Software Market – China October 2014
Executive Summary Market
Drivers and Challenges
Trends
Software market in China was valued at USD xx bn in 2013 and is projected to grow at a CAGR of y% between 20– to 20- Eastern region of China earned USD xx bn, accounting for z% of the total software revenue in China in 20-Drivers: - Increase in R&D Activities - Large Internet and Mobile Phone User Base - Increased Adoption of E-commerce - Rise in Income
- Language Barrier - Loss Due To Software Piracy - Lack of Intellectual Property Rights Protection - High Costs of Entry
- Largely Untapped Rural Market - Strong Education and Training Increasing Importance of Cloud Computing Rapid Growth of Smartphones and Apps Government Measures to Cut Software Piracy
Government Initiatives
Challenges:
Lower Duties and Tariffs Standards and Regulations
Increasing Importance of SaaS Increasing Investment in Software and IT services Beijing’s 12th Five Year Plan (2011-2015) for Software Market Major National Policies Regarding Software & IT Service
Major Domestic Players Player 1
Competition
Player 2
Player 3
Player 4
Player 5
Player 6
Major Foreign Players Player 1
Player 2 SOFTWARE MARKET IN CHINA 2014.PPT
Player 3
Player 4 2
•Macroeconomic Indicators •Introduction •Market Overview •Software Outsourcing •Direct Investment Scenario •Drivers and Challenges •Government Initiatives •Trends •Opportunities •Competitive Landscape •Mergers and Acquisitions •Strategic Recommendation •Appendix SOFTWARE MARKET IN CHINA 2014.PPT
3
SAMPLE
Economic Indicators (1/3) Current Account Balance USD bn
f a
b
c
d
20--
20--
20--e
e
0 20--
20--e
20--e
Exchange Rate: Half Yearly Period Average
USD/INR
Period High
Period Low a
a c b
a a c b
1/1/14
a b
b
b c
c
c
2/1/14
3/1/14
SOFTWARE MARKET IN CHINA 2014.PPT
4/1/14
5/1/14
4
Software Industry - Definition Software Industry Organizations engaged in sales of computer software or services related to computer systems OECD Statistics
Private Sources of Statistics
Data for ISIC Rev.3 division 72, which includes activities related to the design, setup, operation and maintenance of computer systems and networks, as well as custom software development and software publishing
Takes its point of departure in the products and markets, and thus include packaged software, custom software, and computer-related services such as system design, maintenance
Major Types of Software System Software
Application Software
Software that handles different request for using the hardware, many housekeeping work, storage of data and other tasks
Software that handles a specific task and are developed to fulfill specific requirement of the user
Note: OECD refers to Organization for Economic Cooperation and Development and ISIC Rev.3 refers to International Standard Industrial Classification of All Economic Activities Revision 3 SOFTWARE MARKET IN CHINA 2014.PPT
5
China’s software industry is not only highly promoted, but also a heavily regulated sector
SAMPLE
State Council
National Development and Reform Commission
Ministry of Industry and Information Technology
Ministry of Science and Technology
General Administratio n of Press and Publication
Ministry of Finance
Ministry of Commerce
• Text National Development and Reform Commission
• Text Ministry of Industry and Information Technology
SOFTWARE MARKET IN CHINA 2014.PPT
6
managed by several government authorities at both the macro and micro levels
SAMPLE
Ministry of Science and Technology
General Administration of Press and Publication
Ministry of Finance
Ministry of Commerce
• Text
• Text
• Text
• Text
SOFTWARE MARKET IN CHINA 2014.PPT
7
Remarkable annual growth rate and demand from a wide range of industries has boosted software market in China
SAMPLE
China Software Market Overview • By the end of 20--, it is estimated that the Chinese software market will generate revenues worth about USD xx bn • In the year 20--, the top 10 players accounted for almost y% of the total revenue generated in the market • The rapid development is on account of the initiatives by the government and growing demand from software users Demands for ERP, CRM and accounting software has significantly increased post their adoption and usage by SMBs
