Market Research Report : Software Market in China 2012

Software Market – China

March 2012

2

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SOFTWARE MARKET IN CHINA 2012.PPT

Executive Summary

Market

Drivers & Challenges

Competition

China’s software market has kept up its momentum of rapid development and is expected to exhibit speedy growth with a CAGR of around X% from USD ‐‐‐ bn in 2010 to USD ‐‐‐ bn in 2015

Eastern region of China earned USD 198.02 bn, accounting for 86% of the total software revenue by Oct 2011

Government Initiatives

Government Measures to Cut Software Piracy

Lower Duties and Tariffs

Standards and Regulations

Drivers:

‐ Modernization of Core Sectors in China

‐ Large Internet & Mobile Phone User Base

‐ Increased Adoption of E‐commerce

‐ Rise in Income

‐ Largely Untapped Rural Market

‐ Increased Use of Computers

‐ Strong Education & Training

Trends Declining Software Piracy Rapid Development Increasing Mergers & Acquisitions

Challenges:

‐ Language Barrier

‐ Loss Due To Software Piracy

‐ Lack of Intellectual Property Rights Protection

‐ High Costs of Entry

‐ Government Emphasis on the Hardware Sector

‐ Immaturity of Software Users

‐ Software Bug

Established MNCs including Company A, Company B, Company C, Company D are dominating China’s Software Market, indicating stronger and more fierce competition for the domestic players Key domestic players in the market include Company A, Company B, Company C, Company D and others

Beijing’s 12th Five Year Plan (2011‐2015) for Software Market Major National Policies Regarding Software & IT Service

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•Introduction •Market Overview

Global China

•Export •Drivers & Challenges•Government Initiatives•Trends•Opportunities•Mergers & Acquisitions•Competition•Key Takeaways

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Software Industry ‐ Definition

Source:

Organizations engaged in sales of computer software or services related to computer systems

Software Industry

Data for ISIC Rev.3 division 72, which includes activities related to the design, setup,

operation and maintenance of computer systems and networks, custom software

development and publishing

OECD Statistics

Includes packaged software, custom software, and computer‐related services such as system

design and maintenance

Private Sources of Statistics

Software that handles different request for

using the hardware, many housekeeping work,

storage of data etc

Software that handles a specific task and are

developed to fulfill specific requirement of the

user

Major Types of Software

System Software Application Software

Note: OECD refers to Organization for Economic Cooperation and Development and ISIC Rev.3 refers to International Standard Industrial Classification of All Economic Activities Revision 3

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Historical Evolution of China’s Software Industry

Phase I Phase III

Era of Bundled Software

Development

Phase IV

Era of Microcomputer Systems

Phase II

Era of IT Systems DiffusionEra of the Internet

and Informatization

• Development 1

• Development 2

• Development 3

• Development 4

• Development 1• Development 2• Development 3• Development 4

• Development 1• Development 2• Development 3• Development 4

• Development 1

• Development 2

• Development 3

• Development 4

Source:

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Global software market to grow with a CAGR of x% during 20‐ ‐20‐ reaching USD ‐‐bn by 20‐

Market Size and Growth

Global Software Market – Overview

Source:

•Global software market is expected to reach USD ‐‐ bn by 20‐ with a compound annual growth rate

(CAGR) of x% during 20‐ ‐20‐

With the recovery of global economy, importance on IT investment is shifting from the traditional area of back‐

office automation and transaction processing towards the use of information to drive the market

0

100

200

300

400

USD bn

x1%

20‐e

a6

20‐e

a5

20‐e

a4

20‐e

a3

20‐

a2

20‐

a1

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Remarkable annual growth rate and demand from a wide range of industries has boosted software market in China

•Chinese software revenue stood at USD a1 bn in 20‐, expected to reach USD a6 bn by 20‐ with a CAGR of x1% China has shown strong output growth generating USD 205 bn in the first nine months of 2011, up x3% y‐o‐y

• Revenue growth remained robust as enterprises looked for solutions to improve performance and operational efficiency China had y1 software enterprises as of Aug 20‐

