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www.asiaweek.com/asiaweek/technology/article/0,8707,168248,00.htmlCodeRed
Bangalore beware. The Middle Kingdom won't be satisfied with being Asia's leading I.T. hardware producer. Beijing wants to win the programming game, too. By leveraging its huge domestic market and low-cost, well-educated labor force, China could become a software exporting superpower
By ALLEN T. CHENG
Emilio Rivera IIIc
Beijing computer software programmer Wei Ming says when she was in graduate school, she was enthralled by legendary Microsoft chairman Bill Gates. Today, Wei works for him. The 25-year-old engineer is part of a team at China National Computer Software & Technology Service Corp., the country's largest software company, helping to develop security features for the version of the Microsoft Windows operating system that will be sold on the mainland next year.
For Wei and thousands of other Chinese programmers, CS&S's codevelopment deal with the U.S. software giant marks a turning point of a sort - evidence that China's engineers are good enough to contribute to the most ubiquitous software program in the world. "It's a signal that a top U.S. technology company is willing to cooperate with developing countries," says Wei. "I hope to learn a lot [on the project], and I don't mind working overtime. If I do a good job, perhaps I'll even get a raise."
That echoes the hope of tens of thousands of newly minted engineers throughout the mainland. Spurred on by a government anxious to reduce dependence on the West, China has kicked into gear an ambitious effort aimed at cracking the worldwide software market. Using its hugely underdeveloped market as both a nursery for domestic companies and as bait to draw in Western expertise, Beijing has set a goal of multiplying its market sixfold by 2006. "We must develop an intellectual property base . . . we must become like the U.S.," says Andy Li, a senior official of the Chinese Academy of Sciences and an influential voice on national policy. "China's market is so large that it will create half a dozen Microsofts and Oracles in a generation - just watch. He who can dominate China can become a global player."
THE GREAT AND THE GOOD
Though little known outside Asia, China's tech companies are gaining a reputation for being among the country's most dynamic enterprises. From PCs to telecoms, here are the key players Huawei Technologies
The privately owned Shenzhen firm (though with close ties to the military) is China's largest telecoms equipment maker, with $2.7 billion in sales in 2000 and projected sales of $5 billion in 2001. It has grabbed market share in China through aggressive price cutting, and expanded its international horizons by exporting to the former Soviet Union and Zimbabwe.
CS&S
China National Computer Software & Technology Service Corp. is one of China's leading software firms. It recently signed a groundbreaking encryption-software outsourcing deal with Microsoft (see main story). CS&S also produces translation software and operating systems, and has a systems integration business. Sales have more than doubled since 1998, helping the company book a profit of $9.5 million last year.
Legend Group
China's dominant computer vendor, Legend controls 29% of the mainland PC market, selling more than 2 million units a year. It has succeeded partly by marketing Internet-ready PCs to consumers, and now has big ambitions to provide online content through a $200-million joint venture with AOL.
Datang Telecom Technology
A leading maker of telecoms switching equipment and software, Datang is linked to Siemens of Germany in developing TD-SCDMA, a Chinese standard for third-generation (3G) mobile communications. Neusoft This Shenyang-based developer of software used by enterprises, banks and government organizations has annual sales exceeding $130 million. China's largest publicly traded software firm, Neusoft recently inked an alliance with Computer Associates of the U.S. to boost its international ambitions.
Founder Electronics
China's second-largest PC maker (behind Legend) is also the country's second-largest software company and a leading supplier of Chinese-language publishing systems.
Shanghai Huateng Software Systems
A specialist in payment software, it played a key role in the "Golden Card" project, a network of interlinked automated tellers at banks across the country.
Great Dragon Information Technology
One of a quartet of domestic telecoms equipment makers, often referred to as the "Four Dragons" (the others are Datang, Huawei and ZTE), Great Dragon will benefit from China's expanding market for wireless communications.
Ufsoft
An accounting and business software maker, UFSoft is one of China's highest-profile I.T. firms. An initial public offering on the Shanghai stock exchange in May raised more than $100 million and saw the company's share price rocket 151% on the first day of trading. Revenues were $26 million last year.
Great Wall Computer
The country's No. 3 domestic computer vendor, Great Wall shipped 329,000 PCs in 2000, producing revenues of $270 million.
Zhongxing Telecom (ZTE)
Shenzhen-based ZTE sold $1.2 billion worth of switches, routers and other telecoms equipment and services in 2000. Like Huawei, ZTE has complemented domestic sales with exports to the developing world.
