Entering China's Software Market

Tue, May 31, 2005

With its 1.3 billion people and 13.65 trillion yuan (approximately $1.65 trillion U.S.) in 2004 GDP, it is no wonder every U.S. company wants to get into the Chinese market. Although most companies are entering China to utilize its cheap labor for high-tech development, such as software development or electronic manufacturing, many companies are also trying to sell into the Chinese companies.

There are many obvious advantages in selling into the Chinese software market; however, for companies who are considering that route, there are many factors to consider before making the dive.


Quanxi, Quanxi, Quanxi. It is undoubtedly the most important factor in doing business in China. Tomes have been written on the subject of Quangxi, or relationship in Chinese. The right guanxi can make or break your venture in China. With the right guanxi, you have much better chances in getting into opportunities or closing the deals.

It doesn’t matter how good or inexpensive your product is, if you don’t have the right guanxi, you will not be getting in at all. However, if you have the right guanxi, sometimes it doesn’t matter how bad or expensive your product is, you will still be able to get into many opportunities.

Software Market Size

According to CEO & CIO China, a premier technology magazine in China, China’s 2004 software market was approximately U.S. $25 billion, or 2.6% of the worldwide software spending. However, due to the fact that most Chinese companies report system cost and professional services as part of software cost, the actually software sales is only around 50 percent of the total market. In contrast, the U.S. software market is approximately 40% of worldwide software market.

According to IDC, the Chinese software market grew 24% in 2003, and it’s expected to be growing at similar rates for the next few years. This is definitely not a figure to ignore, which is why most ISVs are trying to secure a landing spot early.

Enterprise IT Infrastructure

In general, Chinese companies lag behind in the application of leading-edge technologies in large-scale enterprise infrastructures. Many Chinese companies are just now deploying ERP and CRM applications that have long been part of the U.S. companies’ infrastructure. When it comes to high-availability and fully redundancy infrastructures, most Chinese companies are still in its infancy.

Chinese IT workers are also relatively inexperienced in the design and maintenance of large-scale infrastructures. Many of them have limited exposure to advanced technologies and training that’s required to design a high-availability infrastructure.

If a U.S. software maker is planning to enter the Chinese market with a brand new product, be prepared to invest in the education of Chinese companies and IT workers.

Product Discounts

Q: What’s the difference between buying a silk scarf at a street shop and a technology product in China?

A: Technology products are discounted more. A lot more!

Chinese companies are used to getting huge discounts, sometimes to the tune of 80 to 90%, on their technology investments. In contrast, ISVs in the U.S. are used to offering much lower discounts, such as 20 to 30%.

Companies going into the Chinese market with this mind set will be in a world of hurt when they start their negotiation process. This is one reason why some companies are going in with prices that are four times the U.S. prices.

Customization and Professional Services

In addition to the huge expected discounts, Chinese companies also expect that ISVs heavily customize the products specifically for them. To compete in the software market, many Chinese ISVs are using the ability to do heavy customization at a low cost, or free, as a way to attract large customers. So the cost of the customization generally falls on the shoulders of the ISVs, instead of the customers.

In the U.S., companies generally charge customers $2,000 to $2,500 per day for professional services to provide customization. Sometimes due to the complexity of the products, cost of professional services may even be higher than the product cost.

The cheap cost of labor in China has direct impacts on the cost of professional services. Most ISVs are finding that Chinese companies are unwilling to pay the U.S. price level for professional services. Companies are paying approximately U.S. $300 to $400 per day for professional services in China. For some of the largest banks and telecom companies, they will most likely negotiate for free professional services.

Another area of impact for the ISVs, due to the cheap cost of labor, is support cost. Chinese companies expect immediate support response, most likely on-site, when problems arise.

Intellectual Property and Software Piracy

No ISV should enter China’s software market without the consideration of software piracy issues. According to International Intellectual Property Alliance (IIPA), China’s piracy rate is approximately 96% of all software sold; only 4% is legitimately bought.

This is not only a problem for packaged software ISVs; it is also a problem for enterprise software ISVs as well.

Due to the fact that China has virtually no trade secret laws, intellectual property leakage is more prevalent if ISVs don’t take precautions in protecting their IP.

As more and more ISVs are considering China’s software market as the next landing spot for expansion, these factors are extremely important to consider and cannot be ignored. By understanding these factors and establishing plans as well as strategies to work through them, companies can ensure a much more successful business venture in China.

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