U.S. Department of Commerce/International Trade Administration / April 2003
With 1.3 billion inhabitants, China is the most
populous country in the world. It also has a booming economy that has brought
economic stability to a region recently plagued by a financial crisis in 1997
and Japan's economic woes. China had an increase in Gross Domestic Product (GDP)
of 8 percent in 2002 to $1.2 trillion and a GDP per capita of $1,000, the
highest China has ever had in its economic history. Increased foreign investment
and exports are among the drivers for the country's continued economic growth.
Foreign Direct Investment in the information technology (IT) sector has been
instrumental in China's economic expansion. The privatization and reform of
state-owned enterprises as well as China's accession to the World Trade
Organization (WTO) in December 2001 are expected to attract more foreign
investment and reduce unemployment, currently at 4 percent.
IT Industry
The IT industry remains a pillar industry for the nation and should have a
value-added output exceeding $76 billion in 2003. The Chinese government is very
supportive of developing China's information industry and addressed this
development for the first time in its Tenth Five Year Plan (2001-2005). The plan
includes proposals to accelerate electronic commerce (e-commerce) development
and promote the use of information technology in sectors such as banking,
finance, taxation, and trade as well as in rural areas. The plan also calls for
reform of state-owned enterprises, promotion of science and technology research,
promotion of the development of the software and integrated circuit industries,
and the improvement of China's information infrastructure. The Chinese
government is establishing three new high-tech "belts" located in the
Zhujiang River Delta in South China, the Yangtze River Delta region in Jiangsu
province, and across Beijing to expand electronics production. Since 1997, the
government has doubled its expenditure to $13 billion to promote science and
technology research and development, compared to the previous five-year period.
It believes the information industry will continue to grow at a rate three times
faster than that of the national economy. By 2005, the Chinese government
expects that the industry will account for over seven percent of GDP, of which
telecommunications will represent 4.7 percent and electronic products the
remaining 2.5 percent.
Telecommunications
Market
According to the Ministry of Information Industry (MII), China will have an
additional 33 million fixed phone and 52 million mobile phone subscribers this
year and record $198 billion in sales of information products. It will also
continue to invest more than $25 billion in fixed assets in the
telecommunications sector. China's telecommunications network growth has
exploded since 1990. With 214 million wireline subscribers and 207 million
mobile subscribers as of year-end 2002, China now boasts the largest wireline
and wireless networks in the world. This tremendous growth can be attributed to
a number of factors. The Chinese government has made telecom and IT development
a national priority and enacted preferential policy initiatives to promote
telecommunications modernization. As China's economic development has
progressed, it has generated increased demand for additional communications
services and equipment. The rise in living standards has also made it possible
for a growing number of Chinese citizens to afford telephones. Finally,
technological advances have contributed to network expansion by making available
better equipment at lower prices.
The Chinese telecom services market has been gradually restructured over the
past decade. The former Ministry of Post and Telecommunications' (MPT) monopoly
status through China Telecom ended in 1994 when the China State Council approved
the creation of China United Telecommunications, or China Unicom. It also
established China Jitong Corporation in that year as a data communications
supplier and charged it with developing a national "information
highway" network, which was known as the Golden Bridge Network. Further
industry restructuring occurred in 1999 when the Ministry of Information
Industry (MII), which had been created by a merger of the MPT and the Ministry
of Electronics Industry (MEI) the year before, spun off China Telecom's wireless
network into a new entity, China Mobile, and its satellite operations into China
Satellite. MII also launched China Netcom later that year as China's third
telecom service provider and gave the Ministry of Railways a license in 2000 to
provide all basic telecommunications services, except mobile services, through
the newly-established China Railway Telecom. The State Council split China
Telecom again in May 2002, allowing the company to retain its local loop
networks in twenty-one of China's southern provinces and municipalities, and
combining China Netcom and China Jitong into a much larger China Netcom which
would handle the local loop networks in ten northern provinces and municipal
areas. The revenues of China's telecom services providers were more than $55
billion at year-end 2002 after the restructuring concluded. China Mobile, the
dominant player in mobile services with about two-thirds of the subscriber base,
held over 37 percent of this total while China Telecom, the leading wireline
provider, had a 33 percent share.
China has one of the most competitive telecommunications equipment markets
which, along with the explosive growth of the country's telecommunications
networks, has drawn all of the major international equipment suppliers to
establish joint venture manufacturing operations there since the 1980s. At the
same time, the Chinese government has fostered the development of Chinese
manufacturers through a wide range of tariff and non-tariff barriers
(requirements that foreign suppliers establish joint ventures with Chinese
partners, build manufacturing plants in China, transfer technology, and offset
their imports of component parts with exports of finished products from the
factory). Chinese manufacturers now compete more vigorously with foreign
companies not only in the Chinese market, but also in third-country markets.