• Promotion of cloud computing by domestic and foreign players along with major government support accelerated the growth of the software market Strong adoption of cloud or subscription based services by enterprises and increased usage of cloud based software and platforms are driving the software market
Software Market Size & Growth - China
Software Market Revenue Composition – China 2014*
2013 USD bn f
X%
f%
e c
a%
f%
b%
a% b%
d e%
e%
a d%
b 0 20--
20--
20--e
20--e
20--e
20--e
d%
c% Segment 1
Segment 3
Segment 5
Segment 2
Segment 4
Segment 6
SOFTWARE MARKET IN CHINA 2014.PPT
c%
8
Software sub-sectors in China are expected to be the areas of highest growth presenting attractive opportunities
SAMPLE
Segment - wise Software Revenue Software Segments
System Integrated Services
Software Products
Embedded System Software
Data Processing and Operating Services
IT Consulting Services
IC Design
• China is the world’s fourth largest information technology (IT) market by spend after the US, Japan and Germany
• In the first four months of 2014, software products and information system integrated services generated most of the software revenue followed by data processing and operating services
Revenue Composition – China Software Market (Jan – Apr 2014) USD bn a b
d
e
c f 0 Segment 1
Segment 2
Segment 3
Segment 4
SOFTWARE MARKET IN CHINA 2014.PPT
Segment 5
Segment 6
9
East China is a major growth pole for future software development
SAMPLE
Region - wise Software Revenue • Beijing and Shanghai located in the eastern region are the two main hotspots of the software industry • By region, revenue from the eastern area of China was USD x bn, accounting for y% of the total software revenue in China in 20-• By Nov, 2013, the software revenue in region1 grew rapidly, with an increase of x% y-o-y, while that in Region 2 climbed at a slower pace with z% y-o-y growth rate
Revenue Composition – China Software Market (Jan – Dec 2013) USD bn a
c
d
Region 3
Region 4
b Region 1
Region 2
SOFTWARE MARKET IN CHINA 2014.PPT
10
SAMPLE
Imported software product registration guidelines (1/2) • According to the Administrative Measures for Software Products, the term “software product” refers to the computer software, or software embedded in the information system or equipment, or accompanying computer software being utilized when technical services such as computer information system integration or application service are offered • “Imported software” refers to software products developed outside of China, but are produced or under business operation in various forms within China
GUIDELINES Text
Text
SOFTWARE MARKET IN CHINA 2014.PPT
11
SAMPLE
Imported software product registration guidelines (2/2) • Text
Text
• Text
SOFTWARE MARKET IN CHINA 2014.PPT
12
SAMPLE
Import and Export of software products - Do’s and Don’ts According to relevant Chinese regulations, the development, production, sale and import/export activities of any software product must not • • • • •
infringe on the IPR of others contain computer viruses cause harm to computer system security fail to meet China’s software regulation standards contain contents prohibited by law and administrative regulations
• Text
SOFTWARE MARKET IN CHINA 2014.PPT
13
SAMPLE
China is fast emerging as a major global software outsourcing destination
• Text
China’s Strategic outsourcing locations
SOFTWARE MARKET IN CHINA 2014.PPT
14
Despite being faced with challenges the development of the China’s outsourcing market cannot be overlooked
SAMPLE
• China’s rising importance in the global outsourcing market is evident • China is rapidly emerging from the competitive software outsourcing industry as one of the world's leading suppliers of software outsourcing services
Emphasis on ISO standard compliances, creating incentives and building a robust infrastructure along with a proper process orientation will help China emerge as a prominent outsourcing destination and will soon enable it to compete with India and Japan in the global arena
Exports – Outsourcing Services
Outsourcing Services
USD bn
USD bn +X% a
+Y%
b a
0
b
0.0 Period 1
Period 2 SOFTWARE MARKET IN CHINA 2014.PPT
Period 1
Period 2 15
Software Parks in China (1/5) Set up in 1998 to promote and develop software and service outsourcing industries
SAMPLE
Xi'an Software Park It is located within the Xi’an High-tech Industries Development Zone, a special economic development area
