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Cindy Payne
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By Cindy Payne, Managing Director
Asia-Pacific Connections Pte Ltd

April 2002

 

In the wake of the People's Republic of China's (PRC) entry into the World Trade Organization (WTO) and the country's successful bid for the 2008 Olympics, the Chinese are beginning to wake up to the possibilities and challenges of a Chinese global marketplace.

The potential of the Chinese marketplace has evoked an enormous amount of excitement since the 1970s when China began to engage commercially with the outside world again. According to the United Nations, China attracted the largest amount of foreign direct investment in Asia last year, approximating US$30 billion. The main reasons for this investment include the sheer size of the market (China's population exceeds 1.3 billion people), its emergence as the world's largest mobile and second-largest telecom market, its position as the 7th-largest trading partner in the world, and a gross domestic product valued at US$1.19 trillion (in 2000). The PRC also boasts the world's second-largest Internet user base, approximating 17 million in 2000. Research leader, International Data Corporation (IDC), expects there will be 120 million Chinese Internet users by 2005, with e-commerce revenues close to US$300 billion. In addition, China is fueling its own economy by spending on infrastructure and introducing wage hikes and taxation designed to encourage spending. As a result, Chinese consumers have ensured that the PRC is weathering the global recession far better than most of its neighbours with unprecedented spending patterns. In the post-WTO era, China is expected to gain momentum to become the world's second-largest economy by 2030.

In 2000, total IT spending in China reached approximately US$16 billion. The finance sector accounted for more than 27% of that spending, followed by the telecommunications sector at 22.9%, and transportation at 11.2%. Whilst finance is expected to remain the largest sector for IT-related goods and services, IDC expects growth from the distribution and retail sectors (which accounted for 6% of China's IT spending in 2000) and manufacturing (reported as 4.3% of China's IT spending in 2000). The growth in the distribution, retail and manufacturing sectors will mainly be driven by China's entry into the WTO and the entry of multinational companies into those sectors. According to IDC, the Chinese IT market should reach US$25.6 billion in 2002 and US$50 billion by 2005, growing at a compound annual growth rate (CAGR) of 27% during 2001-2005. Government IT spending is expected to grow at 29% to hit approximately US$600 million by the end of 2002. The bulk of this investment is expected to go to banks and government institutes that need to reform in line with WTO regulations.

Hardware has traditionally generated the lion's share of China's IT spending, followed by IT services and software. As of the fourth quarter of 2001, China was Asia's largest personal computer (PC) market – accounting for 43.3% of all PC sales in the region, totaling 2.45 million units, with a CAGR of 12%. With 20.6% growth in the fourth quarter, Dell enjoyed the highest growth rate in the PC Chinese market, followed by Legend Group Holdings (the leading local Chinese PC maker) with 8.5% growth, and Compaq with 8.4% growth.

Spending on IT services in China is also expected to grow. IDC predicts this sector will grow from US$4.3 billion in 2001 to US$10.3 billion by 2005. The tremendous growth in this sector will be driven by an enormous build-up of infrastructure across most sectors, particularly in the telecommunications arena, which will drive demand for integration services. As the world's largest market for mobile phones, China's home-grown vendors, such as Huawei, ZTE and Datang, are expected to emerge with large-scale contracts for mobile infrastructure, which will also help drive IT services spending. From late 2002, IDC expects networking, security and e-business initiatives to be the strong drivers of IT services demand in China. China's entry into the WTO, its large export sector, and its burgeoning domestic economy will also contribute to the IT services boom.

According to the U.S. trade group Business Software Alliance (BSA), more than half of the software in use at present in Asia is illegally copied, with China topping the charts with a 90% piracy rate. However, IDC foresees phenomenal growth in the emerging Chinese software market due to the growing sophistication of applications and the government's crackdown on piracy. In 2001, the software market grew at a CAGR of 23% to reach US$3.44 billion, and is expected to reach almost US$4.31 billion by the end of 2002. Growth in the software market, in 2001, was fueled by sales of security solutions due to the damage caused by viruses like NIMDA. However, growth in 2002 is being driven by sales of application solutions, application-development tools and system-software infrastructure. High-growth areas in the software market include Enterprise Resource Planning (ERP) applications which will grow at a CAGR of 32% to reach US$3.6 million by 2005. The Enterprise Relationship Management (ERM) market is expected to grow at a CAGR of 37%, to reach US$2.7 billion by 2005.

As a result of the PRC's entry into the WTO, China will implement "zero tariffs" in 2002 on 251 products, including mobile telecommunications exchanges, computers, ink-jet and laser printers, and other information communication hardware. In general, the tariff level on IT products will fall from 12.47% to 3.4% in 2002, and by 2005, all IT products in the PRC will enjoy zero tariffs.

Though China's accession into the WTO will benefit the Chinese economy at large, the IT industry is in the best position to benefit because of its already-internationalised business environment. The entry of international firms in banking, insurance, telecommunications and services will also fuel the IT sector. Foreign IT companies looking to newly enter the Chinese market would do well to ensure they have the right local business partners, a long-term view and deep pockets to compete in this dynamic environment.

 

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