As is the case with so many economic and industrial statistics in China, those generated by the country's software industry are impressive. According to a research report published by China Computerworld, the mainland's leading information technology (IT) publication, mainland software sales over recent years have grown by an average annual rate of 30 per cent, from US$819 million in 1995 to US$2.1 billion in 1999. Unfortunately, closer examination of the numbers reveals the software industry is not the third arrow in China's high-technology bow that it should be. Rather than complementing the country's booming telecommunications and computer hardware sectors, the software industry is arguably the Achilles heel of China's IT sector. It is a runt compared to its hardware counterpart and has been thoroughly out-classed by the competition in India. Worse still, its future development is threatened by a capital-markets infrastructure which could not be worse-suited for promising - but cash-starved - domestic software firms and rampant piracy of intellectual property rights. In any analysis of China's software industry a comparison with India is inevitable - and also surprising, as it is one of the few areas in which India outshines China. Last year China's per capita gross domestic product reached US$840 compared to US$490 in India. According to telecommunications consultancy Pyramid Research, at the end of last year China had 140 million fixed-line telephones and 85 million mobile-phone subscribers, against India's 32 million fixed-line phones and 3.3 million cellular subscribers. According to IT consultancy IDC, China's personal computer market (7.2 million units sold last year) is more than four times larger than India's (1.7 million). In the next few decades, India will overtake China as the world's most populous nation, but few multinational companies seem to care. China's accumulated stock of foreign direct investment stands at US$388 billion. India's is US$23 billion. In the software sector, however, the situation could not be more different. In 1999, according to China Computerworld, India's software sales, at US$5.6 billion, were 2.6 times bigger than China's US$2.1 billion. China's IT hardware and packaged software markets (worth US$9.6 billion and US$759 million respectively in 1999) were substantially larger than India's (US$2.1 billion and US$360 million). But it is the ability of Indian software firms to export that puts them so far ahead of their rivals in China. According to a detailed analysis of the two countries' software industries, published in the latest issue of the China Economic Quarterly, 200 of the United States' 500 largest companies out-source software development work to India. In 1999, software exports accounted for US$3.9 billion - or 68 per cent - of India's US$5.6 billion software sales. By comparison, mainland software firms exported products and services worth just US$130 million in 1999 - representing 6 per cent of its total software sales. For developing countries with visions of Silicon Valley dancing in their heads, the ability to export software services is, at least initially, more important than the size of their domestic packaged software market, which tends to be dominated by foreign multinationals. According to the China Economic Quarterly , foreign companies hold about two-thirds of the mainland's packaged software market. Indeed, turn on any PC in China and the usual array of Microsoft Office programs will pop up. Any domestically developed software on the computer will, more likely than not, be a so-called 'shell' program. These sit on top of underlying (and usually foreign-developed) programs, such as an Internet browser or a word processor, and allow users to read Chinese Web sites or input Chinese characters into a document or spreadsheet. There are some exceptions. China's unique financial and tax laws have helped the development of domestic accounting applications. Of six leading Chinese software companies identified by the China Economic Quarterly, three sell accounting applications. But on the whole, the domestically developed shell programs mainland PC users rely on to input Chinese into imported applications are an appropriate symbol for the hollowness of China's software industry. Beijing, however, is determined to increase local companies' share of the domestic packaged software market to 60 per cent in the course of the 10th Five Year Plan (2001-2005), and to grow software exports 10-fold in the same period. To these ends the State Council in July last year issued the Policies for Encouraging the Development of the Software and Integrated Circuit Industries. Among other incentives, the policy document reduces the value-added tax Chinese software developers have to pay on inputs - to 3 per cent from the standard 17 per cent. Domestic software companies are also entitled to a two-year income-tax holiday followed by three years at half the normal rate - matching the concessions typically extended to foreign investors. The policy document promised software firms preferential access to Shenzhen's second board for high-technology companies, addressing a key concern for software developers desperate to list not only to raise capital but also so they can use stock options to entice and retain talented staff. The effectiveness of this particular inducement, however, remains hampered by the fact that the second board does not exist. When the policies were promulgated, it was widely assumed that the second board would be operational by the end of last year. But the new year came and went with the second board still on hold. Last month, China Securities Regulatory Commission chairman Zhou Xiaochuan hinted that the second board's launch would be delayed at least until the end of this year. With Godot likely to arrive before Shenzhen's second board, China would probably be better off if it simply made it easier for promising software companies - especially privately held ones - to secure listings on either Shanghai's or Shenzhen's main board. In the past, listing barriers have driven some software companies to ludicrous extremes. For example, in 1999 the Clever Software Group, a Beijing-based developer of educational applications, bought a controlling stake in Shanghai-listed Acheng Iron & Steel (subsequently renamed Clever Quantum Network) simply to secure a backdoor listing. Another impediment to the development of China's domestic software industry is piracy. In a survey of Chinese software developers by China Computerworld , more than half the respondents said they had been hurt by piracy of their products. A quarter identified piracy as the biggest problem confronting the industry. But these challenges notwithstanding, the government's determination to upgrade its software industry should be taken seriously. In the hi-tech sector, the government does have an impressive record of getting what it wants. In particular, it has nurtured strong domestic competitors - such as Legend Holdings, Huawei Technologies and Shenzhen Zhongxing Telecom - which have successfully seized back market share from foreign manufacturers of PCs and fixed-line telecommunications switching equipment. India's software industry should watch its back.
