go-go days are back again for the software industry or, more precisely,
for those vendors targeting China's fast-growing enterprise software

IDC predicts
the Chinese market for enterprise resource planning, customer
relationship management and supply chain management applications was
worth just over $1.75bn in 2005 and will grow at a compound annual rate
of 17.5% in the next five years.

In the booming 1990s, that was the sort of heady growth rate that
western enterprise software vendors came to expect from mainstream
markets like Europe and North America.

However, these markets are increasingly mature. In Europe, for
example, spending on supply chain software — once a particularly “hot”
segment of the industry — is expected to grow just 5 percent in 2007,
according to AMR Research.

Looking at the worldwide market for enterprise software, AMR
Research says that North America is expected to lose some share to
emerging markets in Asia Pacific and Latin America.

Europe's overall share is forecast to remain the same, but only
because Europe includes its own emerging markets like Poland and the
Czech Republic, whose growth is outpacing that in mature western
European countries.

Asia is thus a good place to be if you are an enterprise software
vendor and because of its sheer size, China is probably the best place
of all.

IDC estimates that there are over 5.5 m enterprises in China, 63% of
which are small and medium sized enterprises and among these, 62% have
yet to deploy IT infrastructure.

IDC expects the SME market segment to be the main battleground.
Western software vendors will trying to reach the untapped
opportunities with small businesses at the low-end of the segment,
while local vendors remain focused on the upper end of the SME segment.

The analyst firm says local application software vendors have become
more mature in terms of technology, sales and marketing and service
support over the past 30 years.

One would hope so. After all, 30 years ago the number of software
users in China could probably be counted on one hand. The PC had not
yet been invented and SAP's mainframe-based R2 software, the forerunner
to its current enterprise software, only became popular in the west in
the 1980s.

That slip-up aside, the rest of IDC's analysis is worth reading for tips on how this important market might develop.

the manufacturing sector accounted for the largest share of the
enterprise apps market in 2005, contributing more than half of the
market as a whole. The retail industry and telecom industry were second
and third, respectively. IDC believes that the manufacturing sector
will continue to drive the China enterprise software market.

In terms of product categories, ERP and SCM accounted for the
majority of the enterprise software spending. CRM, which includes call
centre software and sales applications has apparently yet to catch on
in China and accounts for less than 10% of the whole market.

According to IDC, China's local software vendors have done
particularly well in the manufacturing, government and SME sectors. Not
surprisingly, the local heroes have distinct advantages in product
localisation and sales and channel networks. Moreover, they are more
familiar with local demands of specific users.

However, they used to say the same thing about second-tier software
companies in the west — that they were good at customisation and
understanding local needs — and yet today SAP and Oracle dominate the
ERP market with a combined share of 65% in 2005.

These two companies now win most of the new sales in the large
enterprise segment, and they are increasingly competitive among smaller
buyers, says AMR. Their brand awareness, geographic coverage and
enormous R&D budgets make it very difficult for smaller vendors to
compete against them.

Nevertheless, neither SAP or Oracle talks much about China's
enterprise software market, so I suspect they still continue to see it
as a “jam tomorrow” market. Microsoft, because of its SME focus, seems
better placed to make inroads into China with its Dynamics range of
enterprise software.

Other possible beneficiaries include Infors, a US vendor which now
owns SSA Global, a vendor known for its manufacturing applications, and
China's own CDC Software, which plans to roll out a hosted CRM offering with Microsoft in December.

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