.

China’s middleware software products market is currently undergoing rapid development and is still in its initial stages. Within the market, more vendors are using the service-oriented architecture (SOA) international standards, in line with future development plans. In 2007, the middleware software products market reached RMB 1.3 billion, recording a growth of 19.7%.

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Network Security Software

Within the industry, the network security software market is yet another area for growth within the country. In 2007, total sales revenues for China’s network security software products reached RMB 6.7 billion and the market is poised for further growth. By 2012, the market is expected to post a significant increment, totaling RMB 15.6 billion. The market will also expand in the direction of software security products in particular, as well as mobile phone applications and related security software products.

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Major Players

Within China’s software industry, the top three software developers are Chinese embedded equipment manufacturers - Huawei, ZTE and Haier. Integrated in diverse fields such as network communications, consumer electronics, medical equipment, security systems and power systems (amongst other applications), the value of China’s embedded software industry has exceeded RMB 100 billion.

Within China’s software industry, the top three software developers are Chinese embedded equipment manufacturers - Huawei, ZTE and Haier.

Other leading software companies within the country include Digital China, Founder Group, Tsinghua Tongfang, Alcatel Shanghai Bell and Langchao Electronic Information. Total revenue from the top ten software companies accounted for 54.5% of the top 100 companies. Meanwhile, the total revenue from the top 100 software companies amounted to RMB 143.8 billion, increasing by 27.5% from the previous year’s top 100 companies and accounting for 30.0% of the overall revenue from the software industry.

The leading software companies in China are China National Software Service Corporation, China Neusoft and China Ufsoft. In 2007, China Neusoft, the largest software outsourcing and service vendor in China, was ranked the 25th top global outsourcing company, thereby becoming the first Chinese company to be on the list. In a bid for further expansion, Neusoft has launched international outsourcing bases in Beijing, Shanghai, Chengdu, Nanjing, Shenyang and Dalian.

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Import and Export

In 2007, China’s overall software industry realized an export value of US$1.9 billion, recording a growth of 167.4% from the previous year. Within this figure, exports of software products reached US$928.0 million, accounting for 49.5%, while IT outsourcing (ITO) services amounted to US$948.0 million, accounting for the remaining 50.5%.

Japan, the U.S. and Hong Kong were China’s major software export destinations, with an export value amounting to US$818.0 million, US$365.0 million and US$264.0 million respectively. Export value to these major markets experienced a year-on-year growth of 62.8%, 90.3% and 53.3% respectively. Amongst the provinces and municipalities, the value of software exports from Beijing, Shanghai, Guangdong, Liaoning and Jiangsu exceeded US$100.0 million.

Within the industry, a group of enterprises focus their operations on export and outsourcing services. These include Chinasoft International, Neusoft Group, SinoCom Software, iSoftStone and CompuPacific International. As the industry continues to expand, these companies are also growing rapidly. Meanwhile, the export of software products and the establishment of independent intellectual property rights have driven profit margins within the industry.

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Foreign Players

In China, foreign vendors have a more dominant presence in the high-end software market. Within the industry, the leading foreign software companies are Microsoft, IBM, Oracle and Sybase.

IBM, an international software conglomerate, has established a significant presence. In a bid to further expand its operations in China, IBM liaised with its counterpart, Kingdee International Software Group, in June 2007. Meanwhile Microsoft has also built cooperative ties with 6 partners in China, including Chinasoft International and Digital China Holdings.

Within the industry, Cisco, an international network equipment maker, is a key foreign player within the country. It also boasts cooperative ties with many domestic companies. In 2005, Cisco entered into an agreement with ZTE to develop overall solution services for third generation (3G) mobile technology, as well as other platforms for telecommunications operators. Subsequently, Cisco also signed a deal with Haier Group to develop home network markets in China. In a bid for further expansion, Cisco plans to invest another US$16.0 billion in China in the coming years, thereby doubling its total investment of US$8.5 million since 2002. Part of the investment will be channeled into establishing network-based academies in colleges thanks to a partnership with China’s Ministry of Education.

In China, the employment of SOA is dominant in the existing software market. By the end of 2007, 70.0% of software companies in China had turned towards its applications. In view of this growing trend, many foreign companies have diverted their focus towards the Chinese market, including IBM, Oracle, SAP and BEA. In 2006, SAP launched SAP6.0 in the Chinese market, thereby being the first SOA based product integrated into companies. Subsequently, Oracle, BEA and IBM entered the burgeoning niche market as well.

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Future Outlook

As the Chinese economy continues to develop, the future of its software industry is deemed to be bright. According to the Ministry of Information Industry (MII), sales for software and information services are expected to reach RMB 1.1 trillion (US$143.0 billion) by 2010 while Chinese software and informational services are likely to exceed 65.0% of the overall market share within the country.

In the coming years, China’s management software market will continue to develop, with rising demands for total solutions. Within the market, the importance of IT services will be on the rise, leading to more domestic and foreign specialized IT service providers. Additionally, the IT service market will become more integrated and IT services in finance will grow.

With security being an issue in China, the network security products market is expected to grow in the coming years. Abiding by a slow growth, the overall network security market is estimated to reach RMB 15.6 billion by the end of 2012.

One of the most promising markets in China’s software industry is the embedded software market, which is expected to scale RMB 387.2 billion in 2010.

Furthermore, the Chinese government plans to encourage foreign multinationals to direct outsourcing services into China, with plans to develop 10 outsourcing bases in the nation by the end of 2010. According to plans, the first base cities will include Dalian, Shanghai, Xi’an, Chengdu and Shenzhen. Support extended to the outsourcing bases include interest rebates, protection of intellectual rights, as well as research and development funding, amongst other forms of preferential aids.

According to China’s Eleventh Five-Year Plan (2006-2010), China’s software and information service industry will continue to grow at an annual rate of 30.0% and is expected to reach US$125.0 billion by 2010. As the industry develops, more resources will be gradually channeled into research and development as Chinese software brands increase their global brand awareness. Under the direction of the plan, exports of software products are targeted to grow at an annual rate of 28.0% and are expected to reach US$12.5 billion by the end of 2010. Additionally, the industry aims to produce approximately 15 major software enterprises with annual sales exceeding RMB 10 billion.

In the long run, the Chinese government has a string of projects aimed at further developing its software industry including e-government, long-distance learning, introducing software to the rural areas, and the digitization of many key industries and areas. In order to achieve these goals, software companies must cooperate and establish innovation ties to further spur the growth in this industry.

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