China's channel partners are over-reliant on their hardware-related businesses and face the risk of seeing their revenue stream dry up as profit margins for this market segment are "rapidly shrinking", an analyst warns.
Liu Jingwei, associate research manager for Springboard Research Greater China, said in a report Thursday that as high as 93 percent of all channel vendors viewed hardware as their largest revenue source. Comparatively, only 6 percent of their business earnings were attributed to software while the 1 percent of their income came from services, Liu noted.
Channel partners include systems integrators, distributors, independent software vendors (ISVs) and resellers.
"The profit margins for hardware are rapidly shrinking, which is why channel partners should steer clear from the fierce competition in this space and focus more on software development and service delivery capabilities," said Liu.
The report also revealed that channel partners were focused mainly on China's huge and fragmented public sector IT market. According to Springboard's findings, 63 percent of companies polled focused on garnering business from the public sector while only 24 percent supplied the Chinese manufacturing industry. Only 8 percent catered to the banking, finance, security and insurance (BFSI) industry, noted the report.
Additionally, the public sector accounted for 26 percent of the channel partners' overall revenue, compared to 21 percent contributed by the manufacturing sector and 20 percent from communications.
However, the Springboard report described China's channel partner ecosystem as too complex and this is impacting the market players' revenue margins.
According to Bryan Wang, associate vice president of Greater China at Springboard, PCs and low-end servers and storage are becoming increasingly commoditized. This has made the market become "highly price-sensitive" and more vendors are choosing to bypass the national distributor layer and work directly with regional distributors and resellers.
Wang said in the report: "With a flat and simplified channel structure, the vendors can also reduce the distribution costs and be agile and flexible in response to market dynamics."