China Information Technology Report Q3 2007: Industry Research Report

China Information Technology Report Q3 2007

Published Date: October 2007

Published By: Business Monitor International

Page Count: 40

Order Code: R302-2418

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Market Overview

The total size of China’s domestic IT market is forecast by BMI to increase from US$52.1bn in 2006 to around US$91.8bn in 2011, representing a compound annual growth rate (CAGR) of 12%. With three years of phenomenal economic advance fuelling an investment trend that shows little sign of tailing off, investment in the IT sector grew 34.4% in the first half of 2007. Once again, this demonstrated that previous attempts to cool the economy have been largely futile, begging the question of what can be done next. Major sectors driving double-digit IT spending growth currently include telecoms, finance, government, energy, education and transport. There is a growing demand from medium and larger companies for management software. As a result of rising computer sales and internet usage in recent years, an increasing number of local companies are attempting the transition from equipment manufacturers to professional service providers.

With Lenovo recently introducing a PC at a sub-US$200 price point, the momentum of PC market growth is shifting towards smaller cities and rural areas. China’s IT market is therefore entering a new phase with growth in rural areas where PC penetration remains below 20% expected to be double that of the market as a whole. Geographical market expansion should also be supported by the government’s goal of making internet available in every administrative region in Central and Eastern China, and every township in the West. The ‘Open the West’ campaign is already stimulating faster growth in previously ‘off-the-map’ provinces such as Shanxi. The government has given ICT a high priority in the 11th national Five Year Plan, which has designated 120 cities for ‘digital city’ infrastructure development.

China is also becoming an increasingly important global outsourcing location, with IT Services representing a more than US$10bn opportunity in 2007, and outsourcing around US$3bn. China IT 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. Revenues from Shanghai’s IT industry alone are expected by the municipal government to double by 2010. Aside from these headline events, spending is currently being generated by major reform projects in areas such as social security and telecommunications.

Competitive Landscape

Lenovo’s introduction of a PC with a record low retail price of US$198 (CNY1499) has signalled a new phase of competition for the rural market. With PC markets in large cities increasingly saturated, Lenovo has indicated that it is offering rural distributors products priced between CNY1499 and CNY1299. The China market leader is also establishing 5000 new marketing agencies to expand after sales service to a maximum of 300,000 administrative villages. Lenovo will also carry out promotional campaigns in the townships.

While, Lenovo’s major foreign rivals did not make an immediate response, Dell recently launched a low cost, low power PC for China which is retailing as low as US$335. Meanwhile HP is likely to follow suit. Through a partnership with Taiwan chipmaker Via Technologies, HP’s new computer is expected to retail at under US$520 with basic software.

The effects of these developments are being felt by the other domestic vendors. A convergence of computer market trends including slower growth for PCs and a shift from desktops to notebooks is making life difficult for leading domestic computer vendors. This is particularly so as they face a strong challenge from foreign competitors.

Industry Developments

MII has released figures indicating that investment in the mainland’s IT industry grew by one third in H107. According to the government data, IT fixed asset investment reached US$15bn in the first six months of 207, up 34.4% year-on-year. The biggest growth area was electronic components which surged 55.7%, followed by telecoms with 32.5% growth. The MII figures also revealed the growing influence of Taiwanese firms following the decision of the Taiwanese authorities to permit firms to expand their presence in the mainland.

Meanwhile, Shanghai’s software industry grew the fastest of all China regions in the first half of 2007 according to government figures. Fuelled by outsourcing and integrated circuits, Shanghai’s software industry gained 35.7% in H107 with revenues of CNY28.9bn. However, Beijing remains the biggest revenue generator with CNY56.3bn. Altogether, seven province level regions in China each generated software revenues exceeding US$1.31bn in H107.

