China Information Technology Report Q4 2009

China's IT market is expected to remain a global outperformer during the 2009-2013 period, but growth will slow to the single digits in 2009 due to the current economic headwinds. The government's stimulus package and rural electronics products subsidy programme helped to revive confidence in Q209 and IT spending is expected to reach US$78.3bn in 2009, increasing to US$124.2bn by 2013. Ultimately, China has a number of strong growth fundamentals in its favour.

Drivers including China's vast potential rural market, government spending and demand from key verticals such as telecoms will help to prevent market stagnation. In H209, demand could receive a boost from factors such as 3G mobile subscriber growth and the launch of the Windows 7 operating system. However, much will depend on the continued revival of consumer and business confidence.

Industry Developments

China's Ministry of Industry and Information Technology (MIIT) announced that it had delayed its previously announced July 1 deadline for launching the controversial Green Dam filtering software. The software, 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. As of September 2009, the government had not announced a new deadline for PC manufacturers to include the software. However, domestic and multinational PC vendors proceeded to include the software in PCs sold in China. According to the MIIT, Chinese software exports were up 48.2% in the first four months of 2009, although this was slightly slower than last year's growth rate. The value of software exports reached US$4.93bn in January-April 2009. 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 had already pledged US$743.73mn in 2008 for SMEs and proposed to allocate even more to inject capital into these smaller firms. The ministry also said that it would add credit loans and guarantee credit.

Competitive Landscape

In H109, PC vendors took advantage of new channels amid the challenging trading conditions associated with the global economic slowdown. The launch of 3G mobile services in China was a key driver behind rising sales of netbooks; China Mobile announced co-operations with 17 vendors including HP, Dell and Lenovo. 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. Software market leader Microsoft China has said that its annual revenues in the Chinese market are growing at a 'healthy double-digit rate'. In 2009, the company hopes that the launch of its Windows 7 operating system, scheduled for October, will drive sales. In the summer, 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 growth in manufacturing sector demand for enterprise resource planning (ERP) applications has stimulated a wave of industry consolidation. 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 last year. Meanwhile, fellow leading domestic vendor Kingdee has also been among those making acquisitions to strengthen its presence in the manufacturing vertical.

Computer Sales

China's computer hardware sales are projected at US$52.0bn in 2009 and are forecast to reach around US$80.7bn in 2013. Close to 30mn computers are expected to be sold in China in 2009 despite the economic slowdown, which is expected to see PC market growth dip to mid-single digits this year. Following a particularly bad quarter in Q408, 2009 is likely to be a challenging year because of the impact of the global financial crisis. However, 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. There were signs in H109 that market demand conditions had improved somewhat compared with the end of 2008. BMI expects computer sales to remain in positive territory this year, with low single-digit growth projected. Early data suggested that laptop sales rebounded somewhat in the second quarter of 2009. Sales picked up after the lunar new year, with the government subsidy programme providing a boost to consumer and business confidence.

Software

The total value of the Chinese software market is forecast to reach US$9.8bn in 2009, up from US$8.8bn 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'. Despite current economic uncertainties, there are still opportunities in many segments of the Chinese software market. The release of Microsoft's new Windows 7 operating system, scheduled for October 2009, 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 will mute 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 segment is projected to achieve expected sector compound annual growth rate (CAGR) of 13% between 2009 and 2013. Spending is projected to reach around US$16.4bn in 2009 as banks, telecoms operators and manufacturers invest to meet the challenges 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 BMI's five-year forecast period as the city invests to implement its plan of becoming a world-class financial and shipping centre. The economic situation and credit tightening have had an impact on projects in some key verticals. However, indications were that overall IT services spending was continuing to grow in 2009, thanks to emerging opportunities such as outsourcing from South East Asia. 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.