The year-over-year growth rate of the SaaS market in China is predicted somewhere around 35-45% until 2020. With the projected growth rate, the market size is expected to reach $65.4 billion by 2020.
- Definition / Scope
- Market Overview
- Market Risks
- Top Market Opportunities
- Market Drivers
- Market Restraints
- Industry Challenges
- Technology Trends
- Market Size and Forecast
- Market Outlook
- Distribution Chain Analysis
- Competitive Landscape
- Competitive Factors
- Key Market Players
- Strategic Conclusion
Definition / Scope
- Software as a service or SaaS is a distribution model of software where a third-party hosts the applications and makes them available to customers over internet. SaaS is also one of the three basic segments of cloud computing technology together with IaaS (Infrastructure as a service) and PaaS (Platform as a service).
- SaaS model encompasses the ASP (application service provider) and on demand computing software distribution models. In ASP, the provider hosts the customer’s software and delivers it to end-users over internet whereas, on demand SaaS model, the provider givers customers network based access to single copy of an application that provider created for SaaS distribution. The source code of application is same for all customers and if updates are available, the functionalities are launched equally among all customers.
- Some of the basic SaaS applications include email, sales management, customer relationship management, financial management, human resource management, billing and collaboration etc. These SaaS applications are utilized by IT experts’ business users as well as C-level executives.
- Some of the advantages of SaaS includes following:
- SaaS eliminates the need for organizations to run or install application on their own which in turn saves expenses on hardware acquisition, provisioning & maintenance as well as software licensing, installation and maintenance.
- These models provide pay-as-you go model where payment is made at times of need and SaaS offer can be terminated entirely when it is not required.
- The updates can be made automatically that reduces burden of the IT staffs of particular organization
- These SaaS applications are delivered over internet so the users can access it from any internet enabled device or location.
- SaaS model also seems to have some disadvantages such as, businesses rely on third-party vendors to provide and upkeep the software and the security of the application entirely depends upon the third-party that is offering these services. If in case security breach occurs, the organization is hampered and it can have negative consequence on the vendors SaaS offerings.
- In 2018, the China IT services and software industry had a market value of $687.5 billion. With growth rate of 16.5% there are total of 35,368 tech companies in China software industry. The figure represents a high scope for national and international companies to enter the market.
- In 2018, more than 6 million employees worked in China’s software industry. The number increased by 3.4% with an addition of 2 million people in 2017 alone.
- Among all the segments of software products (IaaS, SaaS and PaaS) accounted 31.3% of the market and stood at a market value of $246.8 billion respectively. The SaaS accounted 13.6% of the total segment with a market value of $33.7 billion respectively.
- As of 2018, the public SaaS market in China was valued at $6.81 billion whereas that of private SaaS & hybrid market was valued $26.8 billion respectively.
- Since 2013 to 2015, the Chinese SaaS market was growing at a rate of 65-75% yearly before leveling out in 2016. In addition, the Chinese SaaS market will account 10% of the global share in 2020 up from only 3.6% in 2016. This fact highlights the opportunity that the market stores for the foreign players to expand their product and services.
- The Chinese startups ruled in raising VC in 2018 especially in consumer apps and services category. Ant Financial raised largest ever VC at $14 billion in series C funding followed by nearly dozen of private Chinese companies such as SenseTime, Du Xuaoman Financial and JD Finance among others.
- The Chinese companies accounted almost 39.3% of the venture funding in 2018 followed by US in 38.4% respectively. The venture markets in US and China are running neck to neck but the SaaS funding has a huge gap. Where, US ranked top in SaaS funding in 2018 with 70.1% of (total of 15) SaaS startup funding, China accounted only 11.7% with only 4 SaaS deals.
Within cloud computing, the SaaS model is where the overall application is subcontracted to the third party provider of cloud services and this in turn creates a complex security structure.
The users of outsourced service are fully reliant on the service provider for designing, developing, operating and post-maintenance of the service in line with the user’s security requirement and policies. As a result, when a SaaS provider is breached, the users lose invaluable data through no fault of their own.
For instance, a recent example is Microsoft’s cloud based business suite (SaaS product) that exposed data records to customers rather than the owners. Thus, these breaches highlight the importance of considering outsourced services and risks that are likely to follow with it.
As, China is also incompetent when it comes to network equipments as they are more vulnerable and open to exploitation, using such equipments may lead to additional vulnerability in Chinese cloud infrastructure beyond standard baseline of vulnerability.
Top Market Opportunities
Although cloud technology was first introduced by US companies, in 10 years of time it will be dominated by the Chinese tech companies. As the tech giants and startups in China update their infrastructure, the technology is becoming prominent in the country.
