Our instant answer – “Of course not, there’s no IP protection. How could anyone make money in software in China?” – is increasingly wrong.
There are now more than a dozen listed Chinese software companies with a valuation of over US$1 billion. And these are not valuations based on vaporware (software announced publicly and promoted even though it does not yet exist) –these companies make significant profits.
How are they doing it?
Mainly with businesses as their customer. We know that Chinese companies still only spend half of what their peers in other markets spend on technology as a percentage of revenue. And this has long held back the development of the enterprise software market in China.
However, there is an acceleration in spend underway as companies seek to digitize their business and increase operating efficiencies. The government has embraced this trend and is pushing investment in software as a tool for increasing domestic innovation.
Local software companies also benefit from tax breaks and domestic software requirements – the government makes up a bit over 15% of total IT sector spending. But much of this would really not matter if there were no customers willing to pay.
What are their customers willing to pay for?
A lot of it falls into the category of applications with Chinese characteristics – markets that have historically been small, but are growing fast now. Applications where the benefit to the business is not only ongoing, but where there is real value in having access to the current iteration of the software itself or a database that it accesses. Some examples include:
- ERP based on Chinese accounting standards.
- VAT solutions for the Chinese government’s unique VAT rebating system that enables more accurate and faster payments from the government.
- Investment platforms sold to new digital entrants in financial services .
- Property management solutions sold to developers as they seek to diversify their revenues as new sales decline.
- Management solutions for mobile devices, enabling security across the myriad revisions of Android that employees may have on their devices.
- Digital maps to enable many location driven applications.
- Medical information management systems for Chinese hospitals, connecting to the many different Chinese reimbursement systems.
I believe there is a lot more of this to come. Businesses are paying today – and will pay more in the future – for applications that enable them to establish closer connections with their customers and achieve greater efficiency in their internal operations.
They generally have no choice but to go outside, having never invested to build a decent internal IT capability themselves. There has probably never been a better time to be a Chinese software company.