Software copyright registrations in China stood at y2 in 20‐

• The industry growth is partially attributed to key steps taken ensuring crackdown on software piracy and copyright infringement Number of software patent applications filed increased from y3 in 20‐ to over y4 in 20‐

The ministries as well as administration have promoted the use of legitimate softwares in central government since 20‐

Over y5 govt. agencies spent over USD y5 mn buying y6+ genuine copies of softwares in 20‐


Software Sales Growth

China Software Market – Overview

Source: Note: 2010 Exchange Rate has been used for all conversions

0

100

200

300

400

500

USD bn

a1

x1%

20‐e

a6

20‐e

a5

20‐e

a4

20‐e

a3

20‐e

a2

20‐

0

10

20

30

USD bnx2%

Sep 20‐

b2

Sep 20‐

b1

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System integrated services in China experienced the highest growth presenting attractive opportunities

• China is the world’s fourth largest information technology (IT) market by spend after the US, Japan and Germany, as of 20‐

• In the first ten months of 20‐, software products and system integrated services generated more than x1% of the software revenues

followed by IT services, data processing & operating services and those related to IT services

Sub‐sector Split of Software Revenues

Sub‐sector‐wise Revenue Composition of China’s Software Industry

Source:

SOFTWARE MARKET IN CHINA 2012 PPT

Software Products

SystemIntegrated Services

Embedded System Software

Software Sub‐sectors

IC DesignIT Consulting

Services

Data Processing & Operating Services

0%

20%

40%

60%

80%

100%

Jan‐Oct 20‐

a2

c6%c5%

c4%c3%

c2%

c1%

Jan‐Oct 20‐

USD bna1

b6%b5%

b4%

b3%b2%

b1%

IC design

IT consulting services

Data processing & operating services

Embedded system software

System integrated services

Software products

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Eastern China has contributed the highest share of total software revenues in 20‐

• China’s future prospect in software is vivid from its remarkable annual growth rate as well as from demand from

diverse range of industries

• By region, revenue from the eastern areas of China was USD y1 bn, accounting for c3% of the total software revenue in

China during the first 10 months of 20‐

• By the first ten months ending Oct 20‐, software revenue from western China reached USD y2 bn with a y‐o‐y increase

of d1%

•Revenues from central China climbed at USD y3 bn with a y‐o‐y increase of d2% during the same period

Region‐wise Software Revenue

Region‐wise Revenue Composition of China’s Software Industry

Source:

SOFTWARE MARKET IN CHINA 2012 PPT

0

50

100

150

200

250

USD bn +33%

Jan‐Oct 20‐

a2

c3%

c2%c1%

Jan‐Oct 20‐

a1

b3%

b2% b1%

Eastern China

Western China

Central China

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Four cities located in eastern region contribute over x1% of the revenues generated by the Chinese software industry

Source:

Four major cities of the Software

Industry Output are all located in

Eastern China

High concentration of talents

& investment in Eastern

China lead it to be the “city

cluster” of software industry

High concentration of talents

& investment in Eastern

China lead it to be the “city

cluster” of software industry

Software Hubs of China

Others Country 1 Country 2 Country 3 Country 4

20‐ a1% a2% a3% a4% a4%

Province 1

Province 3

Province 4

Province 2

Top Cities

Share of Major Cities in Software Industry Output (20‐)

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China’s share of export to output has been around c12% on an average over the last decade ending in 20‐

• China's software market reaped USD a1 bn via exports in the first ten months of 20‐, up x1% y‐o‐y Oct 20‐, recorded the highest level of y‐o‐y export growth rate of y1%, an increase of 13.3 percentage points over previous month

• Increasing demand of IT service market worldwide acts as a driving force for software export in China

• China's exports of software outsourcing service was USD b2 bn up x2% y‐o‐y in the first ten months of 20‐

Over y3% of the 400 enterprises participating in a survey* expressed increasing interest on service outsourcing

Export Growth of the Software industry Software Export Growth

Source:

Export of Software Outsourcing Services Share of Export to Output

Note: *Survey of 400 companies in 2009 under “Global Outsourcing Market Under Crisis?”

