Market Overview

China’s IT market is projected by BMI to reach a value of more than US$100bn by 2012, on the back of an ongoing investment boom in key sectors. Total spending on IT products and services should grow at a CAGR of around 12% over the forecast period as the country witnesses rapid expansion on the IT front. Despite some concerns such as falling prices, the fundamentals supporting growth will include an expansion into Western China, rural areas and lower-tier cities, growing demand for IT services and outsourcing in key verticals, and more sophisticated demand from enterprises. As a result of rising computer sales and internet usage in recent years, IT is being applied by enterprises to upgrade traditional technologies and enhance efficiency and value. The market is showing a new sophistication, with growing demand for new types of services and software, including CRM. There is a growing demand from medium and larger companies for management software. Spending will also receive a boost from heavy investment in a number of major IT projects associated with the 2008 Beijing Olympics and the Shanghai World Expo in 2010. The government’s recent regulatory reforms indicate that the informatisation agenda will be a priority. This was also signaled by the 11th National Five Year Plan, which designated 120 cities for ‘digital city’ infrastructure development. Aside from these headline events, major sectors driving double-digit IT spending growth currently include telecoms, finance, government, energy, social security, education and transport.

Industry Developments

The government will establish a new Ministry of Industry and Informatisation to supervise the IT and communications industries. The new ministry, expected to be operational in the second half of 2008, will have command of the key informatisation agenda. China’s National Informatisation Development Strategy Guidelines 2006-2010 state that the government will promote informatisation in a number of sectors. In 2007 MII said that its plans to promote informatisation in China comprise four main initiatives. The key policy planks are: 1) to promote rural and agricultural informatisation to support construction of the new socialist countryside; 2) to promote informatisation among SMEs; 3) to promote informatisation in cities and communities; and 4) to promote informatisation of modern logistics. Another key government policy is the ‘Develop the West’ campaign to spread the benefits of economic development to China’s vast but relatively poor Western region. The government has selected the autonomous municipal region of Chongqing to be the Western region’s natural IT hub, due partly to its current large scale chip production.

Competitive Landscape

A current trend in the PC sector is a greater focus by global vendors in the Chinese market on the consumer segment. Dell claimed early gains from its new China strategy of selling direct through retail electronics stores. Building on its partnership with China’s largest electronics store Gome, Dell is now planning to sell desktops and notebooks at Sunning – which is the second largest electronics chain in China. Software as a Service (SaaS) is gaining popularity on the mainland, with local players such as 800App.com emerging with their own internet-based offerings. Global SaaS vendors such as Salesforce.com and NetSuite are also operating in the market. Meanwhile, Oracle recently launched its CRM On-Demand Release 15 and Mobile Sales Assistant for Blackberry products in China. China is beginning to make some headway in its struggle to catch up with India as a destination for global IT outsourcing. According to some estimates, China’s IT outsourcing work is now growing at twice the rate of India’s. Recently Beijing based ChinaSoft International Ltd has been recruiting hundreds of workers to process medical bills and health insurance claims.

Computer Sales

China is already the second-biggest PC market in the world, and BMI forecasts computer sales (including notebooks and accessories) of US$22bn in 2008. A situation of relatively low PC-penetration in smaller towns and rural areas should underpin robust growth, despite strong pressures on prices. China’s market is likely to stay hardware-centric for the next five years, with shares of overall IT spending declining slightly from about 69% to around 65%. Small to medium-sized enterprises (SMEs), smaller towns and rural areas will grow fastest, along with replacement of desktops with notebooks. Market leaders Dell, HP and Lenovo have followed each other in cutting prices and expanding production. Vendors are also using new business models, as China’s relatively high and growing broadband penetration emerges as a significant driver of PC sales in the more mature regional markets. Recently, consumers in Jiangsu province have been offered to chance to purchase an HP branded PC from China Telecom bundled with broadband service for CNY198mn.

Software

According to BMI, the Chinese software market will grow at a CAGR of 14% over the 2007-2012 period. The total value of the Chinese software market reached US$6.9bn in 2007, up from US$6.3bn the previous year. The mid-market business has therefore become a key driver for most vendors’ overall business growth in China, and this is reflected also in the growth of software as a service (SaaS) offerings. Manufacturing is one of the main drivers of ERP demand at present. In the financial sector some providers are looking for scale, with Kingdee and Ufida among those to develop standardized financial software. Elsewhere however, companies are profiting from different vertical specializations. Development of embedded software was also mentioned as a new focus by MII in a recent report. The report forecast that revenue from the industry should reach CNY129.5bn by 2010, with more than 65% from software sales and information services.

IT Services

With strong spending in sectors including banking and financial institutions and government, the IT services market is projected to achieve a CAGR of 15% between 2007 and 2012. The market value rose to around US$10.9bn in 2007, as banks, telecoms operators and manufacturers invested to meet the challenge of WTO membership. Outsourcing is expected to account for up to 30% of the IT services opportunity by 2010, with a potential value of more than US$6bn in that year. A recent report by India IT industry body NASSCOM highlighted the increasing challenge posed by China to its dominance of the global outsourcing market. While China still has some way to go to catch up, with its new education drive and better infrastructure it is in a position to leverage the advantages of low costs and scalability. Seeking the higher margins associated with IT services, an increasing number of local companies are attempting the transition from equipment manufacturers to professional service providers. A process of consolidation is continuing in the sector, particularly among local companies, which are looking to grow through mergers and acquisitions.

E-Readiness

The number of internet subscribers is expected to pass the 200mn mark by 2009, from around 166mn in 2007. However, the penetration rate is low, at just 12% last year. The number of broadband subscribers will reach a projected 235mn by 2012, overtaking those using a narrowband access service. Pc penetration is forecast to reach around 22% by 2010, although it is much higher already in some areas. MII has said that over the next five years its goal is to make the internet available in every administrative village in Central and Eastern China, and every township in the West. To this end, foreign company support is expected to be important. E-government developments have been in the spotlight recently, with two landmark developments. Firstly, the State Administration of Foreign Exchange in Shanghai launched a long-awaited e-settlement system. The ‘E-Payment Settlement System’ was more than one year in development and will help users achieve instant foreign-exchange transfers between different banks in Shanghai.