Tomorrow's IT Powerhouse?
Once overlooked and underestimated, China's software industry is now poised to make its mark at home--and beyond
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By Kathy Wilhelm/SHANGHAI and BEIJING
Issue cover-dated June 14, 2001
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WHEN CHINA'S LARGEST business-software developer debuted on the Shanghai Stock Exchange it did far more than make UFSoft founder Wang Wenjing a very rich man. By giving a cash-starved private software company access to the stockmarket, the listing signalled that China has leapt a major hurdle in its effort to develop a knowledge economy.
"Now that we've listed, those behind us will have a smoother path," says Wang, who tried to list UFSoft for four years before finally winning regulatory approval in May. "It gives encouragement to the whole industry."
It's about time. While China's mainly state-owned manufacturers of computers, telecommunications equipment and other hi-tech hardware were showered with domestic and foreign capital through the 1990s, enabling the best to grow large enough to compete abroad, the largely private software industry was overlooked.
Large state companies with money to invest dismissed software as something that comes free with hardware, or should-- an attitude reflected in the widespread willingness to use pirated software. Foreign investors assumed China would follow the pattern set by Japan, South Korea and Taiwan, all of which became significant producers of hardware--but not software. Expectation helped shape the outcome: China's software market was worth just 23 billion renminbi ($2.8 billion) in 2000, against nearly 200 billion renminbi in hardware sales.
But now, aided by a happy convergence of seemingly disparate factors, China's software industry is poised for take-off.
China's anticipated entry into the World Trade Organization is fuelling an explosion in businesses' demand for software, as is its rapid roll-out of a world-class telecoms infrastructure. Meanwhile, the government's oft-expressed envy of India's software boom is prompting it to offer new incentives to invest in software, including tax breaks and easier access to capital markets. It's also realized that unless the country's predominantly small-scale software developers are able to grow, they will be easily snapped up by foreign competitors after China's WTO entry.
A final piece of the puzzle: China has always had plenty of raw technical talent, but now the tech slump in the West is encouraging many who had decamped to Silicon Valley to return home. "I think it's the best time for entrepreneurs to enter the software industry," says Isaac Mao, a Shanghai computer engineer who founded an educational software company, Tangram, two years ago and recently celebrated his first profitable quarter. (See article on page 39.) "Everyone from government agencies to businesses all need software upgrades."
China's software entrepreneurs are starting to think very big. Wang borrowed 50,000 renminbi to found UFSoft (the letters stand for "user friendly") in 1988, when he was a 24-year-old government office worker. On the day it listed, he found his 55% share of the company suddenly worth 5 billion renminbi. Now he wants to build his Beijing-based company into one of the world's top 50 software companies within 10 years. He's got a long way to go--UFSoft had just 213 million renminbi in revenues in 2000. Still, that was up 65% from 1998, and he doesn't anticipate any slowdown.
Indeed, most projections are for China's overall software market to grow by 30%-40% in each of the next five years, driven largely by corporate demand for modern management tools like inventory-tracking software. "In the past most companies were engaged in manufacturing and operated on low margins. It wasn't so critical if they used software," says Zhou Quan, managing director of the Chinese venture-capital arm of IDG, a U.S. technology publisher. "But now Chinese enterprises have reached the stage where they need software to better manage themselves."
The prospect of keener foreign competition after China enters the WTO is magnifying this trend, as Chinese companies rush to install software systems that can lower their costs, speed up product development and make customer service more efficient. China's largest corporations are turning to the same global vendors that their foreign counterparts use--Oracle, Sun Microsystems, SAP, IBM. Wang's target market is smaller companies who can't afford the Oracle or SAP brand, but want a similar product.
"The gap between their technology and ours gets less and less," he argues. He says that's especially true as software everywhere begins migrating onto the Internet for easier information sharing. UFSoft began developing Java-scripted, Internet-based business software products in 1997, and brought the first ones to market this spring. "These kinds of products are at the cutting edge internationally, so we are working at the cutting edge," Wang says.
Not everyone agrees that Chinese enterprise software is nearing foreign standards of quality. "The functionality and features of local products are not as good," says Dorothy Yang, a Beijing-based researcher at IDC, the U.S.-based technology market-research company. She says the only segments of China's software market where local products outsell imports are security systems, where the government restricts foreign participation, language-based products such as Chinese voice-recognition software, and financial software crafted for China's unique accounting and financial systems.