0

5

10

15

20

25

USD bnx1%

Jan‐Oct 20‐

a2

Jan‐Oct 20‐

a1

0

5

10

15

20‐

x3%

20‐

c11

20‐

c10

c7

20‐

c6

20‐

c5

20‐

c4

20‐

c3

20‐

c2

19‐

c1c12

% Share

c9

20‐

c8

20‐0

2

4

6

USD bn

Jan‐Oct 20‐

x2%

Jan‐Oct 20‐

b2

b1

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Drivers & Challenges – Summary

Drivers

Modernization of Core Sectors in China

Large Internet & Mobile Phone User Base

Increased Adoption of E‐commerce

Rise in Income

Largely Untapped Rural Market

Increased Use of Computers

Rising Population of Computer Scientists

Challenges

Language Barrier

Loss Due to Software Piracy

Lack of Intellectual Property Rights Protection

High Costs of Entry

Government Emphasis on the Hardware Sector

Software Bug

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China being the world’s 2nd largest economy after US acts as a key growth driver for its software market

Modernization of Core Sectors in China Impact

China’s GDP Growth (20‐ ‐20‐)

Source:

• Finding 1• Finding 2 Sub‐finding 1 Sub‐finding 2 Sub‐finding 3 Sub‐finding 4

0

5

10

15

% Growth

20‐e

a6

20‐e

a5

20‐e

a4

20‐

a3

20‐

a2

20‐

a1

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China has the most internet and mobile phone users in the world …

•Finding 1Sub‐finding 1


Sub‐finding 3

•Finding 3

Large Internet and Mobile Phone User Base (1/2) Impact

Source:

Internet Population Top 5 Countries – Internet users(20‐)

0

200

400

600

mn users

a4

20‐

a2

20‐

a1

x1%

20‐

a5

a3

20‐ 20‐0

200

400

600

b5

Country 3

b3

Country 2

Country 5

Country 4

b6

No. in mn

b2

b1

Country 1

China has the highest number of internet users in the world

Only y1% internet penetration in 20‐

demonstrates huge scope for further expansion

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…which provides high impetus to the growth in China’s software market

Large Internet and Mobile Phone User Base (2/2)

Source:

0

500

1,000

mn users x1%

20‐

a4

20‐

a3

20‐

a2

20‐

a1

China has the highest number of mobile phone

users in the world

Mobile Phone Population Top 5 Countries – Mobile Phone users(20‐)Smartphone Market Size

• Finding 1 Sub‐finding 1 Sub‐finding 2 Sub‐finding 3

• Finding 2 Sub‐finding 4

• Finding 3 Sub‐finding 5 Sub‐finding 6

Note: WCDMA refers to Wideband Code Division Multiple Access

0

50

100

mn unitsx2%

20‐e

b3

20‐

b2

20‐

b1

0

500

1,000

No. in mn

Country 5

c5

Country 4

c4

Country 3

c3

Country 2

c2

Country 1

c1

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Increased adoption of e‐commerce will boost further growth in China’s software market

Increased Adoption of E‐commerce Impact

Source:

0

1,000

2,000

3,000

USD bn

20‐e

a7

20‐e

a6

20‐e

a4

20‐e

a3

20‐e

a2

20‐

a1




With increased adoption of e‐commerce making financial transactions online, there is a rising need for payment gateways and other related software platforms driving the software industry in China

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Rise in people’s income and the largely untapped rural market are set to drive China’s software market

Largely Untapped Rural Market

Rise in Income Impact

Source:

Impact

• Finding 1• Finding 2 Sub‐finding 1


• Finding 2 Sub‐finding 2 Sub‐finding 3

Urban Per Capita Disposable Income

0

1,000

2,000

3,000

4,000

USD bn

a1

x1%

20‐

a2

20‐

18SAM

PLE


Wave of computerization and automation both in public and private sectors driving the software market in China