The government policy which is friendly to the Chinese companies is encouraging domestic players such as Alibaba, Baidu and Tencent. The market for cloud services is expected to reach $100 billion by 2020 mostly driven by domestic players, MNC’s and government agencies. The high potential of the Chinese cloud market is also catching the attention of nearly everyone associated in the cloud service to the country.
The Chinese enterprise IT market is almost 5 years behind US or European markets which also suggests that there is huge amount of opportunity to create an impact in the market before it is dominated by few incumbents.
Another reason for the cloud models to be adopted at a quick pace is also the trend where Chinese consumers have started adopting smartphones and mobile apps belligerently. As China has evolved as a mobile first and mobile only country, which also means there is huge opportunity to build in applications that are cloud based suited for mobile.
Along with mobile, China has also high internet penetration (more than 70%) which generates tons of data which can be better handled with cloud computing. In addition to mobile, China is investing in AI and smart cities that generate huge amounts of data which can be handled with cloud. This is further expected to bolster the cloud scene in the country.
Shift to Cloud Infrastructure: China is one country that is in verge to transition into the cloud based infrastructure from the traditional hardware. As of 2019, the growth rate of hardware is predicted to fall 5% and be replaced by the growth in cloud-based services revenue or SaaS. The overall non-cloud and cloud combined ERP software was worth $49.5 million in 2018 i.e. 30% of the growth in revenue came from SaaS ERP.
SME SaaS adoption growth: Some large companies and government owned enterprises are becoming laggards in picking up SaaS models as they have huge capital investments in existing hardware and physical infrastructure.
In contrast, SME’s have tighter capital budgets which makes SaaS subscription models appeal to them as it is more cost effective. As 99% of the companies in China are SME’s and the growth rate of these companies are increasing at an annual rate of 20.2%, the continued growth of SME’s will likely to increase the market scope for SaaS products. The only effort required by the SaaS providers is to build interest of ERP SaaS among the SME’s.
Wage growth: The continuous rise of wage in China has led to rising labor costs which has led businesses to rethink about the labor productivity to save costs rather than hiring more labors.
Since 2017, the average private sector wages grew to $6,900 and in Beijing it was as high as $10,650. Thus, as private sectors wages grow the SME sector will begin to rely on productivity solution driving growth of SaaS solutions that reorganize business processes.
- Due to the extensive regulatory requirement, there is only one way to enter the Chinese SaaS market legally for a foreign company. This model is also used by big foreign companies such as Apple and Microsoft to sell SaaS in China. The requirements include:
- The SaaS software needs to be located on a server in China, if the server is outside China’s boundaries it will be illegal to provide SaaS services.
- Despite of joint ventures being allowed in the sector and the entity able to provide SaaS services, the provider must be a fully-owned Chinese entity. Additionally, the foreign firm in the partnership cannot be issued ICP licenses which is why the Chinese entity providing the service must acquire one.
- The only other option to operate is to have server outside China, which makes speed much slower and overtime can be blocked by the government due to illegality. Thus, the URL can be easily blocked by the government and company willing to enter the market mustn’t follow this path.
- The major difficulty arises from the legal requirement of finding a Chinese provider willing to acquire ICP licenses. As obtaining such license is very expensive and the Chinese entity must bear all the costs. Thus, technical capability is not sufficient, the company must also have enough financial resources to gain the license.
- For established foreign players another problem arises when Chinese provider could turn into a competitor in case, intellectual property concern is existent. The Chinese provider will easily get access to all the data and software on the server and even the data in the server can be accessed by the Chinese government.
Discouraging foreign companies to operate in China: The Chinese SaaS and particularly Cloud market has demoted the US vendors. In 2017, no US vendors made out of the “others” title despite of contributing higher revenues than their Chinese counterparts.
As the US and China trade war instilled by President Trump led to tariffs on Chinese goods by US, the China has also retaliated tariffs. Despite, it is hard to put tariff on cloud product/services, the government of China is limiting the US or foreign companies to be successful in the China market through their policies and more indirect ways such as advertising.
Despite of the companies such as AWS or Microsoft’s technical competence and worldwide presence, the companies are finding it difficult to replicate the integration between Chinese companies and their government involving activities such as procurement, security and law enforcement standards which further accentuate their difficulty to operate in the China market.
Other factors that are causing unease among the cloud circles of foreign companies is that China will soon be able to surpass other foreign counterparts in important research areas such as AI and IoT.
With the country’s will to invest billions of dollars into research projects in these areas and with the population of China, the domestic market itself will generate billions of volume of data.
