Running a software business in China

Author: Iloka Benneth Chiemelie
Published: 1/1/2014

PROPOSED BUSINESS

Enterprise Software manufacturer and IT consultant

REASON FOR THE PROPOSING THE BUSINESS IN CHINA

General overview of China’s software industry

Since the aftermath of the economic recession ended, the Chinese economy has maintain strong and steady growth (Apco, 2010), with expansion of gross domestic product (GDP) up to 11.1% in the second quarter of 2010. This growth is followed by an increase in domestic demand of the overall Chinese software market (Apco, 2010). In reference to the official data published by the Ministry of Industry and Information Technology (MIIT0, the Chinese software market is valued at RMB 951.3 billion (USD 142 billion)as of 2009.

Structure of the market

International software companies made their initial entrance into the Chinese market in the late 1980s (Apco, 2010) by taking advance of their strong technologies and high capital base to grab a considerable market share through numerous business partnerships with local services providers, distributors and sellers.

However the government offered support to local IT companies and this helped to destabilized the market shared and provide opportunity for local companies to explore and excel in the industry. In general, the Chinese software market industry is highly dominated by local companies.

In comparison with other industries in China, the enterprise software market is presently dominated by local companies and they have control of 77.5% of the market share as of 2009 (Apco, 2010), as a result of tremendous supports from the government that has enhance a sense of deep understanding of the local software needs and business practices, as well as locally based products and services that include round-the –clock customer support.

On the other hand, foreign owned companies have also been very successful at the high-end of the market, followed by the middle- and low-end which is somehow a common occurrence in the Chinese high-tech industries. The description of share ownership by foreign owned firms is as illustrated below:

1.      High-end market – foreign owned companies have a 50.8% control of the market in 2009 as a result of the shift in trend within the Chinese industry which include development of numerous sophisticated technologies that has for long been the expertise of foreign owned companies.

2.      Middle-end market – this market is dominated by the Chinese companies up to 83.9% as a result of foreign owned companies not being able to provide the same expertise and staff supports that are provided by their Chinese counterparts.

3.      Low-end market – the Chinese owned companies also dominate this section of the market with over 90% market share ownership because of their ability to adopt effective price competition (Sources as adapted from: Apco, 2010)

For the foreign owned companies, most of their businesses come from multi-nationals that are operating in China and this represent a relative small amount of the enterprise software customers. As a result of that, few of the foreign owned companies have been successful to get contracts from state-owned enterprise (SOEs) and local Chinese companies – which make up a high amount of the Chinese software enterprise market. In most cases, foreign owned companies must go into partnership with local companies in order to form cooperation or joint ventures (JVs) for them to gain access to the higher sections of the market (Apco, 2010).

It was discovered by Apco (2010) that the local companies have been very successful because they target Chinese customers which as a result of their localized knowledge, products and service offerings, and this market represent a high section of the customers. Contrasting with this is the fact that foreign owned companies have not been able to meet the needs and demands of these local markets as the local companies tends to offer more basic products at lower prices which is better meets the need of the Chinese software market.

The major players in Chinese software market are as illustrated below

Source as adapted from: Apco (2010)

MARKET SECTORS

The Chinese enterprise software market is presently dominated by enterprise resource planning (ERP), accounting, and supply chain management (SCM) software which all accounts together for the 79.2% of the market share as of 2009 (Apco, 2010).

Enterprise resource planning (ERP) software – this is the fastest growing section in the Chinese enterprise industry, and is responsible for 50.5% of the whole market. 

Source a readapted from: Apco (2010)

The Chinese government represents the largest customer base for ERP in the Chinese market, followed by state-owned enterprises and government ministries, agencies and affiliated industries.

Although this market is dominated by local owned companies, foreign owned companies have also has great success by targeting the high-end market, and their global experience and presence has also been successful in helping them compete effectively with local based companies.

Accounting software – the accounting software segment is made up of 16.8% enterprise software, which makes it the second-largest market. Right from the beginning, China’s tax agencies are the dominate customers in this sector and they market has grown into a more diversified and competitive section, which now serves a wide number of government and private owned institutions.

The element of success in accounting software is that the software must be built to be in line with Chinese financial practices, which include the regulatory policies, and use of Chinese languages. Moe of the software products developed outside the Chinese market in this sector doesn’t get enough recognition from the government agencies and thus it limits the potentials for the success of foreign owned companies.

