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Market Overview China's IT market is expected to grow at a double-digit rate over the next five years, passing US$100bn by 2012. In the short term the unfavourable global economic environment may have some impact on business and consumer demand, with signs in H108 of PC sales growth slowing. These are likely to be temporary setbacks however, as the fundamentals
of rising incomes and low PC penetration support strong continued growth.
Total IT spending in China is expected to approach US$65bn in 2008 and grow at a CAGR of 12% over the five-year forecast period. IT spending will continue to receive a boost from major infrastructure projects. The vast and relatively underdeveloped rural and SME market segments offer great PC sales growth potential. Major vertical sectors driving double-digit IT spending growth include telecoms, finance, government, energy, social security, education and transport.
The government's recent regulatory reforms, with the establishment of a new 'super-ministry' to oversee both the IT industry and industrial sectors, indicate that the informatisation agenda will be a priority. This was also signalled by the 11th National Five Year Plan, which designated 120 cities for 'digital city' infrastructure development.
Industry Developments The State Council has announced the inauguration of the new Ministry of Industry and Information Technology (MIIT). The new ministry inherits the duties of the former Ministry of Information Industry (MII) in the IT sphere, but also has wider responsibilities for industry. The MIIT will be responsible for promoting industry standards, pushing technology innovation, guiding the development of Chin's information infrastructure, and ensuring China's information security.
The new ministry has control of the important informatisation agenda. In 2007 MII said that its plans to promote informatisation in China comprised four main initiatives. The key policy planks were: 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.
Competitive Landscape The global economic situation, mixed with some local issues, had an impact on the PC market in H108, and caused a slowdown in sales for some vendors. Chinese vendors seemed more affected than foreign vendors. PC market leader Lenovo, despite being a lead sponsor of the 2008 Beijing Olympics, reported the slowest quarterly net profit growth in the past year in Q208.
Despite some temporary setbacks, the fundamentals support a strong expansion of the PC market due to the large relatively untapped rural market and consumer segments. In 2007 the PC competitive battleground expanded to tier four-to-six markets. Dell recently said that it intends to expand its business from the current 45 Chinese cities to 1000, and the company has launched a low cost, low power PC for China.
Demand for Linux software is growing at rapidly in some quarters. Lenovo is reportedly exploring a collaboration with IBM to install IBM's 'Open Collaboration Client Solutions' (OCCS), a software package which runs on open source Linux operating systems. However, Microsoft earlier this year signed an agreement with leading domestic PC vendor Founder to bundle MS Windows Live with its computers over the next two years.
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 Lenovo, HP and Dell have followed each other in cutting prices and expanding production.
While the long-term market growth fundamentals are good, PC sales growth slowed in H108, due to a combination of factors. The global economic situation had an effect on consumer and business demand through a falling stock market, inflation, and rising fuel and power costs.
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 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. Software exports reached around US$930mn last year.
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.
E-Readiness The number of internet subscribers is expected to pass the 200mn mark by 2009, from around 167mn in 2007. However, the penetration rate is low, at just 13% last year. The number of broadband subscribers will reach a projected 240mn by 2012, 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 'home-grown' 3G technology TDSCDMA.
Vendors such as Dell and Microsoft are already exploring TD-SCDMA data cards and other areas of opportunity. For more information about China telecommunications developments, see BMI's separate Telecoms reports series.
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