China Information Technology Report Q1 2009 - companiesandmarkets.com adds new report

Market Overview China’s IT market should grow at a double-digit rate over the next few years, passing US$100bn by 2011.

In 2008 the global economic environment affected demand for IT from both business and consumer segments, with PC sales growth easing significantly. The falling stock market
and high inflation affected consumer sentiment, while rising fuel costs
and declining external demand influenced business investment plans.

BMI sees growth easing further in 2009 before making a recovery in 2010. There were clear signs from the second quarter of 2008 of the global economic downturn hitting China IT spending. Logistics issues associated with the Beijing Olympics, and the Sichuan earthquake, may have affected the market to some extent. Some vendors held back new products for the latter part of the year, hoping for a strong performance in Q4, traditionally the best of the year.

These were likely to be temporary setbacks however, as Chinese IT spending has a number of strong growth fundamentals. Per capita IT spend is set to double over the forecast period, from US$54 in 2008 to US$109 by 2013. Spending will receive a boost from investments related to the government’s 2008 stimulus package and the Shanghai World Expo in 2010. The vast and relatively un-penetrated rural and SME market segments offer great growth potential.

Industry Developments The new Ministry of Industry and Information Technology (MIIT) has taken control of the important informatisation agenda. According to MIIT figures the growth rate of China’s IT industry slowed in the first three quarters of 2008, to 15.3%, which was 6.5% down on the previous year. However, MIIT projected 20% growth for the year as a whole. Between January and September 2008, the combined business revenues of major IT companies reached US$600.3bn, up 20.5% in yuan terms year-on-year.

Informatisation among small- and medium-sized enterprises (SME) is a government priority, given that smaller companies are the most vulnerable to the current decline in demand in many of China’s export markets, and tighter credit conditions. MIIT has already pledged US$743.73mn in 2008 for SMEs, and proposed to allocate even more to inject capital into these smaller firms. MIIT also said that it would add credit loans and guarantee credit.

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 IT hub, due partly to its current large scale chip production, which is expected by the government to reach US$7bn by 2010.

Competitive Landscape The PC market slowdown in 2008 had a mixed impact on vendors, with some reporting a decline in China business, while others still expanded. Several vendors commented that logistics issues in Beijing and nearby cities in the run up to the July 2008 Olympic games affected distribution. The result seems to have been a delay in promotion and launch of new products into later in the third quarter.

In general, Chinese vendors seemed more affected than foreign vendors. PC market leader Lenovo’s reported China market PC sales of 2.9mn units for Q208 were well below analyst projections. A fall in H108 profits of 22%,, alarmed analysts In contrast, Dell reaped the rewards of channel expansion and a greater focus on the retail sector. Dell has enjoyed 30-40% annual growth in China PC revenues over the past five years, and was on track to repeat this level of performance in 2008.

Software as a Service (SaaS) is gaining popularity on the mainland, with a number of local players emerging with their own internet-based product offerings. Global SaaS leader Salesforce.com is already present on the market, and has around a 10% share of the SaaS market. Rival NetSuite recently set up an office in Hong Kong to target the Pearl River Delta region. However many of the leading players are domestic companies, including market leader Alisoft, which has about 30% of the market.

Computer Sales BMI forecasts computer sales (including notebooks and accessories) of US$39bn in 2009, up from close to US$34bn in 2008. Hardware compound annual growth rate (CAGR) for the 2008-2013 period will be around 16%. Growth slowed in 2008 however, and is expected to ease further in 2009 before making a strong recovery in 2010 and beyond. PC sales growth slowed in 2008, due to the global economic situation, falling stock market, inflation, and rising fuel and power costs. Logistics issues associated with the Beijing Olympics, and the Sichuan earthquake, may also have affected the market.

A situation of relatively low PC-penetration in smaller towns and rural areas should underpin robust growth going forward. 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%. SMEs, smaller towns and rural areas will grow fastest, along with replacement of desktops with notebooks.

Software BMI projects that the Chinese software market will grow at a CAGR of 18% over the 2008-2013 period.

The total value of the Chinese software market reached US$2.9bn in 2008, up from US$2.1bn 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 enterprise resource planning (ERP) demand at present. In the financial sector some providers are looking for scale, with Kingdee and Ufida among those to develop standardised financial software. Elsewhere however, companies are profiting from different vertical specialisations. According to government figures, China’s annual software output topped US$84.5bn in 2007, making it the world’s fourth largest software producer, with an 8.7% share of the global software industry.

IT Services The IT services market is growing fast, and will continue to do so, achieving an expected sector CAGR of 18% between 2008 and 2013. The market value rose to around US$14.6bn in 2008, as banks, telecoms operators and manufacturers invested to meet the challenges by growing demand for their services, and the more competitive environment generated by 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.

E-Readiness The number of internet subscribers is expected to pass the 200mn mark in 2009, from around 186mn in 2008. However, the penetration rate is low, at just 13.8% last year. The number of broadband subscribers will reach a projected 280mn by 2013, overtaking those using a narrowband access service. PCpenetration 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 several landmark developments. The long awaited restructuring of the telecoms sector took place in 2008, and should result in more competition, which will drive demand for IT. The government has also awarded China’s first 3G mobile licence, to China Mobile, which will roll out a service using China’s ‘homegrown’ 3G technology TD-SCDMA.

Author:
Mike King
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