The goal seems far-fetched today. China's packaged software market - held back by rampant intellectual property theft and lack of funding - is estimated at $1.28 billion, just one-fiftieth the size of the U.S. market. And most of the legitimate revenue that does come in flows to companies such as Microsoft and Oracle. Chinese universities churn out anywhere from 20,000 to 40,000 computer science graduates every year. But especially after the dotcom bust, much of the work available has been mundane systems integration for the bureaucracy and state-owned industries.
Policy planners in Beijing, however, are out to change the situation. Last year, China's State Council implemented its first industrial policy covering software. Over the next five years, the government plans to grant start-up software developers some of the same tax holidays and other incentives it has used to jumpstart hardware manufacturing on the mainland. China currently is a net importer of software and programming services. Officials want the country to export $1 billion worth of software in 2006.
The effort is hamstrung because most Chinese consumers and businesses pay little heed to intellectual property rights. More than nine out of 10 software programs used on the mainland are illegal copies, according to the Business Software Alliance, an industry trade group. China has taken small steps to tackle what it perceives as a long-term piracy epidemic. But in the short term, there is plan B: Domestic companies hope to develop expertise and generate revenue not by developing piracy-vulnerable proprietary software programs, but by contracting software services to the West - the same strategy used by India to become the second-largest software producer in the world. The government has even promised to ease travel restrictions that make it difficult for Chinese companies to send employees overseas for on-site work or training.
At CS&S headquarters in Beijing, it's hard to picture China's software industry as an export powerhouse. The front gate is locked. A sign directs visitors to the back entrance. Behind the gate are shattered glass windows and a dust-filled lobby. As visitors walk behind the building, they are welcomed by the large entrance of a Sichuan restaurant. Only the persistent find a tiny sign that points to the inner courtyard that leads to a temporary entrance.
Once inside, however, visitors quickly come to realize that CS&S is, in fact, not some hole-in-the-wall operation. About 2,000 engineers work on 15 floors of the building. The state-owned company, which had revenues of $120 million last year, plans to hold an initial public stock offering later this year. New $60 million facilities - 60,000 square feet of space in 10 buildings - are under construction at a modern office park on the outskirts of the city.
Last year, the company generated just 7% of its revenues from exports. But it recently opened offices in San Francisco and Tokyo to help promote sales. CS&S vice president Guo Xianchen says the goal is to increase exports to 30% of total revenue by 2003, primarily by targeting the U.S. and Japan. "Indians say we Chinese software companies will have a hard time cracking the U.S. because we don't speak English well," says Guo. "Perhaps they're right. But they must remember that we can easily hire some of the tens of thousands of Chinese engineers based in the U.S."
Indian companies exported $5.7 billion worth of software services in 2000; China's software exports are a minute fraction of that at $130 million. But a recent report by India's Manu- facturers' Association for Information Technology sounded the alarm that China could become a formidable competitor. "The main concern is that China is infrastructure-ready, and for it to leapfrog to software will not be difficult," says Vinnie Mehta, director of the association, which reported that China has about $5 billion set for investment in software companies.
Some Western firms have already started to plug into the mainland's labor pool. One of the four Microsoft global support centers - facilities that provide customers with technical help via telephone and e-mail - is located in Shanghai. "We don't hide the fact that we are in China," says Todd Main, Microsoft regional technical account manager. "But we don't advertise it either." Operational costs are one-third of what they would be in the U.S. While the center's 300 engineers generally handle phone inquiries from Asian customers, they also answer e-mails from American consumers. Most employees are computer science graduates with good English skills, Main says.
Microsoft considered locating the facility in India. "We chose China because the political, economic and social stability was more suitable," Main says. "Of the developing countries in Asia, [China] has the best infrastructure and Internet access around. In India you always have blackouts and brownouts. Then there's a fantastic talent pool." Los Angeles-based telco Tornado Development, a unified messaging provider, is another early China adopter. "We find China's cost structure is half of India's," says Tornado's managing director Steven Chao, who is shifting up to half of his source-code writing contracts to a firm in Guangdong. "But more importantly, our top market is none other than China. So why not have our software development done in our largest market?" In India, Tornado pays an average of $20 to $30 per hour for source coding, but only $10 to $15 per hour in China. In the Silicon Valley, a similar service costs $300.