Supply chain management (SCM) software – the SCM software - which also include demand management, sales and operations planning and logics marketing is the third largest enterprise software market in China, with a market share of 11.9% of the Chinese market. The increase in globalization has also increased the demand for SCM software, in order to better integrate processes and make management as a well as purchase functions effective and efficient in the Chinese market (Apco, 2010).

CHINA AS AN EMERGING ECONOMY

The rise of China as a major global economy within the space of about three decade is usually described by analyst as one of the greatest economic success stories in human history (considering the change from 1979 when the economic reform started in the country to 2012), as the country’s real domestic product (GDP) grew at an average rate of 10% per annum for about more than 3 decades (Wayne, 2013). It has been estimated that about 500 million people in China have been raised from absolute poverty as a result of the economic reform. In that case, China has successfully emerged as a global economic power, and is presented the largest manufacturer, exporter of merchandize, and holder of the highest foreign exchange reserve in the world (Wayne, 2013). Presently, China is the second largest economy in the world after the United States, and some of the analysts have already began to pinpoint the country as having the potential to take over as the world’s largest economy in about 5 years or so. However, these analysts should not be fast believed but instead their statements should be subjected to critical open debate because on a per capital basis (that is the value used to measure the standard of living in a country), USA is still by far better than China (Wayne, 2013). It can also be argued that this is not a reason for China not to take over the USA because there are also countries with per capital basis (e.g. UK, Germany, France etc.) that China is presently toping in terms of economic power.

From the above analysis, it is clear that China represent a successful platform for increased profitability in the software market. This is because, the country is well positioned in terms of expertise and demand to help surge growth for new entrants. The reasons behind some of the foreign based companies are because of their lack of ability to integrate their management process to suite the need of the Chinese market. Therefore, since the reason for their lack of growth has been identified, it can then be stated that Bill can operate a successful business in China by partnering with the local services providers in order to ensure that their business operations are well integrated with the needs and demands of the Chinese market.

CHALLENGES OF OPERATING AN ENTERPRISE SOFTWARE BUSINESS IN CHINA

Although the software market in China has been associated with huge potentials for success, it still has to be stated that software companies are facing numerous challenges in the form of operating in an immature commercial environment. Some of the challenges they face are:

Limited understanding of enterprise software – it has heavily been conceived that only a few of the domestic users can actually understand and appreciate the need for enterprise software. Most of the Chinese firms and some of the foreign firms with operations in China still adopt basic principles to accounting and business management that include pen and paper documentation, and adoption of gut feelings in business management process (Apco, 2010). Even some of the firms that tend to understand the need for enterprise software to enhance their management process don’t seem to have a clear understanding of what type of software they need in relation to their business challenges. This pose an ineffective marketing activity for the companies that manufacture this software as the volume of customers who are ready and willing to adopt these software seems to be on the decline with every single purchase.

Piracy issue – another issue facing software companies is that of high level of piracy in china, which had a direct negative influence on their level of profitability. China has been famously known for copying technological products (Apco, 2010), and this is a big issue in the software industry because software are very easy to duplicate in the sense that all that is needed is for the user to copy the software into multiple sources and selling them out. On the same hand, this forces company to reduce price subsequently in order to leverage possible loses and accumulate as much sales as possible.

However, the Chinese government seems to understand the issue of piracy, and they have enacted numerous intellectual property right (IPR) protections that have repeatedly cracked down numerous pirates. However, the huge landscape of the country and the steady penetration of internet technology pose a huge threat to the success of such crackdown programs. This is because;these software can easily be downloaded and distributed amongst users online or sold in other remote parts of the country where the crackdown is ineffective on a pirated platform.

Government procurement policy – from the above analysis, it is clear that the Chinese government focuses procurement of software from Chinese firms, which is an open discrimination against foreign owned companies as the study discovered that these companies also make application for contracts. This issue of open discrimination policy has also been highlighted in the study as the main reason why the locally owned companies seems to be more effective in their business process than the foreign owned companies as they get more contracts from the government and use the fund to source their business operations effectives.

From the above analysis, it can be see that while the Chinese market create a potential for success in the sense that it has a huge market bases and increasing economy, the company will face a number of challenges as related to the markets misunderstanding or misconception of the use of software, the high level of piracy in the country that yield a negative influence on manufacturers, and the Chinese government discrimination against foreign owned corporations in terms of purchases decision. In line with the above issues, this paper will then present ways in which Bill and his business partners can mitigate these negative factors and increase their chances for success in the Chinese market.

