New home turf for China software makers

Local software vendors are beginning to hold their own in the domestic Chinese market, although foreign players still dominate this space.

The enterprise software market in China is still one where foreign vendors dominate, but local software companies are beginning to make a name for themselves, too.

Matthew Cheung, software senior research analyst at Gartner, noted among the largest enterprise resource planning (ERP) vendors in China, are locals such as UFIDA Software and Kingdee International Software Group. RedFlag Software is a strong player in the Linux operating system segment, he added, while local companies Rising Tech and Jiangmin Antivirus Software are capable players in the security software market.

"Traditionally, foreign vendors [are seen to be] more advanced in terms of technology," Cheung told ZDNet Asia in an e-mail interview. "However, local vendors are more agile in terms of developing localized solutions and marketing. They understand and cater to the needs of local customers better. This explains the rise of Chinese software vendors in some application segments."

Local vendors are more agile developing localized solutions and marketing. They understand and cater to the needs of local customers better. This explains the rise of Chinese software vendors in some application segments.
Matthew Cheung, Gartner

In 2007, software revenues in China reached US$3.1 billion and this market is expected to expand at a 17.7 percent compound annual growth rate through 2012, Gartner forecasts.

"Since China has been focusing on manufacturing, ERP software has been hot," Cheung said. "But the high demand in the infrastructure software market, which includes middleware, operating systems and security software, is also worthy to note."

According to Michael Barnes, vice president of software research at Springboard Research, Chinese buyers are becoming more sophisticated in terms of software evaluations and spending, with value steadily supplanting price as the key evaluation criteria.

"However, the majority of Chinese organizations remain focused on cost versus value, when making IT investment decisions," Barnes said in an e-mail interview.

"We expect strong software demand to continue, but unique market conditions will ensure China remains a challenging place for global software vendors to generate profit," he added.

Barnes explained that the huge disparities among Chinese companies in terms of IT resources, process sophistication and technology adoption, will ensure the market remains fragmented and no single software vendor will be able to secure dominant market share.

The demand for software and software-related services is primarily driven by foreign multinational companies (MNC) entering China, as well as two distinct categories of Chinese organizations, he said. These are: internationally-focused companies targeting global growth via exports and direct competition with foreign-based companies; and domestically-focused Chinese organizations seeking to grow operations and compete more effectively locally.

Local companies challenged
According to Cheung, Chinese vendors mostly offer software designed specifically for local use. Since the domestic market is big enough to sustain local vendors, many of these companies have yet to venture abroad. They also do not expand overseas due to the language barrier, he noted. He added that a lot of China-made software is extremely localized, making it difficult to modify these applications to fit international requirements.

IT end-user software spending
in China, 2006-2011
(US$ billion)
Source: Gartner

Chinese software companies are also handicapped by a lack of management expertise, said Cheung. "There are not enough middle management people with the expertise to manage a more globalized company that can withstand competition," he said.

Foreign software vendors looking to do business in China also have their challenges .

Cheung explained: "It's not easy to partner in China as the channel, especially in software market, is semi-mature and foreign vendors may not find a 'perfect-match' [reseller] partner experienced in selling software, particularly in the enterprise space. So, to cultivate a partner ecosystem would be a difficult task and it takes time to grow organically."

He also noted that, when many foreign vendors decide to set up shop in China, they do not take into account the huge cultural differences in terms of product management, working with people, marketing and other related issues.

"If the companies don't pay attention to these issues, it could seriously impair their development in China," Cheung said. "Companies need to be culturally sensitive [to succeed] in the China market."

Foreign vendors also need to do a lot of customer research, especially if they do not have a clear understanding of local customers and they do not employ any local staff, he said.

"Chinese customers need very local support and services, so the 'remote' support mode cannot work in China," Cheung said.

Springboard's Barnes noted that user acceptance is also a major hurdle for most organizations in China because the technical comfort level among employees varies among departments, geographies and roles.

"Lack of collaboration between IT departments and non-technical business users is also a major issue as it hinders agreement on core requirements, which is crucial to ensure project success," he said. This is partly due to a traditional unwillingness among Chinese organizations to pay for implementation and consulting services, Barnes said.

"Instead, most organizations demand these services from software vendors as part of the software license sale, arguing that ensuring the successful implementation of software products and technology rests with the seller, not the buyer," he said.

While Springboard expects demand for software and related services to steadily increase across China, project risks remain high, said Barnes.

"A large percentage of initiatives typically represent the first significant implementation of automated systems in manual environments. This is particularly true in state-owned enterprises, most of which remain large, inefficient and highly labor-intensive," he said. "Due to the lack of technical, project management and change management expertise, as well as a lack of process maturity, risk of failure is high."

The potentially enormous disparities that exist among Chinese businesses also pose a risk to large-scale software project success.

Barnes explained that externally-focused organizations in the coastal regions of China are typically well-positioned for increased IT spending, because they understand the value of IT, are reasonably well-capitalized and are moving toward more-centralized IT management.

"[In comparison], internally-focused organizations in other provinces are often poorly capitalized and far less modernized," he said. "Along with subsidiaries or joint ventures of MNCs, these local organizations are typically evolving rapidly as they struggle to keep pace with China's growing economy and regularly changing government policies and legal regulations."