Increasing Emphasis on Computerization Impact

Source:

Sub‐finding 1

Sub‐finding 3

Sub‐finding 2

Sub‐finding 5

Sub‐finding 4

Sub‐finding 6

Finding 1

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Over x1 computer scientists graduate every year, depicting strong growth potential for software market

Source:

Rising Population of Computer Scientists Impact

•Finding 1 Sub‐finding 1

Sub‐finding 2

Sub‐finding 3

•Finding 2

Rising number of technically qualified professionals are likely to drive the software market in China

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Language barrier is one of the biggest challenges faced by the software market in China

Language Barrier

Source:

10 Most Popular Languages in Internet (20‐)

a9

Language 10 a10

Language 9

Usersin mn

100 200 300 400 500 6000

All the rest a11

Language 8 a8

Language 7 a7

Language 6 a5

Language 5 a5

Language 4 a4

Language 3 a3

Language 2 a2

Language 1 a1

Impact


Sub‐finding 2

Sub‐finding 3

Finding 2

‐ Survey

x1% Respondent x2% Respondent

Result 1 Result 2

Note:

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China suffered a loss of USD y1 bn due to software piracy in 20‐

•Finding 1

•Finding 2 Sub‐finding 1

Sub‐finding 2


Sub‐finding 4

Loss Due to Software Piracy Impact

Source:

Commercial Value of Pirated PC Software (2010)

0

5,000

10,000

USD mn

Brazil

a5

India

a4

Russia

a3

China

a2

US

a1

Commercial Value of Unlicensed Software in China

0

5,000

10,000

USD mnx1%

2010

b5

2009

b4

2008

b3

2007

b2

2006

b1

Loss due to software piracy is second highest in China

after the US

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Beijing municipality plans to improve local software and information service …

Source:

According to the development target for the software industry over the 12th Five Year Plan (2011‐2015), China will support the establishment of over x1 firms each with annual revenues exceeding USD y4 bn

Beijing’s 12th Five Year Plan (2011‐2015) for Software Market

Beijing Municipal Commission of Economy and Information Technology and the Beijing Municipal Commission of Development and Reform aims for:

Total revenue of USD y1 bn for the software and information service industry

Fostering and development of more than five globally competitive enterprises with operating revenues of more than USD y3 bn

Exports totaling USD y2 bn

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… industry during the 12th FYP period

Plan for Growth in Five Key Areas of Beijing's Software and Information Services Industry

Finding 1

Finding 3

Finding 5

Finding 2

Finding 4

Source:

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Government policies in the recent years will support the development of software & IT services sector

Issuer 1• Special research project on core electronic devices, high‐end computing chips and base software products

Issuer 2 • Electronic and information industry development plan

Issuer 3• Guidelines to encourage governments and enterprises to support business process outsourcing industry

Issuer 4 • Action plan to improve information technology in rural areas

Issuer 5 • Decision to accelerate the development and growth of strategic emerging industries

Issuer 5 • Notice for cloud computing demonstration projects

Issuer 6 • Further Policies to Encourage the Development of Software and IC Industries

Source:

Nov 20‐

Apr 20‐

Sep 20‐

Apr 20‐

Oct 20‐

Major National Policies Regarding Software & IT Service

Time Period

Issuer Policy Name

Oct 20‐

Feb 20‐

Note:

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Trends – Summary

Key Trends

Declining Software Piracy

Increasing Mergers & Acquisitions

Rapid Development (Growing Operating

Revenues)

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Government campaigns is one of the key measures that reduced the software piracy rate in China during 20‐ ‐20‐

• Finding 1

• Finding 2

Declining Software Piracy

Decline in software piracy will develop

the market

Source:

0

20

40

60

80

% Share

20‐

x2%

20‐

x1%

0

2

4

6

8

10

12

% Share

20‐

y2%

20‐

y1%

Declining Software Piracy Rate Declining Losses due to Piracy

Reasons for Declining Piracy Rate

• Finding 3• Finding 4• Finding 5• Finding 6

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Revenue from software products accounted for the largest share versus the other software sub‐sectors