In addition, China also experiments with the own technology standards that don’t match to the rest of the world which also leads other cloud providers to cater two types of services inside and outside of China that imposes standardization issues for foreign players.
Despite of opportunity present in the China market, the US or foreign companies may not be able to operate in the cloud computing market of China with their full potential due to unhealthy competition present in the market.
This also limits the effective technology-transfer in cloud-computing as Chinese companies may not be able to leverage competent security, network and IT infrastructure of the foreign companies that is needed to provide reliable and efficient product/services in the market.
AI is the new technology that is believed to bolster the cloud especially SaaS model. The AI technology uses data and algorithms to predict, recommend and automate processes with applications in areas from accounting to email.
Some of the players in the SaaS market such as Salesforce democratized AI by leveraging large parts of its Einstein package available to all its users. The company reinforced its position in CRM SaaS solutions by incorporating the AI technology.
Another player called AppZen also offers automated auditing using AI, the company was the second fastest growing SaaS in 2018 registering growth of 150% in six months of time span.
Some of the common areas in which AI is supporting SaaS include:
Personalization: AI and data together are driving SaaS businesses to offer more personalized services. For example, UI can be customized based on consumer’s historical data and their experience in the platform at past. Without, AI the interfaces would be crammed with full of options and features. By utilizing such data SaaS companies are setting up options that are based on individual preferences.
Automation: Chatbots are another application of AI where common queries are answered by machines rather than human. Most of the SaaS models are utilizing automation which is helping their business to respond to consumer needs without having to rely on human resources.
Security: Data security is a highly debated subject at present and priority for SaaS businesses as any cloud model requires connection to internet network which makes it vulnerable to attacks. Some players such as Oracle has recently announced the application of AI to secure its cloud service or automatically detect and eliminate threats along processes.
The Chinese government has been trying to promote innovation in the cloud computing market of China by mandating policies that support the innovation process of the technology providers. In 2010, the NDRC committee of Government released a “Circular regarding successfully conducting Computing services Innovation and development pilot demonstration work”.
The circular was further rolled out across five major cities in China including, Beijing, Shanghai, Shenzhen, Hangzhou and Wuxi. As a result, these regions have turned out to be technology clusters with presence of most of the cloud technology companies that are supporting innovation in product/services.
The government of China has also commenced on taking steps on addressing data security issues. In December 2012, the Standing Committee of National People’s Congress issued a mandate on “Strengthening the protection of Information on Internet”. This aims to improve network and security practices by provider of cloud computing services.
Another draft was published in 2013 on “Regulations on Telecommunication and Internet User personal information protections”. The criteria of the circular encompasses cloud service providers that process personal information online. Despite of these mandates, some gaps are still prevalent in China’s laws.
In addition, China doesn’t have data hosting or specific security laws regarding data hosting infrastructure to which cloud services companies are subject.
For many years, Chinese government has been continuously investing heavily on development of cloud infrastructure. There are 46 public cloud project still underway in 4 Chinese municipalities overseen by Central government (Beijing, Tianjin, Shanghai and Chongqing) and in 18 out of total 27 provinces in China.
These projects have been established in two major regions of the country: far west (Xinjiang Uyghur autonomous Region) and far south (Hainan). Beijing alone has received funding for a total of 30 projects with total investment funding of $8.2 billion from state and municipal government.
Market Size and Forecast
- As of 2018, the overall software and IT services market in China was valued at $687.5 billion of which SaaS industry alone accounted only 4.8% of the market with a value of $33.7 billion respectively.
- The Chinese SaaS industry can further be divided into five segments that include, Customer Relationship management (CRM), office automation software (OA), intelligent manufacturing software (IM), office collaboration software and others.
- In 2018, the CRM segment accounted 29% of the market with value of $9.7 billion.
- The OA was the second highest ventured segment accounting 27% of the market with a value of $9 billion.
- Then, the IM segment which accounted 19% of the total market with a value of $6.4 billion.
- Next, Office Collaboration software accounted 14% of the total market with a value of $ 4.7 billion
- And finally, other niche segments together accounted 11% of the total market with a value of $3.7 billion respectively.
The year-over-year growth rate of the SaaS market in China is predicted somewhere around 35-45% until 2020. With the projected growth rate, the market size is expected to reach $65.4 billion by 2020.
In SaaS, China is still at a nascent phase compared to economies such as US, Singapore and Japan. However, the development of IT infrastructure and core technology is likely to drive the growth of market in future. By 2020, it is expected that China’s SaaS market will account 10% of the world SaaS industry.