U.S. telecommunications equipment exports to China have risen at an average
annual rate of 8 percent each year since 1993, reaching a peak of $1.1 billion
in 2001. However, U.S. imports of these products from China grew more than twice
as fast (19 percent) each year during this same period to $ 3.2 billion. By
year-end 2002, U.S. telecommunications equipment exports fell sharply, losing
over a third of their value, while imports from China increased by nearly $1.4
billion. These significant changes in trade have led to a steadily worsening
U.S. telecommunications product trade deficit with this country.
There is currently intense interest and speculation surrounding China's plans
for third generation (3G) wireless technologies with three standards under
evaluation by MII. The Chinese view WCDMA as a "European" standard,
CDMA-2000 as an "American" one, and TD-SCDMA as "Chinese."
MII has indicated that it will issue four 3G licenses to Chinese wireless
services providers and will allow each operator to choose its preferred
standard. However, most observers believe that pressure will be exerted on at
least one operator to go with the Chinese TD-SCDMA standard. The stakes will be
very high, not only for operators, but for equipment vendors.
IT Market
According to International Data Corporation (IDC), China's market for IT
products and services reached $22 billion in 2002 and is expected to exceed
$40.2 billion by 2006, representing nearly a 16.3 percent compound annual growth
rate (CAGR) during these years. In 2002, hardware accounted for 73 percent of
this overall market, followed by packaged software (10 percent) and IT services
(17 percent). The Chinese government's emphasis on expanding the use of
information technologies in schools, public sector agencies, and businesses has
led to increased spending on computer equipment and should continue to affect
demand in the future. Due to industrial policies that have stimulated the
development of China's computer hardware industry, domestic manufacturers have
captured more than 70 percent of Chinese PC sales while U.S. suppliers have held
much of the remainder. China's PC server, handheld computer device, and storage
market segments are also expected to have high growth rates through 2006.
The volume in IT hardware trade between the United States and China has nearly
tripled between 1998 and 2002. As in telecommunications equipment, U.S. computer
exports to China have grown much more slowly than imports from that country---a
CAGR of only 2 percent versus 34 percent---leading to a significant U.S. trade
deficit with China in this product area. In 2002, the United States exported
$579 million of IT hardware to China, making it the ninth largest customer for
these exports. However, in that same year, China became the largest foreign
supplier of computer equipment to the United States with its shipments totaling
over $9 billion. China's accession to the World Trade Organization (WTO) in
December 2001 will contribute to boosting this trade between the two countries
by allowing U.S. and Chinese IT firms to take advantage of tariff reductions on
certain IT hardware and to be subject to the same legal and regulatory
requirements and benefits as domestic suppliers.
China has emerged as the second largest IT hardware producer in the world behind
the United States and is followed by Japan and Taiwan, in that order. China's IT
hardware output doubled between 1999 and 2002 due to China's lower production
and labor costs, investment incentives, and relatively reliable infrastructure.
U.S., Japanese, and especially Taiwanese suppliers have established a
manufacturing presence in China to gain market access, but domestic firms, such
as the Legend and Founder Groups, now present a significant competitive
challenge to the foreign subsidiaries as a result of aggressive pricing tactics
and their close-knit relationships with government buyers.
The Chinese government has issued a number of policies ranging from export
incentives to value-added tax rebates and financial assistance to small
businesses and established eleven software development bases in relatively large
cities, near universities and scientific institutions. China will attempt to
increase its software industry's sales from approximately $4 billion in 2001 to
$31 billion by 2005 and more than double its share of the world software market
to 3 percent during the same period. To meet this goal, China's software
industry will have to control over 60 percent of the domestic market, export $3
billion worth of products and services annually, and train 20,000 to 30,000
software professionals each year. The government has also promulgated laws
addressing intellectual property protection since China has the second highest
software piracy rate in the Asia-Pacific region and must attack this problem if
it is to achieve its objective of creating a world-class software industry.
Additional obstacles it must overcome are the relative poor quality of Chinese
software developers and the lack of an entrepreneurial culture in China that
fosters innovation.
