China Information Technology Report Q1 2010

China's IT market is expected to remain a global outperformer during the 2010-2014 period. The government's stimulus package and rural electronics products subsidy programme helped to revive confidence in 2009 and IT spending is expected to reach US$78.3bn that year, increasing to US$139.1bn by 2014.

In 2010, the government subsidy programme will continue to boost demand from the vast, underpenetrated rural areas of China. By the end of August 2009, around 414,000 computers had been sold under the programme, which provides a 13% subsidy for purchase of certain products. The growth surge of netbooks may have peaked in mid-2009, with sales by China's telecoms operators falling short of inflated expectations.

Total IT spending in China is projected to grow at a compound annual growth rate (CAGR) of 16% over the five-year forecast period. China's IT market has a number of strong fundamentals in its favour. A number of factors, including China's vast potential rural market, government spending and demand from key verticals such as telecoms, will help to drive growth. Industry Developments

As of September 2009, the government had not announced a new deadline for PC manufacturers to include the controversial Green Dam filtering software in PCs sold in China. China's Ministry of Industry and Information Technology (MIIT) had previously announced that it had delayed the July 1 2009 deadline for launching the software. Green Dam, which would have been mandatory for any PC produced or sold in China, was ostensibly designed to block internet pornography, but concerns were expressed about privacy.
According to the MIIT, Chinese software exports were up 48.2% in the first four months of 2009 at US$4.93bn, although this was slightly slower than 2008's growth rate. Meanwhile, eastern China reported software business revenues of CNY219.82bn, according to government figures, accounting for 86.1% of the national total.

Informatisation among small and medium-sized enterprises (SMEs) is a government priority, given that smaller companies are the most vulnerable to the current decline in demand in many of China's export markets and tighter credit conditions. The MIIT has proposed to allocate capital to inject into smaller firms. The ministry also said that it would add credit loans and guarantee credit. Competitive Landscape

Lenovo has said that it aims to sell 5mn computers in rural areas and cover 320,000 villages across the country. To this end, the company will establish 700 new county-level stores in the next three years and introduce 15 new models specifically designed for the rural market. Lenovo and other vendors have tailored their marketing focus to different priorities of the rural Chinese. HP has also been steadily expanding its sales network in rural China over the past couple of years. Meanwhile, Acer, Dell and Lenovo were among 14 vendors selected by the Chinese government as designated suppliers for its subsidised computers programme launched in February 2009.

Software market leader Microsoft China has said that its annual revenues in the Chinese market are growing at a 'healthy double-digit rate'. In 2010, the company hopes that sales will receive a boost from the launch of its Windows 7 operating system. In the summer of 2009, Microsoft continued to lay the groundwork for the new operating system launch in China and announced that it had tested more than 1,000 software applications for compatibility with Windows 7.

Strong and more sophisticated manufacturing sector demand for enterprise resource planning (ERP) applications has stimulated a wave of industry consolidation. Oracle hopes that its acquisition of Sun Microsystems will deepen its footprint in the mainland market and enable it to compete with the likes of HP and IBM as a full services provider. Meanwhile, domestic software giant Ufida Software said that it would continue to expand through mergers and acquisitions in 2009, after spending around US$70mn in this area in 2008. Computer Sales

China's computer hardware sales are projected at US$57.1bn in 2010 and are forecast to reach around US$89.8bn in 2014. Close to 30mn computers were expected to be sold in China in 2009. The roll-out of 3G mobile services by China's mobile telecoms network operators will stimulate sales of netbooks, while government subsidy programmes will boost demand from the vast, under-penetrated rural areas of China. We forecast that computer hardware CAGR for the 2010-2014 period will be around 12%, with SMEs, smaller towns and rural areas driving growth, along with replacement of desktops with notebooks. Vendors face the challenges of geography and channel underdevelopment in China's vast rural hinterland, where villages are often widely dispersed and far from the nearest large town. Vendors such as Lenovo and HP have been aggressively expanding their sales networks outside China's largest cities. Software

We project that the Chinese software market will grow at a CAGR of 13% over the 2010-2014 period. The total value of the Chinese software market is forecast to reach US$11.3bn in 2010, up from US$9.8bn the previous year. In H109, software revenue growth was down on the same period of the previous year, but remained robust as enterprises looked for solutions that would help them improve performance and operational efficiency. According to government figures, which include software industry export and software-related services, revenues were up across a variety of sub-segments including software products, business software and software technology services. The release of Microsoft's new Windows 7 operating system has the potential to provide a boost to the IT market; however, much will depend on the extent of consumer and business confidence in the economic upturn. The sheer scale of the enterprise market has muted the impact of cuts in IT budgets in sectors such as construction and real estate, as demand from other sectors such as telecoms, logistics and retail continues to grow.

IT Services The IT services market has been the fastest-growing segment of the IT market in recent years and continued to show robust growth in H109, despite the global economic slowdown. The IT services segment is projected to achieve expected sector CAGR of 14% between 2010 and 2014. Spending is projected to reach around US$18.4bn in 2010, as banks, telecoms operators and manufacturers invest to meet the challenges posed by growing demand for their services and the more competitive environment generated by WTO membership.

Shanghai will be a key location of IT services opportunity over our five-year forecast period, as the city invests to implement its plan of becoming a world-class financial and shipping centre. In the telecoms sector, the launch of 3G services and associated network roll-outs will generate spending, while government spending is expected to increase as a percentage of GDP thanks to stimulus packages. Other potential growth areas include healthcare, banks and retail.