Although it is fragmented, the China’s SaaS market is growing explosively particularly due to two reasons: First, China is spending in cloud technology 2 times that of the global market and second, cloud computing in a major priority of “Made in China 2025” plan which aims to upgrade traditional manufacturing base through high-tech development.
Distribution Chain Analysis
In China there are total 8 “Software Cities”: Nanjing, Jinan, Chengdu, Guangzhou, Shenzhen, Shanghai, Beijing and Hangzhou. These cities together earn approximately 60% of the China’s software industry revenue.
Also, there are 20 Software parks in China and a cluster of technology companies in Cyberport Hong Kong and Shenzhen which is also known as Silicon Valley of China. These clusters are set to promote expansion of more tech based companies in Chinese market further supporting the growth of software market in long-term.
The Chinese SaaS market is highly proliferated with multiple small to medium players. The top player is a company called Kingdee with market share of 7.2%. Whereas the top 10 companies control only 35.6% of the total SaaS market in the country.
Until now, no giant players have appeared in the market nor did the local players in the market expand their operations overseas. The main reason behind this seems to be domestic firms that are still developing and firms are benefitting from the domestic growth.
The lack of Mergers & Acqusitions or integration has led these players to operate on their own and even the small foreign players entering the market with a quality product and effective strategy has to compete in the market due to presence of high number of players.
For domestic firms, the government of China has some lucrative benefits for entering the market in support of promoting domestic firms inside the country. For instance, exclusive access to SOE markets is supported by domestic procurement policy for technology products that provides funding to these companies.
In general, the foreign companies willing to operate in the Chinese SaaS market must also understand the Chinese business practices as partnering with the Chinese entity is necessary to enter the SaaS market. Some factors that these foreign firms need to consider are: customizing software to fit Chinese accounting standards, providing regular software updates according to changing regulatory environment and conducting proper translations into Chinese.
Despite of some difficulties for the foreign firms to operate in Chinese SaaS market, 6 out of 10 major players are foreign firms that have succeeded in China’s SaaS market.
On a global scenario, the China’s SaaS market is relatively small than that of the developed countries such as UK and US. Thus, there is significant opportunity for the foreign players to leverage the market in both developed and underdeveloped segments.
The China’s SaaS is shifting towards cloud-based sales model. As the China’s software market went under major restructuring, the emerging software providers are taking advantage of cloud infrastructure platform to introduce innovative SaaS products across segmented market or industries. On the other hand, the incumbents in the market are also starting to leverage M&A and establishment of subsidiaries to collaborate and enter the cloud market.
Some of the recent cooperation in China’s SaaS market include Microsoft & IBM, SAP’s partnership with China Telecom and Oracle and Tencent collaboration which suggests the commencement of international software vendors entering China SaaS market with marked strength.
The most recent collaboration (Oracle and Tencent) seems an interesting one as Oracle’s core business lies in PaaS and SaaS while that of Tencent lies in IaaS. Thus, both companies can mitigate their limitations by integrating their complementary business lines.
Even though, the current cloud market in China is dominated by IaaS model, the market has low profit due to uniform IaaS products in the market. This has led many IaaS vendors to seek association with the SaaS proficient partners. The operating revenues of SaaS is smaller than IaaS or PaaS and doesnot have one or two dominating player, the Oracle’s entry into the market with largest SaaS product segment may change the course of competition in future.
Other potential players in the market such as Salesforce and Workday are also looking to heavily invest in the China market which could bring obstacles to companies such as Oracle and impede its designation of a sole-leader.
The cloud computing overall has become a battleground for Chinese Tech companies such as Alibaba and JD.com. Foreign services companies such as Amazon and Microsoft are looking to grow in China’s lucrative SaaS market but their efforts are limited by the local regulation present in the market.
Key Market Players
The top 10 players that control more than 35% of the SaaS market in China are follows: According to their 2018 revenues, the top players in the market are as follows:
- Kingdee (Local)
- Microsoft (Foreign)
- Oracle( Foreign)
- Salesforce (Foreign)
- SAP (Foreign)
- Veeva Systems (Foreign)
- Zoho (Local)
The China’s SaaS market is at a very nascent phase however it is growing at an exponential rate providing ample of opportunities for companies to thrive.
Although IaaS is the leading segment in China with big tech players such as Alibaba and JD.com leveraging the model in the market, SaaS is also being initiated by a number of companies in China.
Until present, the top players in the market is ruled by foreign companies, in near future, more collaboration with Chinese tech giants will be witnessed in the market and SaaS will comprise of joint ventures rather than standalone companies.
- SaaS- Software as a Service
- IaaS- Infrastructure as a Service
- PaaS- Platform as a Service