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