In spite of the cost advantage, Chinese officials acknowledge they have far to go. "China, of course, can't compete with India right now," says Hu Biliang, chief financial officer of Beijing-based software outsourcing firm DoubleBridge Technologies, "But within 10 years, China will be far bigger than India as a software exporter. That's because we have a huge domestic market for high-tech products - unlike India - and whoever comes from a large market base will naturally have a powerful export ability."
China's ambitions are far bigger than just competing for the low-margin outsourcing business. Firms have their eyes on getting into the profitable branded I.T. business. The country's I.T. professionals are not known for innovation, says Ta-lin Hsu, chairman of venture capital firm Hambrecht & Quist Asia Pacific. But China's large pantry of potential customers affords the country an opportunity to improve its technical and inventive prowess rapidly by borrowing from others.
For several years, Western firms willing to trade code-writing know-how for market access have been establishing research facilities on the mainland. The projects, run by companies such as Microsoft, IBM and Motorola, seed the domestic software industry. Chinese programmers working for Western software firms are exposed to cutting-edge technologies, and many later leave to start their own companies.
Microsoft's decision to take CS&S under its wings was prompted at least in part by the need to curry government favor - and to prove to China that Windows complies with Beijing's ban on the sale of Western encryption software on the mainland.
While domestic enterprises so far have been unable to establish strong brands in packaged software, companies, including CS&S, intend to learn from U.S. firms - and eventually compete with them. Microsoft dominates in China as it does throughout the world. But Chinese companies are working on domestic alternatives to best-selling products with government encouragement. Beijing-based Red Flag, for example, built an operating system, a version of the Linux system, to compete with Windows. Kingsoft of Beijing in May introduced its own suite of desktop software applications as an alternative to Microsoft Office. "We have a lot to learn from Microsoft," says Guo. "We aim to sell our cheap labor in the coming five years. But after that, we aim to develop our own software for the U.S. market."
Hubris? Not according to Li of the Chinese Academy of Sciences. Although software piracy grossly impedes the growth of Chinese packaged programs, domestic companies can build their expertise on a large internal market for customized business software solutions. The field is largely immune to piracy, and it favors local developers - China's corporations and bureaucracies have idiosyncratic business processes for which standard Western software is unsuited. "I believe Chinese software firms can become giants even without innovation," says Li, who made millions of dollars as an entrepreneur in Silicon Valley before returning to China a year ago to help the government map out a high-tech strategy. "Just by taking Windows, XML and Java and creating Chinese products and applications that run on these platforms will make a large enough market to create future global players."
The country plans to take that strategy even further. A key to success in the software business is the establishment of proprietary software that becomes a global standard. China has begun dictating the technologies that will be used on the mainland, in the hope that those standards will take root and spread worldwide. In next-generation mobile phone networks, for example, the country convinced German telecommunications equipment giant Siemens to invest more than $10 million to develop of a 3G mobile phone standard just for China. Created with Datang Telecom of Beijing, the TD-SCDMA transmission system has been recognized by the International Telecommunications Union, an important endorsement. Also under development is a Chinese version of XML, an advanced scripting language for Internet communication, that will facilitate B2B e-commerce among Chinese companies.
The country's fledgling software producers, however, run the risk of coding themselves right out of world markets if they build products based on China-only standards. The strategy could isolate the country, leaving it dependent on one technology while the rest of the world uses another. "The Chinese government is right in saying that, for a market this big, you should build standards just for China," says Jay Puri, -Asia-Pacific vice president for U.S.-based Sun Microsystems.
"But frankly, China's standards should be an extension of international standards. Things happen so quickly that you would be left behind if you make the wrong moves." Says venture capitalist Hsu: "The government should focus on providing more infrastructure, a better business environment, more incentives, more English. But they should not dictate [technology]. They should let markets decide."
Beijing has plenty to do just in creating a better environment for its software firms. Capital markets are still relatively unformed and dogged by corruption. The country has a shortage of managers capable of running modern, shareholder-owned companies. And then there is the overwhelming piracy rate, a problem the government has yet to address comprehensively. "The Chinese have a tendency not to respect intellectual property, yet they want to produce a second Microsoft," says Hsu. "This is ridiculous."
Others think that, in time, the country's sheer market size and large supply of enthusiastic I.T. professionals will turn ambition into reality. "China already has become a global center for hardware manufacturing," says Ken Xie, IDC's managing director in Beijing. "In five to 10 years, China will be a global center for software development as well." India should worry. But should Bill Gates?
