Software & Services

China's 2Q 2008 enterprise application software reached 2.25 billion Yuan, up 19.6% YOY. The 2008 Beijing Olympics helped drive larger-scale telecom and government purchases and software deployment, while some purchases were made in advance of 2Q. Small and medium enterprise (SME) demand for SaaS grew rapidly, while FM (financial management) and CRM categories grew the fastest, although not as fast as vendors hoped. Larger enterprise demand has remained steady, so vendors continue to look towards the next growth point, SaaS.

IT services are critical to high-end, large enterprises.

Software license revenues share continues to decline relative to increasing IT services revenue share, which include consulting, integration and maintenance. Vendors are recouping earlier service giveaways, but more importantly, customers are realizing the importance and value of IT services. Large and globally focused enterprises are demanding customized service, systems transformation, and upgrade offerings to enable their competitive advantage.

From a vendor perspective, software vendors are critical, but so are their services partners. Competition is also between various software and services alliances. For large, high-end customers, multinational software vendors like Oracle and SAP still lead in China, and are better able to manage their value chain of services vendors. For example, SAP and its partners IBM and Accenture are able to provide a life cycle of technical services and support.

On the other hand, China's domestic vendors have some catching up to do. While LangChao (Inspur) GS, UFIDA NC and Kingdee EAS have done reasonably well, their consulting and implementation services capabilities are still challenged when it comes to servicing high-end clients.

SaaS is the mode for SMEs.

At the start of 2007, China had 42 million SMEs. SME software application needs differ dramatically from large enterprises. China's SME IT application level is low, with most limited to finance management and document processing. Few SMEs can realize ERP, CRM, and collaboration. SME can only afford small initial IT and services investment, so SaaS is more often applicable. Regardless, realizing China's SME potential will take time and effort.

There are many SaaS players in China, including SaaS CRM specialists such as Salesforce.com and 800App.com; Internet platform providers such as Alisoft.com and 35.com.

Enterprise application software vendors have also entered the fray, and they provide enterprise domain expertise advantages, but they also lack experience in the SME domain. Success has been mixed and they will have to put continued effort and resources.

Kingdee's Youshang.com has done relatively well, having only launched a year ago and already developing a base of SME clients. On the other hand, UFIDA's wecoo.com was launched in 2000, which may have been too early in China, as user retention was limited. UFIDA has attempted to diversify with mobile commerce and PLM, but the PLM portion has been put up for acquisition. The result thus far has been increased operating costs and profit pressures.

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