All eyes on gov't buying rule
By Zhu Boru (China Business Weekly)
Updated: 2004-04-06 14:32

China will draw on the international common practice to define whether software products and services are domestic, an important factor for software vendors to win favourable treatment in the country's government procurement, said a senior government official.

"Certainly we will take into consideration the international common practice when stipulating the rules on government software procurement," Ding Wenwu, director of the Electronics and Information Products Management Department of the Ministry of Information Industry (MII), told China Business Weekly last week.

The rules Ding referred to concern government procurement of software products and services.

According to Ding, the policies will be rolled out probably later this year, after the Government Procurement Law's implementation rules are announced, which is expected in June, reported 21st Century Economic Herald.

Currently in many developed countries including the United States, software products and services with a locally added value accounting for more than 50 per cent of the original value are considered domestic in government procurement, Ni Guangnan, academician with the Chinese Academy of Sciences, told China Business Weekly.

However, China will not necessarily copy the US practices, he said.

And as no final results have come out, Ding declined to elaborate.

Although the Government Procurement Law took effect on January 1 last year, only general principles indicate whether domestic products, projects and services should be favoured in government procurement, but there are no detailed rules available.

Foreign software vendors in China have been watching China's rule-making concerning government software procurement closely, in particular, the definition of domestic software.

Because software products falling into this category will be favoured in government procurement, an effective means widely adopted abroad to promote domestic industries, said Ni.

Many experts have suggested, in previous legislative proposals, a 50-per-cent ratio of locally added value to the original should be the dividing line for domestic and foreign software, he said.

It is encouraging news for domestic software vendors, most of which are weaker in developing core technology with intellectual property rights, experts say.

According to Ni, domestic vendors of operating systems (OS) and office software are expected to be big winners if such rules are followed.

Domestic leading vendors of these two product categories are able to meet the government's demand.

In particular, as the Chinese Government is fighting against Microsoft's Windows monopoly in personal computers (PCs), domestically-made Linux OS software are "very likely" to be favoured, said Ni.

Major domestic Linux developers include Red Flag Software Co Ltd and China Software and Service Co Ltd.

Linux is an open-source, cheaper software standard OS that can be copied and modified freely, compared with Microsoft's Windows OS, which is based on proprietary programming.

Consequently, domestic vendors offering cross-platform office software capable of running both Windows OS and Linux OS are most competitive, including Kingsoft, Evermore and China 2000, said Ni.

But foreign vendors should not be worried about being excluded from the software procurement list, he stressed.

As domestic vendors are not competent enough in some categories, such as database software, the government still has to adopt certain foreign products, Ni explained.

Kerry Zhang, deputy managing director of Oracle China, told China Business Weekly last week that no matter how domestic software is defined, the rules will have little impact on Oracle's business deals with the government.

Oracle has been good at database software and enterprise management software, which no Chinese counterparts are able to challenge in government procurement, he explained.

Moreover, Oracle has been in close co-operation with the government in promoting Linux OS, he stressed.

Oracle Corp is the world's No 1 enterprise software company.

Meanwhile, foreign software vendors should not count on expanding their investment in China to obtain favourable treatment in government procurement, experts suggested.

"Usually laws on government procurement give definitions to domestic products and services, instead of companies," said Ni.

To judge whether a product is domestic or not is based on its locally added value or other factors. To calculate that of a company is much more complicated, due to diversified ownerships -- Sino-foreign joint ventures, share-holding companies or others, he explained.

Expanding investment in China, either in production or research and development, will not directly lead to higher ratio of the locally added value to original value. Therefore, such moves do not help much in winning government deals, said Ni.

The Chinese Government spent 34.5 billion yuan (US$4.16 billion) in IT procurement last year, in which software products and services contributed 5.05 billion yuan (US$608.4 million), according to CCW Research, a leading domestic market research firm.

For this year, government procurement in IT sector is expected to reach 40 billion yuan (US$4.82 billion), up 15.9 per cent year-on-year, CCW Research predicted.