Is the West losing the Chinese game market?

China claims its developers capture more than 60 percent of the country's computer gaming revenue. Even if it is an exaggeration, it's a shot across the bow of U.S. and European developers.

It's easy to be skeptical about a Chinese government statement that it satisfies 60 percent of its own gaming market with domestically developed games, but if correct this is a red flag over expectations that U.S. and European companies will compete effectively with Chinese game developers. U.S. culture, in particular, has dominated global culture trade, and we naively assume it will continue to do so in the future.

According to ChinaTechNews, Kou Xiaowei of China's General Administration of Press and Publication, Chinese-designed games accounted for "more than 60 percent" of the country's computer game market during 2005. Of course, such statements have to be taken with a grain of salt, wherever it comes from.

In China, which is hard at work revolutionizing itself, the words of a government official should be taken as a direction if not the truth. Foreign developers should take heed and many have already moved to transfer game development to China and are probably now counted as Chinese firms by the government.

The Chinese game market in 2006, according to the Chinese Academy of Social Sciences, will represent 20 percent of the global game market at 8.34 billion RMB ($1.03 billion). China's mobile game market generated 0.8 billion RMB ($99.1 million) in 2004, according to Analysis International. It's computer game revenues were estimated to be $580 million in 2005, according to a DFC Intelligence report cited by this Red Herring article.

By contrast, U.S. video game revenue was $8.2 billion in 2004, according to PriceWaterhouseCoopers, second to Asia/Pacific at $10.1 billion. China accounted for $1 billion of that revenue (see graph), but it's growth is likely to be much greater than that of Japan, which saw approximately $3.1 billion in 2004 revenue, it could overtake Japan in three to five yearrs—still a far cry from 20 percent of the market, but significant. We haven't lost the game yet, but simply shipping work to China is a losing strategy.

Telling a story and engaging an audience is hard, but doing it without language and cultural skills is virtually impossible. U.S. developers will have to migrate development to China, which comes at a significant cost in governmental overhead. Even if the workers come cheaper than American and European coders, profits can be locked up in China for years.

A winning strategy for the West would include language training in schools and extensive cultural exchanges to familiarize students with Chinese (as well as Indian, Korean and other Asian) culture, so that developers have the opportunity to hire creative programmers at home to serve the Chinese market. Otherwise, we're looking at more and more exports of revenue and gaming growth.