By Tian Jietang, Research Team of "Transforming Growth Model through Technological Advance and Innovation", Department of Techno-Economics Research of DRC

Research Report No 205, 2010

China's software industry in recent years has been developing exceptionally fast and playing important roles in China's industrial restructuring and upgrading. This scale expansion will directly contribute to the industry's own restructuring. Moreover, this industry's development also plays irreplaceable roles in enhancing industrial informatization and corporate management and in cutting unnecessary resource consumption.

I. Development Trend of China's Software Industry

1. Software Industry Becomes Greatest Growth Point of China's Electronic Information Industry

Due to the impact of the international financial crisis, China's electronic information industry in 2009 met difficulties in development and became one of the most-affected industries of the Chinese economy. This industry's revenue rose 0.1% to 5,130.5 billion yuan and its export shipments dropped 5.6% to 2,893.2 billion yuan. By contrast, China's software industry saw its business revenue rising 25.6% to 951.3 billion yuan. Being the only sector to post a 20% growth and to claim a 15.6% industrial share, the software industry has become the most powerful engine to drive the growth of the whole electronic information industry.

2. Software Service Assumes Growing Importance and Posts Strong Revenue Growth

In 2009, software service generated 212.63 billion yuan, accounting for 22.4% of the total revenue of the whole software industry and being 31.4% higher year-on-year. This growth was 5.8 percentage points higher than the average level of the whole software industry. At a time when China's service trade export posted a dramatic decline, its software and information service outsourcing maintained a strong growth. Software outsourcing realized 30.7 billion yuan in revenue, up 35% over the previous year.

3. Software Industry Is Typical Low-Carbon Industry

The software industry itself produces no pollution and consumes less energy. It is a typical low-carbon industry. According to the estimate of the Dalian Software Park, a 10,000-square-meter land space can attract 1,000 software engineers in industrial buildings or in standard plant buildings and can produce about 300-million-yuan tax revenue each year. This is more than five times those of the traditional manufacturing industry. But its power consumption is only one-fifth of that consumed by the manufacturing industry. Compared with the manufacturing industry, the Dalian Software Park has saved 1.9 billion KWhs in the past 12 years, which is equivalent to the power consumption by a city with a population of about 1 million.

4. Software Industry Still Lacks Core Technologies and Competitiveness

China's software industry is still noted for few core technologies and weak competitiveness. As a result, its profitability is low. According to the data of the CCIDConsulting, the average profit rate of China's software enterprises is only 7%~8%, which is far lower than the 20% average level in developed countries. Besides, the core business revenue of listed enterprises accounts for only 10%~15% of their total operating revenue. The profit rate of China's software service industry as a whole is 20%, which is also far lower than the 40% profit rate in some countries where software industry is mature (quoted from Invest in Software Industry When Prospects Are Goods, China Guoxin Weekly on Technological Industry, 2008, 9, 1). The International Data Corporation (IDC) divides the process of competitiveness enhancement into four stages. The first stage emphasizes customer relations, the second stage project management, the third stage market development and the fourth stage resource integration. IDC researches discover that on average, China's software service enterprises are in the 1.8 stage, its software product enterprises in the 2.4 stage, and nearly 70% of Chinese software developers in the 1.5~2.5 low stage. Most of them are not competitive (IDC, Whitepaper on Software Company Growth Roadmap, 2008, 9).

5. Cloud Computing May Bring Fundamental Changes to Traditional Software Industry

Cloud computing will change the complex process of traditional software purchases and installations. All applications and licensing can be purchased and become effective at any time and the networks can complete the application of software services. While cloud computing does not require much resources of a local computer, it breaks the temporal and spatial limits of software applications bundled in one single computer. All the computing capacity, storage, broadband and power required for applications are provided by network data centers. As a result, the ratio of a single computer's system software and intermediary components can be gradually reduced and software will be more attached to applications. On the other hand, pirated software cannot work any more in the cloud computing model. Software sale will shift from software pad and terminal-user licensing to "cloud computing" service, and payment will be charged for what has been used. Copyright piracy represented by CD reproduction will no longer exist under the attack of cloud computing.

II. System Constraints to Software Industry's Innovation and Development

China's software industry as a whole enjoys some advantages. One, personal reserve is fairly abundant. Two, market environment is fairly good. Three, the government departments have introduced many tax incentives for the development of the software industry. But some system barriers still exist.

1. Organization of Basic and Generic Technology Researches Needs to Improve

The research and development of basic software products, including both core technologies and some key generic technologies, is of external nature to a specific enterprise. Therefore, it is unrealistic to rely on enterprises to do such research and development. In 2006, the State Council promulgated the National Plan for the Long and Medium-Term Development of Science and Technology 2006~2020. The document cites "core electronic components, high-end general chips and basic software products" as one of the 16 major research projects and envisaged heavy investments in the research and development of basic software products. But each major research project has been divided into many sub-projects, which would be undertaken by different institutions. As these institutions are often driven by self interests, how to organize and coordinate them becomes a difficult problem. There are only very few institutions, owned or supported by government departments, that are engaged in the development of generic technologies. Relying on research institutions, which have been transformed into enterprises, to develop generic technologies often fails to produce expected results. Enterprises have formed some industrial alliances. But as judicial associations are difficult to register, these alliances can hardly become independent legal persons. For this reason, many alliances, established with government support, have to improve their operating and management mechanisms.

2. Government Procurement of Proprietary Software Products Needs to Be Truly Implemented

China's regional governments have launched government software procurement programs. But government procurement has been designed mainly to advocate the use of patented software, instead of creating market space for proprietary software products. We conducted a questionnaire survey on the implementation of the policies in support of the National Program on the Long and Medium-Term Development of Science and Technology 2006~2020. The survey results indicate that 19.8% respondents believe government procurement policy has been fully implemented, 22.2% believe the policy is not truly implemented, and only 7.1% believes the policy has been efficiently implemented. This is an indication that this policy has not been implemented intensively and efficiently. Chinese enterprises have identified several main difficulties in policy implementation. The procurers have misgivings about Chinese products and prefer to buy foreign products; some governments are slow in updating procurement catalogues and unable to keep up with the latest market information about product quality and prices; government procurement bidding needs to closely supervised and managed.

3. Software Intellectual Property Protection Remains Weak

Intellectual property protection is vitally important to the software industry. China now has a relatively sound legislation on intellectual properties, but law enforcement is still problematic. The software industry is still troubled by weak enforcement awareness and by difficulty in evidence collection. If intellectual properties are infringed, corporate litigation costs are very high, making it extremely difficult for enterprises to fight against privacy. Moreover, the outsourcing of information and business systems has an even stricter demand for intellectual property protection. As business projects often contain business secrets and software copyrights, customers are all the more concerned about effective intellectual property protection. Many OEM enterprises fail to emphasize this customer concern, and government departments fail to emphasize intellectual property protection in software outsourcing. Inefficient intellectual property protection has increased customer concern and fear about business outsourcing and impeded the development of the software industry.

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