Spread over an area of 7 square kilometers, it has been engaged in the cultivation of high tech environment and infrastructure construction
In 2009 total revenue of the park from software and information service outsourcing industry reached USD 4.669 bn with 41% y-o-y growth
The total export earnings reached US$ 154 mn, marking year-on-year growth of 36% in 2009
The Xi'an Hi-tech Zone Software Industrial Supporting Policies
The parks‘ main activity is to bring the national preferential policies to the member companies and absorb global investors
• • • • • • • • • • • •
House rent subsidy Personal income tax subsidy Market exploration reward Export reward Telecommunications data reward Corporate merger reward High-end talent finding reward The best employee reward New staff's internal training reward Intern reward Corporate capability certification reward Corporate loan discount reward SOFTWARE MARKET IN CHINA 2014.PPT
In 2009, the total number of enterprises were increased to 870 and the total number of employees to 82,000
16
Direct Investments – Player 1 Total Investments – Sector-wise
SAMPLE IT Investments – Geography-wise A%
Sector X% B%
Region 1 Region 2
IT Investments – Segment-wise
Investment Snapshot • The company has invested in the IT sector only
0%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
100
A total of 4 investments were made in the x sector • Maximum number of investments were seen in the region 1
Segment
SOFTWARE MARKET IN CHINA 2014.PPT
17
Drivers & Challenges – Summary
Challenges
Drivers Increase in R&D Activities Large Internet and Mobile Phone User Base Increased Adoption of E-commerce
Language Barrier Loss Due to Software Piracy
Lack of Intellectual Property Rights Protection High Costs of Entry
Rise in Income
Largely Untapped Rural Market Strong Education and Training
SOFTWARE MARKET IN CHINA 2014.PPT
18
Increase in China’s R&D expenditure on software has Paved the way for the country to become a
SAMPLE
Increase in R&D Activities (1/2)
Impact
• In 20--, software and IT services industry R&D expenditures was USD x bn an increase of x% from the previous year • R&D investment ratio (R&D expenditure as a percentage proportion of main business income) was more than y% • China’s investment in R&D as a percentage of its GDP shows a strong and steady growth and if the growth rate remains consistent China will surpass the United States by the next decade • China’s 12th Five Year Plan (2011-2015) targets R&D spending at 2.2% of GDP by 2015 Major Software R&D Centers in China
Major companies with their R&D centers in China A B C D Note: The list is not exhaustive SOFTWARE MARKET IN CHINA 2014.PPT
19
Improving condition of e-commerce will boost further growth in China’s software market
SAMPLE
Increased Adoption of E-commerce
Impact
• China is expected to become the world’s largest e-commerce market surpassing the US More than x mn Internet users in 2013 and y mn online shoppers in 2013
In 2010, x% of China’s urban population shopped online, which is to become y% in 2015
• Growth in e-commerce market is one of the key factor that will drive growth in software market Chinese shoppers spent around USD x bn on online shopping in 2012 By June, 2013, China e-commerce transaction reached USD y bn Around x mn people work in e-commerce enterprises
• Mobile e-commerce market has also witnessed a high growth rate Increasing smartphones and tablets are fuelling the growth of the mobile e-commerce market
B2B revenue
No of online buyers No of buyers bn
USD bn +x% b
c
d
+y%
b
a
a
0
0.0 2012
2013
2014e
2015e
Jan- Jun 2012
SOFTWARE MARKET IN CHINA 2014.PPT
Jan-Jun 2013 20
Language barrier is the key challenge for bringing software …
SAMPLE
Language Barrier (1/2)
Impact Foreign Perspective
• For companies trying to enter Chinese market, the biggest challenge is the language barrier China’s large market attracts different customers from diverse backgrounds and cultures, many of whom do not read or speak Chinese, leading to serious negotiation problems In China, all verbal and written communications would need to be in Mandarin, which would further be complicated by thousands of local dialects – Capturing pertinent data in systems presents a challenge even if these problems were solved
