China Leading the Enterprise Software Charge in 2010
March 22, 2010 Dan Burger
Where would you expect to find the highest growth rate in the enterprise software market? China, of course. And, so the latest report from Gartner that forecasts what you expected is not exactly stunning in its revelations. The annual enterprise software revenue growth rate for 2010 is pegged at 14.8 percent. That slides neatly into an estimated compound annual growth rate (CAGR) of 14.6 percent during a span of 2008 to 2013.
Gartner foresees no other enterprise software market that will top this CAGR percentage increase. As a recent Newsweek headline pointed out: It’s China’s World. We’re Just Living in It.
“Software vendors have strong growth potential in China, but also face the challenges of operating in a commercial environment that is still developing,” said Hai Hong Swinehart, one of the Gartner army of research analysts. “Chinese enterprises have historically preferred to develop applications using their own labor because it costs less. However, this tendency has resulted in legacy and quickly obsolete software as well as inhibiting Chinese enterprises’ sustainability and business IT continuity. Growth will mainly be driven by replacing immature infrastructure with standardized systems and the large vendors stand to benefit.”
To add perspective to this enterprise software growth forecast, Gartner is betting that the stack of chips on the Chinese side of the table will reach $6 billion high in 2010.
China is already the largest software market in the Asia/Pacific region. Gartner predicts it will account for 27 percent share of AP revenue in 2010. This equates to 2.7 percent of the worldwide software market share. By 2013, China’s share of the software market in AP is expected to reach 30 percent and represent $9.4 billion in revenue. That would be 3.3 percent of total worldwide software market revenue. Australia, as another reference point, is forecasted to garner 21 percent of AP spending in 2010.
The clout of the still-evolving Chinese market is also apparent in Gartner statistics that show 46 percent of respondents in China planned to increase their software spending in 2010. That number, Gartner says, is far higher than other countries it has surveyed, and that, of course, includes North America, Europe, the Middle East and Africa, and Latin America. The same survey found that organizations in China in 2010 are expected to spend approximately 23 percent of their IT budgets on software compared with 33 percent on hardware.
Gartner expects infrastructure spending to outpace application software spending gains in 2010. The magnitude of investment in infrastructure software–double that of application software through 2013–is indicative of China’s IT evolution. Priority areas of software spending, based on Gartner’s report, include enterprise resource planning (ERP), office suites, operating systems and database management systems.
During the next five years, revenue from data integration and data quality tools will climb quickly, but startling numbers related to percentage gains should be tempered by a starting point that represents a small base due to slow adoption rates of this software.
“China is still a hardware-centric country that tends to spend more on infrastructure, and we expect this to continue through the forecast period to 2013,” says Gartner’s Swinehart. “Optimism regarding spending within Chinese organizations reflects confidence in China’s regional economic performance, as well as the need to adopt better technology to effectively compete in a tougher global environment.”
An important aspect of the Chinese software market that is not mentioned in the Gartner report is piracy. Recent statistics show that 80 percent of the software used in China is pirated. Although this incredibly high number does not apply specifically to enterprise software, it reveals an ugly reality that all software vendors face.
Intellectual property rights violations and policies that favor the Chinese software industry continue to be serious concerns for software vendors.
A report, released a year ago, titled China Software Market Forecast to 2012 by the research firm RNCOS, indicated the Chinese software industry registered 30 percent growth in 2008. It also noted “the Chinese government’s continuous efforts in the form of IT investment, construction of software parks, and provision of quick approvals to secure international investment have largely driven the software industry amidst global downturn.”
Another report, this one by the Organization for Economic Cooperation and Development, showed China’s overall economic growth diminishing. According to an article published by Bloomberg in March 2009, the forecast for 2010 economic growth was at 8 percent in November 2008, which was down from 13 percent in 2007. Declining exports were a major contributor to the economic slowdown. And the concern was great enough that the Chinese government initiated a stimulus plan that totaled nearly $600 billion.