Yet Yang agrees that the quality gap is closing. She says the best Chinese contenders could catch up in a few years. In some niches, such as mobile-networking software, Chinese companies are already developing state-of-the-art products and marketing them abroad.
"The Chinese mobile-phone industry is very different from other Chinese industries in that the infrastructure is being built to global standards," says Patrick Benzie, chief strategy officer for Intrinsic Technology, a Shanghai-based software start-up with 100 employees. "The top global vendors are all doing business here. If Intrinsic builds a system for a Chinese network and then takes the product outside China, we're not confronted with a huge technology barrier."
Intrinsic offers a software platform that lets mobile-phone operators easily integrate the content of outside applications developers into their networks. More than 10 provincial networks in China have already installed it, and now Virgin Mobile (Asia) is installing it in Singapore. "I would be very disappointed if we don't have an installation in most Southeast Asian countries by the end of the year," Benzie says.
Shanghai Huateng Software Systems is another niche-software developer eyeing regional markets. Huateng specializes in payment software, including the complex systems that link banks, automatic-teller machines and merchants. Over the past year, Huateng has partnered with South Korean and Hong Kong companies to develop products for their markets.
"We have few overseas projects today because the China market is growing so fast that it absorbs our resources," says chief executive Spencer Loh. But as Chinese banks become more like their foreign counterparts, the products Huateng develops for the home market will need less customization to sell abroad. Loh predicts that in a decade, half of Huateng's revenues will come from outside China.
Since last summer, when Beijing declared the software industry a national priority and lowered taxes on it, the government hasn't spelled out a detailed vision of what kind of companies it wants to promote or what path they should take. That's fine with most people in the industry. In an economy that remains one of the world's most regulated, software entrepreneurs say the best way to give them a boost would be to move faster toward a free market--by opening the door wider to foreign software developers, lifting constraints on venture capital and creating a stockmarket for start-ups.
The government's only significant direct investments in the software industry have been in companies trying to develop a Chinese operating system, which it regards as a matter of national security. After years of failed efforts, success may finally be looming: A company under the Chinese Academy of Sciences recently announced it is about to launch an operating system for servers called East Sun. The Ministry of Science and Technology has also started giving small grants to software start-ups, as have some local governments.
Educational-software developer Mao says Tangram recently won a 1 million renminbi grant, which he admits will be useful. But far more valuable would be the speedy creation of a start-up board, which Shenzhen officials originally promised for the end of last year. That target was missed and no new one has been set, with Chinese regulators apparently spooked by the global crash of hi-tech stocks.
"Good exit options attract good investors," says Mao, who's trying to raise $1 million in venture capital to boost his product development and distribution. UFSoft's listing on the main board can only help, he adds: "It showed Chinese venture-capital companies that software can be a profitable investment."
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OPEN-SOURCE TURN-OFF
There's nothing China's suspicious mandarins would love more than for Linux, the open-source operating system, to supplant Microsoft. They've funded local Linux developers and urged government offices to switch. All in vain. Federal Software Stores, China's top software retailer, says fewer than 1% of computers in China use Linux. Federal sold 24,000 Linux packages last year, against about 6.5 million PCs that were sold nationwide with Microsoft bundled inside. No contest.
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THE "P" WORD
By Kathy Wilhelm
Mention China and software in the same breath, and piracy springs to mind. The Washington-based Business Software Alliance, a developers' group, claims that 94% of the software used in China last year was pirated. "In China, people will spend a lot of money for something they can see, but not for knowledge," complains Huang Xiaojian, vice-president of Shenzhen-based Kingdee International, China's No. 2 business-software developer. "Changing that will take several generations."
But Huang says Kingdee and other major software vendors are making a good start. "We tell our customers that if you use pirated products, we can't guarantee your systems won't crash and we won't service them."
Industry trends are also helping. "Our first products were simple accounting packages, which are easy to pirate," says Huang. But more businesses now are installing complex software systems that run on networks and handle everything from the supply chain to customer relations. A high degree of customization is required with each sale. "Piracy is much less of a problem now," says Huang.
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