The nearby city of Hanghzou has also recently announced plans for a new US$700mn IT park which will be located in the Hangzhou Economic and Technical Development Area (HEDA). Singapore company Ascendas has been tasked with developing the park which is expected to eventually provide employment for as many as 50,000 people. The news follows an announcement by the Ministry of Construction earlier this year that China is to accelerate the construction of ‘digital cities’ across the country.

Computer Sales

Vendors are utilising 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 CNY198/mn. Hardware CAGR for the 2006-2010 period will be around 10%, with small-to-mid-sized enterprises (SMEs), smaller towns and rural areas providing growth, along with replacement of desktops with notebooks. Unit sales growth will be much higher than revenues, as intense competition is leading to aggressive price cuts. Market leaders Dell, HP and Lenovo are all following each other in cutting prices and expanding production. Dell’s announcement that it is to lower costs in China through procurement of Advanced Micro Devices (AMD) chips signifies more downward pressure ahead and facing a declining market share Lenovo has recently signalled that it will also cut prices further.

BMI forecasts computer sales (including notebooks and accessories) of US$19.9bn in 2007, up from US$18.2bn in 2005. Already the second-biggest PC market in the world, relatively low PC-penetration in smaller towns and rural areas ensures continued strong growth prospects. Vendors are responding with more investment in manufacturing facilities and support services, which are becoming more important. China’s market is likely to stay hardware-centric for the next five years however, with shares of overall IT spending declining from about 73% to around 66%. The main growth opportunities are currently coming from the SME sector. Servers and networking equipment will form the fastest growing elements of SME demand, with entry and mid-range servers showing the greatest potential.

Software

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 standardised financial software. Elsewhere however companies are profiting from different vertical specialisations. Development of embedded software was also mentioned as a new focus by regulator 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.

According to BMI, the Chinese software market will grow at a CAGR of 14% over the 2006-2011 period. The total value of the Chinese software market reached US$6.3bn in 2006, up from US$5.6bn the previous year. Despite the fast growth, Chinese enterprises still tend not to pay enough attention to software. However, there is a growing trend for companies to seek greater efficiency by using IT to improve productivity and lower costs, including labour costs. The mid-market business has therefore become a key driver for most vendors’ overall business growth in China. Software is also a key industry for the government with the IT regulator Ministry of Information Industry (MII) recently launching an initiative jointly with the Ministry of Commerce and State Administration of Taxation to offer a reduced 10% rate of corporate tax to 152 software firms in China.

IT Services

A recent report by India IT industry body BASSCOM has 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. Outsourcing is expected to account for around one third of a total IT Services opportunity of more than US$10bn in 2007. The top three vendors currently are IBM Global Services, HP and Lenovo. However, 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. China Soft, a Beijing company, switched its focus from hardware to services in 2006 and was rewarded with a 37% increase in profits for the last three quarters, even as turnover fell 11%. Meanwhile, Lenovo Holding’s unit Digital China, which got 58% of its sales from hardware in 2006, has also announced its intention to invest more in its IT services operation. A process of consolidation is continuing in the sector, particularly among local companies, which are looking to grow through mergers and acquisitions.

With strong spending in sectors including banking and financial institutions and government, the IT services market is growing fast, and will continue to do so, achieving an expected sector CAGR of 17% between 2006-2011. The market value rose to around US$9.4bn in 2006, as banks, telecoms operators and manufacturers invested to meet the challenge of WTO membership.

E-Readiness

The number of internet subscribers is expected to pass the 190mn mark in 2007, from around 140mn in 2006. However, the penetration rate is low, at just 11% in 2006. PC-penetration is forecast to reach around 22% by 2010, although it is much higher already in some areas. The stock of PCs per thousand inhabitants is estimated by International Data Corporation (IDC) at around 120 in 2006.

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, such as the agreement recently signed between Intel and the Guangdong Provincial Information Industry Department, to promote the use of IT in rural areas of the province. E-government developments have been in the spotlight recently, with two landmark developments. Firstly, the State Administration of Foreign Exchange in Shanghai launched a longawaited 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.

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