• Language barrier hinders software exports, since communication is a critical component of software development • Language barrier affects e-commerce as it hinges on language too, thus indirectly affecting software market
SOFTWARE MARKET IN CHINA 2014.PPT
21
Software piracy is hampering the growth of e-commerce market
SAMPLE
Loss Due to Software Piracy
Impact
• China’s estimated software piracy rate remains excessively high despite some progress in recent years and the overall value of stolen software has increased with the growth in Chinese software market The proportion of China’s personal computers with pirated software installed was 77 percent in 2011 ‘BRIC’ economies of Brazil, Russia, India and China are home to rampant piracy inspite of being the world’s fastest-growing technology markets
• In China, almost four out of five programs in use are pirated Piracy poses a problem for companies such as Microsoft Corp. (MSFT), the biggest software maker, as PC sales growth is fastest in countries that have high rates of software theft A company could lose USD 114 bn yearly if its IT system crashes because of pirated software
Chinese private enterprises, state-owned enterprises and government agencies continue to use pirated software
The commercial value of unlicensed software in China was $8.9 billion in 2011
• The lack of criminal remedies against this form of software piracy
• Ineffective civil • enforcement procedures • Inadequate administrative enforcement
SOFTWARE MARKET IN CHINA 2014.PPT
22
Government initiatives have contributed to the recent drop in piracy rate, still there is scope for further development
SAMPLE
Government Measures to Cut Software Piracy • During the 2007-2010, Chinese government has spent USD 169.84 mn on purchasing copyrighted software • In 2011, central and local government computers were investigated by teams of inspectors to ensure that all the departments are using authorized software and inspections of software pre-installation on computers sold in the country are stepped up 135 central government departments, including all ministries, completed installing licensed software at a cost of more than USD 22 mn in May 2011
• Copyrighted software has already been installed in central government departments, and it was popularized among local authorities in 2012 • The government's frequent campaigns against IPR infringement helped create a sound business environment and greatly boosted the development of the country's software industry • By the end of 2013, most of the Chinese government departments have started to use licensed software in the latest move to IPR rights and to provide business opportunities for software providers • Bilateral negotiations with the US through the Joint Commission on Commerce and Trade (JCCT) includes the following commitments Ensuring the use of legal software in government agencies and state-owned and other enterprises Requiring pre-loading of legal operating system software on computers produced or imported into China Delaying indefinitely the implementation of certain discriminatory government procurement regulations
SOFTWARE MARKET IN CHINA 2014.PPT
23
Summary – Trends
Increasing importance of cloud computing
Rapid growth of Smartphone devices and Apps
Trends
Increasing investment in Software and IT Services
Increasing importance of SaaS
SOFTWARE MARKET IN CHINA 2014.PPT
24
Prioritization of cloud computing by the Chinese government has caused the market to boom in China
SAMPLE
Increasing importance of cloud computing (1/2) Government Initiatives and Investments
Chinese government will invest USD 1 bn to drive cloud computing deployment in China over the next few years and has set up several projects for the development of key domestic cloud computing hubs
Strategic Partnerships in Investment by Foreign Players
Promising National Policy
Strategic partnerships among domestic vendors like 21Vianet and Microsoft and investments' made by foreign players including IBM and HP are driving the cloud market in China
The 12th 5 year plan has recognized the need of cloud computing and has formulated policies that support the cloud business
NDRC has established a Cloud Computing Special Fund with an initial investment of USD 101.54 mn in 15 pilot projects in Beijing, Hangzhou, Shanghai, Shenzhen, and Wuxi to launch the initial development and innovation for cloud computing under supervision of MIIT as of Oct 2011 Investment in new cloud computing projects in China are on the rise SOFTWARE MARKET IN CHINA 2014.PPT