RECOMMENDATION

Customer oriented business strategy

Numerous researches have suggested that customer-oriented culture is a significance success factor in an organization (Athanassopoulous, 2000). To be more precise, customer orientation has been defined as the root of marketing theories and practices of marketing management even before the introduction of marketing concepts (Jaworski and Kohli, 1993). Researchers have long ago linked customer oriented companies with increase in customer satisfaction and value because they produce goods and services that better meet customers need and are high in quality and value. As such, it can be seen that the concept of customer orientation is not just the background for business management, but the foundation for more remarkable value and increase in customer satisfaction (Slater and Narver, 1995).

As Kotler (1980) put it, the concept of customer satisfaction is based on organizations restructuring themselves to meet customers’ need by producing exactly what customers’ demand and building profitable long-term relationship. Therefore, it can be stated that service providers with high customer orientation are capable of increasing customer satisfaction (Dunlap et al., 1988) and building long-term relationship (Saxe and Weitz, 1982) with their service offerings.

From the above analysis, it is clear that the business partners will be able to establish a successful business in the Chinese software industry by adopting a customer oriented business strategy. This has also been attributed as the reason behind the success of local companies because they are well positioned to understand the needs of the customers and design products and services that best suites these needs. Thus, if Bill and his partners are able to understand the needs of the customers and target their products towards these needs, it is expected that they will be able to maintain successful business in the Chinese market.

Partnership with Chinese firms

Another discovery from the study of the Chinese software market is that foreign owned businesses that partner with Chinese companies have a higher potential for success. This is because, the local companies can earn more contracts while the feigned owned business with adopts its expertise and fund based resources to enhance the production process. Therefore, the issue of business partnership is inevitable if the new business operation is to yield huge success.

Offer higher valued software

The first scholar to propose the term “value” was Levit in 1960. He is of the notion that if a product is designed to emphasize on customers’ needs, then the product has value for the customers. Kotler (2003) is another author that emphasized on the need for service value by stating that marketing is a process of socialization and management. As such, it is expected that individuals and groups can create and exchange products and value in order to satisfy their desires.

In the beginning, the concept of value in business was based on price perception. That is, the higher price a product costs, the higher value it has and vice versa. However, Zeithaml (1988) stated that such perception is an ignorance of other benefits. Thus, he stressed that the relationship between price and quality is only related only when price and other factors such as benefits are combined to understand their influence on service value.

The concept of service value is used to illustrate the trade-off between what customer receives and what the customers gives up in the process of receiving the benefits (Woodruff, 1997). The utility concept is based on the fact that there must be associated value with a product or service in order to increase customers’ interest in that product or service. This implies that the higher value a service has, the high the potential of customers seeking that particular service. The term value is measured by what customers perceive of a service in relation to either meeting or not meeting the customers’ expectation.

From the above analysis, it can be seen that Bill and his partners will be able to create a more profitable business in the Chinese software industry by offering higher valued software than their Chinese competitors. The benefit is that the software will be high in terms of obtainable value and lower in price. All these elements combined together will give them a competitive edge over their competitors in the Chinese market. The issue of creating competitive advantage is important in the Chinese market considering its huge potentials for success. This is because, if the software are differentiated in terms of obtainable value from other software in the market, the customers will be more better positioned to adopt the software and this will increase the sales volume and revenue generation for the company.

CONCLUSION

This paper has successfully demonstrated that the Chinese software market represents huge potentials for business success and growth. This is because, the market has a high volume of customer base considering the population of the country and the number of enterprises that maintain operations in the country. However, the paper also revealed that new business entering the market will face numerous issues such as the issue of piracy which seems to be crippling the industry as it forces producers to reduce price instead of increasing value as measure for increasing profitability. Another issue that was highlighted in the case is that discrimination in procurement from the Chinese government. It was discovered that Chinese governments focuses their procurement contracts for software on localized firms, and this is an issue to the success of internationally owned brands as the government represent a huge figure in terms of the market share and size. The issue of limited understanding of the value of software by business owners in the country was also highlighted. However, the concluding sections of this paper presented recommendations for these issues in the form of offering higher valued software, adopting customer orientated business strategy and going into partnership with localized firms in order to get more government contracts.

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