China's market for IT services is expected to reach $4.7 billion in 2003,
representing an increase of nearly 25 percent over the previous year. In the
next four years, China's IT services market is expected to reach $11.7 billion,
growing at CAGR of nearly 26 percent between 2003 and 2007. Implementation
services represent the largest proportion of IT services market in China,
followed by operations management services. While IT services represents a
relatively small portion of the total IT market compared to hardware, this
segment is expected to grow substantially as the notion of procuring IT services
becomes more widely accepted in China.
Growth of the Internet. Use of the
Internet in China has been expanding rapidly. The number of Internet users grew
from only 15,000 in 1995 to 59 million (or 5 percent of China's population) by
January 2003. Most of these users currently access the Internet through a
dial-up connection. However, Strategy Analytics, a market research firm,
predicts that nearly 37 million homes will have a broadband connection by 2008.
The increasing availability of broadband and cheaper charges for Internet access
will be the key drivers to the development of China's Internet in the future.
One major barrier to the growth of Internet use could be the Chinese
government's continuing regulation of content.
Electronic Commerce. Among the
reasons why Chinese businesses and consumers are not yet buying online are: the
use of credit payment systems is not widespread; online merchants are not yet
fully trusted; the security of electronic payments cannot be guaranteed; and
delivery systems are inefficient throughout most of the country. China has also
yet to develop a legal, regulatory, or policy framework conducive to the rapid
growth of e-commerce. Laws recognizing the validity of "e-contracting"
tools and stressing the importance of online security have been proposed, but
not fully implemented. The Chinese government has taken action to
encourage more businesses and consumers to go online by stepping up its national
"informatization" campaign and to continue its efforts to construct an
appropriate framework for e-commerce to flourish. Its efforts to expand online
education services (e-learning) and to institute electronic government
(e-government) have been largely successful as well.
WTO Accession. Through its
accession to the WTO, China has committed to wide-ranging reforms affecting
trade in IT and telecommunications equipment that should result in better access
for foreign suppliers to the Chinese market. These reforms include agreeing to
sign the Information Technology Agreement (ITA), thereby eliminating tariffs on
all products covered by it (see Appendices); to allow imports and distribution
of most products, particularly those covered by the ITA, into any part of China;
and to remove quotas and local content, technology transfer, and export
performance requirements. China also agreed to allow an increased level of
foreign investment and/or open a larger geographic area to foreign participation
through a staged implementation plan for its IT, Internet, and
telecommunications services markets. For example, in the telecommunications
services area, it will allow 50 percent foreign participation in value-added
services two years after accession, 49 percent in mobile voice and data services
five years after accession, and 49 percent in domestic basic services six years
after accession. The Chinese government has further committed to undertake the
pro-competitive obligations contained in the Reference Paper of the WTO
Agreement on Basic Telecommunications Services, such as establishing an
independent regulator, defining interconnection rights, and prohibiting
anti-competitive practices. China's accession to the WTO should stimulate
greater foreign competition and investment in China's e-commerce market as well
which will spur the development and introduction of more efficient mechanisms
for online payment, delivery, and security.
Market Opportunities. U.S.
information and communications technology (ICT) exporters may find substantial
market opportunities in China, but they also will face tremendous challenges.
While their products are generally well regarded in this country, U.S. firms
must compete with offerings from European, Japanese, Korean, Taiwanese, and
Canadian companies as well as those of local Chinese manufacturers. As
previously noted, local firms benefit from a variety of Chinese government
policies that are designed to foster the development of an indigenous ICT
industry. China's accession to the WTO has helped to reduce or eliminate many of
the market access barriers by U.S. exporters, but significant hurdles still
remain.
Four key factors are opening significant
opportunities for U.S. IT hardware and software suppliers to take advantage of
China's vast consumer market. These are: 1) the government's informatization
drive, as stated in its Tenth Five-Year Plan, to spread the use of information
technologies among communities, government agencies, and China's traditional
industries; 2) the "Go West" campaign to narrow the digital divide
between Eastern and Western China; 3) China's accession to the WTO; and 4) the
2008 Beijing Olympic Games and its particular focus on high-tech applications.
According to IDC, China's increase in
e-government spending of nearly 40 percent annually between 2001 and 2003
provides U.S. IT firms with the opportunity to introduce solutions that will
help the national, provincial, and municipal governments offer online services
to their citizens. These solutions include networking hardware and software,
Chinese language database software, Chinese language content management tools,
portal software, and network security solutions. Thanks to the market opening
resulting from China's membership in the WTO, U.S. IT suppliers will have new
business prospects in traditional industries, such as manufacturing and banking,
that need to upgrade their systems to become competitive internationally. These
industries will require solutions (e.g., enterprise resource planning, customer
relationship management, and supply chain management packages) that will help
them become more efficient in delivering products to customers and receiving
inputs from their suppliers. U.S. IT companies should take advantage of China's
rapidly growing market for IT services by not only targeting the traditional
industries, but also by assisting state-owned enterprises to increase their
competitiveness through selecting the right combination of equipment and
software.