25
Though software piracy issue shadows the country, still it’s a huge market and provides sales opportunities
SAMPLE
Opportunity in IT Consultancy and Outsourcing Sector Foreign companies entering with IT systems which are integrated with their operational processes (e.g. ERP and CRM systems) are implemented in China
Need for Service Providers
Potential Source of Opportunity China’s second and third tier cities with scarce quality service providers
Underdeveloped consultancy services market
Banking and health sectors as they upgrade their systems
Opportunity in Web development More foreign companies and organizations entering China
Setting up their own websites
More online activities driving demand for compatible software
Good opportunity to web developers for building attractive and stable websites Boost to e-commerce in China
By the end of 2015, China will have 350 mn online shoppers Note: ERP refers to Enterprise Resource Planning; CRM refers to Customer Relationship Management SOFTWARE MARKET IN CHINA 2014.PPT
26
Porter’s Five Forces Analysis
SAMPLE Impact High
Threat of New Entrants Text
Impact Medium to High
Bargaining Power of Suppliers • Text
Impact Medium
Competitive Rivalry
Impact High
Bargaining Power of Buyers • text
• Text
Impact Low Threat of Substitutes • Text
SOFTWARE MARKET IN CHINA 2014.PPT
27
Competitive Benchmarking (1/4)
SAMPLE
Trading Comparables (FY 2013)
Player 1
Player 2
Player 3
Market Capitalization (USD mn)
Share Price (USD)
EV/EBITDA (USD)
EV/Revenue (USD)
PE Ratio
SOFTWARE MARKET IN CHINA 2014.PPT
28
Competitive Benchmarking (x/x)
SAMPLE
Key Ratios of Major 3 Companies – Operational Basis (FY 20--) (x/x) Debtors Turnover Ratio
10 8 6
xx xx
4 2 0
xx Player 1
Player 2
Player 3
• xxx
Note: Assuming all sales are credit sales SOFTWARE MARKET IN CHINA 2014.PPT
29
SAMPLE
Public: Domestic Company – Player 1 (x/x) Company Information
Locations – China
Corporate Address Tel No. Fax No. Website Year of Incorporation Ticker Symbol
Stock Exchange
Products and Services Category
Headquarters Products/Services
Key People Software related products
Name
SOFTWARE MARKET IN CHINA 2014.PPT
Designation
30
SAMPLE
Public: Domestic Company – Player 1 (x/x) Financial Snapshot Total Income USD mn
Key Ratios
Total Income
a b 0
Net Profit/Loss
Profit USD mn
x
x
b
x x y
y
20--
20--
y
y
20--
20--
y-o-y change (20--)
20--
20--
20--
20--
Profitability Ratios Operating Margin Net Margin Profit Before Tax Margin Return on Equity Return on Capital Employed Return on Working Capital Return on Assets Return on Fixed Assets
Cost Ratios
• The company earned a net profit of USD xx mn in FY 20--, as compared to a net profit of USD xx mn in FY 20-• The company reported total Income of USD xx mn in FY 20--, registering an increase of xx % over FY 20-• The company earned an operating margin of xx% in FY 20-- an increase of xx percentage points over FY 20--
• The company reported debt to equity ratio of xx in FY 20--, an increase of xx % over FY 20--
Financial Summary Market Capitalization (USD mn) Total Enterprise Value (USD mn) EPS (USD) PE Ratio (Absolute)
c 0
Financial Summary
Indicators
a
Particulars
Value (12/05/2014) xx xx xx xx
Operating costs (% of Sales) Administration costs (% of Sales) Interest costs (% of Sales)
Liquidity Ratios Current Ratio Cash Ratio
Leverage Ratios Debt to Equity Ratio Debt to Capital Ratio Interest Coverage Ratio
Efficiency Ratios Fixed Asset Turnover Asset Turnover Current Asset Turnover Working Capital Turnover Capital Employed Turnover Improved
SOFTWARE MARKET IN CHINA 2014.PPT
Decline
31
SAMPLE
Public: Domestic Company – Player 1 (x/x) Key Business Segments
x
A%
Key Geographic Segments
Industry1 x
Region 1 x A%
B%
Y%
Y%
Y%
B% 0%
0%
20-
20-
Key Recent Developments Description
20-
Region 2
x
x
Y%
Y%
Z%
Z%
20-
20-
News
Overview Approval Joint Venture & Cloud news
SOFTWARE MARKET IN CHINA 2014.PPT
32
SAMPLE
Public: Domestic Company – Player 1 (x/x)
• Text
• Text
S
W
Strength
Weakness
O
T Threat
Opportunit y • Text
• Text
SOFTWARE MARKET IN CHINA 2014.PPT
33
SAMPLE
Private: Foreign Company – Player 2 (x/x) Company Information
Locations – China
Corporate Address Tel No. Fax No.