Finding 1

Rapid Development (Growing Operating Revenues) (1/2)

China experiences rapid growth in

operating revenues

Source:

Data Processing & Operating Services Revenue IT Consulting & Management Services Revenue

Rapid Growth of Operating Revenues

Software Product Revenue Embedded System Software Sectors Revenue

0

10

20

30

40

USD bn

a1

x1%

Oct 20‐

a2

Oct 20‐0

10

20

30

USD bn

b1

x2%

Oct 20‐

b2

Oct 20‐

0

50

100

Oct 20‐

USD bnx3%

c2

Oct 20‐

c1

0

20

40

USD bn

d1

x4%

Oct 20‐

d2

Oct 20‐

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Software and IT services sub‐sectors like data integration and data quality tools are expected to see highest growth

Opportunity in Applications Development

Source:

Opportunity in Enterprise Software

Between 20‐ and 20‐, data integration and data quality tools will be the fastest‐growing segment with a CAGR of x1%

• Finding 1

Sub‐finding 1

Sub‐finding 2

Sub‐finding 3

Product 1

Product 2

Growing Popularity

Finding 2

Finding 2Finding 1

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Mergers & Acquisitions (M&A) (1/9)

Announced Date Closed Date Target Buyer/Investors Sellers Size (USD mn)

Jan‐4‐20‐ Jan‐11‐20‐ Target Company A Investor Company A Seller Company A USD X mn

Jan‐4‐20‐ Jan‐4‐20‐ Target Company B Investor Company B Seller Company B USD X mn

Jan‐16‐20‐ N.A. Target Company C Investor Company C Seller Company C USD X mn

Sep‐6‐20‐ Sep‐16‐20‐ Target Company D Investor Company D Seller Company D USD X mn

Source:

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35

40

45

50

55

60

65

70

75

80

150 200 250 300 350 400 450 500 550 600 650 700 750 800 850

Total Income

Net Profit

m1

m2

m3

m4

m5

Size of the Bubble represents Market Capitalization in USD mn

Major Domestic Public Companies – Summary (1/2)

Company 5Company 4Company 3Company 2Company 1

Note:

Source:

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Note:

Total Income and Profit for Major Domestic Companies

Company 5n5

t5

Company 4n4

t4

Company 3n3

t3

Company 2n2

t2

Company 1n1

t1

Net IncomeTotal Income

Major Domestic Public Companies – Summary (2/2)

Source:

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Domestic Company – Company Name

Key People

Products and Services

Company Information Locations – China

Corporate AddressCompany 5

x, y Avenue, City 5, City 5 Pin‐code, Country

Tel No. xxx‐yyy‐zzz

Fax No. xxx‐yyy‐zzz

Website ‐

Year of Incorporation 19

Ticker Symbol xx

Stock Exchange yy

Category Products/Services

Business and operation support systems

OpenBilling, OpenCRM, OpenBOSS, OpenBI, OpenPRM

Service applications Mail Center, Spam Patrol software, Net Disk, Internet Short Messaging Gateway, Device Management Platform, software enhancement and maintenance, system integration, other value‐added IT consulting & planning services

Network management solutions

NetXpert, OpenXpert

Name Designation

Person 1 Executive Co‐Chairman

Person 2 CEO, President &Director

Person 3 CFO & Vice President

Person 4 Chief Technology Officer & Executive Vice President

Headquarters

Source:

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Source: Company Websites; Press Articles; Databases

Financial Snapshot Key Ratios

Financial Summary


• The company earned a net profit of USD a3 mn in FY 20‐, as compared to net profit of USD a2mn in FY 20‐

• The company reported total Income of USD b1 mn in FY 20‐, registering an increase of x1 % over FY 20‐

• The company earned an operating margin of 18.40 % in FY 2010 an increase of x2 percentage points over FY 20‐

• The company reported debt to equity ratio of x3 in FY 20‐, a decrease of x4 % over FY 20‐