China's successful bid for the 2008 Beijing Olympics will present U.S. IT
companies with enormous opportunities to sell their equipment, software, and
services. The IT projects envisioned by the municipal government of Beijing will
require a wide range of products such as smart card technologies, broadband
applications, database applications, e-commerce platforms, network security
solutions, simulation software, games software relating to Olympic sports, and
voice recognition software.
In the area of e-commerce, China's business-to-business market should continue
to offer U.S. IT firms the best prospects for exports. Demand for U.S. web
developers, web hosting services providers, and e-commerce consultants is
particularly high. E-commerce products and services localized for the Chinese
users should enjoy the most success.
U.S. suppliers interested in pursuing opportunities in China's ICT markets
should recognize the differences in business and cultural styles between the
United States and China and develop an appropriate market entry strategy. Some
form of local presence is essential. Options include using agents and
distributors; partnering with large IT firms, systems integrators, or
consultants; partnering with like-minded Chinese small and medium-sized
enterprises (SMEs) with complimentary skills or products; or setting up a local
office staffed by local employees to do marketing and training and to provide
ongoing support. Even though China is a very large market of 1.3 billion people,
it is essential that businesses understand consumer behavior in the
provinces/regions they are targeting. For example, spending patterns and needs
of ICT end-users in the Pearl River Delta Region are very different from those
of end-users in the Yangtze River Delta Region and from those in Western China.
Regardless of the market entry strategy, a variety of organizations, both public
and private, can help U.S. ICT SMEs enter or expand their presence in China.
Research Report Acknowledgements & Credits
The report was prepared by international trade
specialists from Information Technology Industries offices in the Trade
Development unit of the U.S. Department of Commerce's International Trade
Administration (ITA): Jeffrey Rohlmeier and Tu-Trang Phan of the Office of
Information Technologies and Electronic Commerce, and John Henry of the Office
of Telecommunications Technologies. They were actively supported by U.S.
Commercial Service staff in China, including Jianhong (Michael) Wang in Beijing,
Scott Shaw, Christie Ho, and Ronnie Xu in Shanghai, Rose Nickel and Xu Tao in
Chengdu, and Kent Gou in Guangzhou.
Information on the Office of Information Technologies and Electronic Commerce
and the Office of Telecommunications Technologies can be found at: (http://www.export.gov/infotech).
The report describes and analyzes the trends, key issues, and events in
information technology, telecommunications, Internet and e-commerce adoption in
China, to create a framework from which U.S. small and medium-sized enterprises
(SMEs) can make educated business decisions about entering these markets. The
report analyzes the status of telecommunications liberalization, competition in
telecommunications services and the deployment of new technologies, and how
these changes are affecting the adoption of the Internet and e-commerce. It also
analyzes the economic, cultural, and political factors influencing the adoption
of information, Internet, and e-commerce technologies. The report highlights
issues and market opportunities relevant to U.S. SMEs in the telecommunications,
information technology (IT), and e-commerce areas. In addition, it provides
suggested market entry strategies for SMEs, U.S. Department of Commerce and
other resources to assist U.S. firms in market entry endeavors, and contacts in
the United States and China.
The report is based on bilateral meetings conducted in China and the United
States over the course of the past several years, as well as market research and
analysis undertaken in China in June 2002 by international trade specialists
from the Information Technology Industries unit of Trade Development within the
Commerce Department's International Trade Administration (ITA): Tu-Trang Phan
and Jeffrey Rohlmeier of the Office of Information Technologies and Electronic
Commerce, and John Henry of the Office of Telecommunications Technologies. They
interviewed software, Internet, and telecommunications equipment producers and
services providers, trade associations, industry analysts, IT end-users, and
government officials in China. The work was actively supported by market
specialists in ITA's Commercial Service (US&FCS) in China. Information
gathered from on-site interviews was supplemented with data from market research
firms and an extensive review of available literature.
The information in this report was accurate to the best of our knowledge at the
time of drafting in March/April 2003. Certain changes to China's government
structure resulting from the March 2003 National People's Congress may not have
been known at the time this report was published and could not be incorporated
in this report. A supplement to this report may be prepared at a later date to
reflect new information.