Website Year of Incorporation
Products and Services Category Solutions Services
Regional Offices Products/Services
Key People Name
Designation
Product
SOFTWARE MARKET IN CHINA 2014.PPT
34
SAMPLE
Private: Foreign Company – Player 2 (x/x) Financial Snapshot Total Income USD mn
Key Ratios
Total Income
a b 0
Net Profit/Loss
Profit USD mn
x
x
b
x x y
y
20--
20--
y
y
20--
20--
Financial Summary
• The company reported total Income of USD xx mn in FY 20--, registering an increase of xx % over FY 20-• The company earned an operating margin of xx% in FY 20-- an increase of xx percentage points over FY 20--
• The company reported debt to equity ratio of xx in FY 20--, an increase of xx % over FY 20--
Financial Summary Market Capitalization (USD mn) Total Enterprise Value (USD mn) EPS (USD) PE Ratio (Absolute)
c 0
y-o-y change (20--)
20--
20--
20--
20--
Profitability Ratios Operating Margin Net Margin Profit Before Tax Margin Return on Equity Return on Capital Employed Return on Working Capital Return on Assets Return on Fixed Assets
Cost Ratios
• The company earned a net profit of USD xx mn in FY 20--, as compared to a net profit of USD xx mn in FY 20--
Indicators
a
Particulars
Value (12/05/2014) xx xx xx xx
Operating costs (% of Sales) Administration costs (% of Sales) Interest costs (% of Sales)
Liquidity Ratios Current Ratio Cash Ratio
Leverage Ratios Debt to Equity Ratio Debt to Capital Ratio Interest Coverage Ratio
Efficiency Ratios Fixed Asset Turnover Asset Turnover Current Asset Turnover Working Capital Turnover Capital Employed Turnover Improved
SOFTWARE MARKET IN CHINA 2014.PPT
Decline
35
SAMPLE
Private: Foreign Company – Player 2 (x/x) Key Business Segments
x
A%
Key Geographic Segments
Industry1 x
Region 1 x A%
B%
Y%
Y%
Y%
B% 0%
0%
20-
20-
Key Recent Developments Description
20-
Region 2
x
x
Y%
Y%
Z%
Z%
20-
20-
News
Overview Approval Joint Venture & Cloud news
SOFTWARE MARKET IN CHINA 2014.PPT
36
SAMPLE
Private: Foreign Company – Player 2 (x/x)
• Text
• Text
S
W
Strength
Weakness
O
T Threat
Opportunit y • Text
• Text
SOFTWARE MARKET IN CHINA 2014.PPT
37
SAMPLE
Mergers and Acquisitions (2011-2014) – (1/6) Announced Date
Closed Date
Target
Buyer/Investors
SOFTWARE MARKET IN CHINA 2014.PPT
Sellers
Size (USD mn)
38
Strategic Recommendations (2/2)
SAMPLE
• Text
1
Text
2
Text
3
Text
Brand Building And Creating Brand Awareness Text SOFTWARE MARKET IN CHINA 2014.PPT
39
Thank you for the attention Software Market – China report is part of Netscribes’ Information Technology Series. For any queries or customized research requirements, contact us at: Phone: E-Mail:
+91 22 4098 7600 info@netscribes.com
About Netscribes Netscribes is a knowledge-consulting and solutions firm with clientele across the globe. The company’s expertise spans areas of investment & business research, business & corporate intelligence, content-management services, and knowledge-software services. At its core lies a true value proposition that draws upon a vast knowledge base. Netscribes is a one-stop shop designed to fulfil clients’ profitability and growth objectives. Disclaimer: This report is published for general information only. Although high standards have been used in the preparation, “Netscribes” is not responsible for any loss or damage arising from use of this document. This document is the sole property of Netscribes and prior permission is required for guidelines on reproduction. SOFTWARE MARKET IN CHINA 2014.PPT
40