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The Chinese Software Market Presents Great Opportunities



Software

Overview

Best Products/Services
China's software industry, with the considerable aid of government incentive programs,
is in the midst of a period of steady growth after more than 10 years of slow
development. In 2005, the sale revenue generated from sales of software in China is
expected to reach US$7 billion, an increase of 17.9%, while the IT service market is
expected to reach US$10.1 billion, an increase of 20.1%.3 In 2004, China's software
exports reached $320 million, however, Chinese produced software only accounted for
3.55% of the global software market4. Foreign software still dominate the Chinese
market and should continue to realize strong sales potential, especially in the high-end
software market.

It is very difficult to obtain accurate and consistent market data for this industry in China.
To illustrate, according to an IDC forecast, the packaged software market will reach
US$6.234 billion in 2009 with a 2004-2009 compound growth rate (CAGR) of 18.7%5.
Clearly, these projections vastly understate the above CCID figures (it should be noted
that CCID is connected to the Chinese Ministry of Information Industry). We highlight
this difference to caution readers to thoroughly evaluate all market data available and
evaluate such statistics with a 'grain of salt.'

Many software vendors have penetrated the China market relying mostly on channels and
partners, especially systems integrators (SIs), and independent software vendors (ISVs) to
sell their products.

Opportunities

2006 marks the first year of China's Eleven-Five Year Plan (2006-2010). The Ministry
of Information Industry will draft a new plan on software development. In order to
further develop the IT infrastructure in finance, telecommunication, banking, education,
medical, construction, media, communication, and traditional manufacturing entities, the
software market will have more opportunities not only for domestic software venders but
also for foreign entities. Furthermore, software vendors will have good opportunities in
China's mobile business fields.

The application field will include financial, government, telecom and the manufacturing
industries.

Application software and customized software such as ERP, CRM, middleware and
open-source software will have good development in the China market. Competition in
China's software market is fierce. Foreign vendors still account for about 65% of China's
total software market. In the Enterprise management software market, local Chinese
products accounted for 50%, however, about 90% of the system and office automation
software come from foreign vendors6. High-end products such as database
management systems, systems management software, networking security software,
and industry application software are the fastest growing prospects for foreign firms
selling into the China market.

Starting from 2003, import tariffs on software were eliminated. The Chinese government
issued a number of policies ranging from export incentives, value-added tax rebates,
and financial assistance for companies; it also addressed intellectual property rights
protection. One major development was the promulgation of the Chinese Government
Procurement Law, which mandates that all Chinese government entities (not including
State-Owned Enterprises) procure domestically produced products whenever
commercially available. However, with respect to software, these regulations are still
under draft; of particular ambiguity is what constitutes a "domestic" product.



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