Financial Summary

Profit / Loss

Total Income

0

100

200

300

400

0

20

40

60

ProfitUSD mn

Total IncomeUSD mn

20‐

a3

20‐

a2

20‐

a1

Indicators Value (24/01/2012)Market Capitalization (USD) y1 mnTotal Enterprise Value (USD) y2 mnEPS (USD) y3PE Ratio (Absolute) – (6th March 2012) y4

Particulars y‐o‐y change (2010‐09)

2010 2009 2008

Profitability RatiosOperating Margin ‐ ‐ ‐ ‐

Net Margin ‐ ‐ ‐ ‐

Profit Before Tax Margin ‐ ‐ ‐ ‐

Return on Equity ‐ ‐ ‐ ‐

Return on Capital Employed ‐ ‐ ‐ ‐

Return on Working Capital ‐ ‐ ‐ ‐

Return on Assets ‐ ‐ ‐ ‐

Cost RatiosOperating costs (% of Sales) ‐ ‐ ‐ ‐

Administration costs (% of Sales) ‐ ‐ ‐ ‐

Liquidity RatiosCurrent Ratio ‐ ‐ ‐ ‐

Cash Ratio ‐ ‐ ‐ ‐

Leverage RatiosDebt to Equity Ratio ‐ ‐ ‐ ‐

Efficiency RatiosFixed Asset Turnover ‐ ‐ ‐ ‐

Asset Turnover ‐ ‐ ‐ ‐

Current Asset Turnover ‐ ‐ ‐ ‐

Working Capital Turnover ‐ ‐ ‐ ‐

Capital Employed Turnover ‐ ‐ ‐ ‐

Improved Decline

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Key Business Segments Key Geographic Segments


Key Recent Developments

Description News

Overview• AsiaInfo‐Linkage, Inc. provides telecommunications software solutions and IT products and services to telecommunications carriers and other enterprises in the People’s Republic of China

Business

• On Jan 20, 20‐, AsiaInfo‐Linkage, Inc. announced receipt of "Going Private" proposal from Power Joy (Cayman) Limited, a wholly owned subsidiary of CITIC Capital China Partners II

• On Jan 4, 20‐, announced to sign an agreement to provide convergent billing and customer relationship management software to Nepal Doorsanchar Company Limited

• On Dec, 20‐, signed NG‐BOSS 3.5 and NG‐BASS 3.5 upgrade contracts with Shanghai Mobile

New CTO• Mr. Yadong Jin, vice president and general manager of marketing, has been appointed as executive vice president and chief technology officer w.e.f Dec 14, 20‐

100%

0%

50%

100%

20‐

Segment A The company operates through single

reportable segment namely, Telecom

Solutions

The company operates through single

reportable segment namely, People’s Republic of China

100%

0%

50%

100%

20‐

People’s Republic of China

Source: Company Websites; Press Articles; Databases

35

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Chinese software industry has undergone rapid development in the past 10 years and the growth story continuesWith rapid growth in IT spending among various industrial segments, including Government, banking, healthcare and

manufacturing, China’s software sector is likely to propel in the near future

Software and IT services sub‐sectors in China are expected to be the areas of highest growth presenting attractive opportunities in –IT consultancy and outsourcing sector;Applications development;Enterprise software

Opportunities in the Market

Market Size Initiatives Taken by Players

Challenges

Huge increase in IT spending across public and private sector, coupled with demand for software development talent and high‐quality software products are driving the market

• Language Barrier• Software Piracy• Lack of Intellectual Property Rights Protection • High Costs of Entry• Government Emphasis on the Hardware Sector• Software Bug

Players are taking steps to upgrade the quality of their products and after‐services along with development in software outsourcing services

Software firms are picking up the pace of development via M&A to improve their products and satisfy the multiplying demands of customers

0

200

400

600

USD bn

x1%

20‐e

a6

20‐e

a5

20‐e

a4

20‐e

a3

20‐e

a2

20‐

a1

36SOFTWARE MARKET IN CHINA 2012.PPT

Thank you for the attention

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