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Development of the ICT Industry in Mainland China – the unique role of Hong Kong
Dr. C.K. Wong, Distinguish Fellow
Hong Kong Computer Society
2004.11.26
A Joint Seminar Organized by
Hong Kong Institution of Engineers (IT Division and Electronics Division)
and
Hong Kong Computer Society
Full Scope of the ICT Industry in Mainland China
How this Industry Has Evolved
Hong Kong’s Role in the Two Decades of High-speed Growth of this Industry in Mainland China
New Opportunities and New Roles for Hong Kong in Moving Forward
Contents
Review of the Mainland China ICT Industry
Electronic and Optical Components
Industry
Software Products, Software Services and other IT Professional
Services Industry
Information Contents and Communication Services
Industry
Electronics Products, Information Processing
HW and Communication Equipment Industry
Full Spectrum of the ICT Industry in China
Component Manufacturing
Semi-Conductor and Optics Technologies
Material Science
Component Design
Review of the Mainland China ICT Industry
Electronic and Optical Components
Industry
Software Products, Software Services and other IT Professional
Services Industry
Information Contents and Communication Services
Industry
Electronics Products, Information Processing
HW and Communication Equipment Industry
Full Spectrum of the ICT Industry in China
Digital Electronic Products
Computer Peripherals
Computing Hardware
Data Com Equipment
Systems and Embedded SW
Review of the Mainland China ICT Industry
Electronic and Optical Components
Industry
Software Products, Software Services and other IT Professional
Services Industry
Information Contents and Communication Services
Industry
Electronics Products, Information Processing
HW and Communication Equipment Industry
Full Spectrum of the ICT Industry in China
Digital Contents Providers and Developers
Valued-added Information Services Providers
Communication Services Providers
Infrastructure Services Providers
Review of the Mainland China ICT Industry
Electronic and Optical Components
Industry
Software Products, Software Services and other IT Professional
Services Industry
Information Contents and Communication Services
Industry
Electronics Products, Information Processing
HW and Communication Equipment Industry
Full Spectrum of the ICT Industry in China
Software Tools
Application Software Products
Software Development Services
Business Consulting Services
Security Design and Audit Services
Other IT Related Professional Services
System Architecture Design Services
A Complex and Sustainable Eco-system of Industries
Electronic and Optical Components
Industry
Software Products, Software Services and other IT Professional
Services Industry
Information Contents and Communication Services
Industry
Electronics Products, Information Processing
HW and Communication Equipment Industry
Full Spectrum of the ICT Industry in China
Component Manufacturing
Semi-Conductor and Optics Technologies
Material Science
Component Design
Digital Electronic Products
Computer Peripherals
Computing Hardware
Data Com Equipment
Systems and Embedded SWDigital Contents Providers and Developers
Valued-added Information Services Providers
Communication Services Providers
Infrastructure Services Providers
Software ToolsApplication Software ProductsSoftware Development ServicesBusiness Consulting Services
Security Design and Audit ServicesOther IT Related Professional Services
Architecture Design Services
The Consumers and Organizational Users of the TechnologiesThe Consumers and Organizational Users of the Technologies
Some Statistics on the Overall Market Size of the ICT Industry in China
In 2003, total realized value-added output of ICT industry in Mainland China was RMB 709B (US$88.6B) ， ~ 6% of the GDP for the year.
Component, Equipment and Software Industry accounted for RMB 400B (US$50B)， Communication Services RMB 309B (US$38.6B).
Projected Growth Rate in 2004 is > 30%。 At the end of 2003, total installed base of telephones ~ 532 million subscribers.
Fixed line ~ 263M，Mobile ~ 269M. It has exceeded 600M by the end of 3rd Quarter 2004 (Rank Number 1 in the world).
Internet user base = 78 million (Rank Number 2 in the world). Total ICT products and Services Sales = RMB1.88T (US$235B) (Rank Number
3 in the world).
2. 01% 2. 24%2. 65%
3. 33%3. 84%
4. 20%
5. 70%6. 10%
0%
1%
2%
3%
4%
5%
6%
7%
1996 1997 1998 1999 2000 2001 2002 2003
1996~2003 ICT Industry Output as % of GDP
Software Products and Services Sector of the ICT Industry in China
-
5.00
10.00
15.00
20.00
1997 1998 1999 2000 2001 2002 2003
In US$ Billion
Total Market Size for SW Products and Services in Mainland China
Source: CCID (RMB figures normalized at today’s US$ exchange rate)
Average annual growth from 1997-2003 is 34% Local content and value-add is around 30% of the market size. (National target is to reach
60% by 2005- Unlikely to achieve based on current figures.) “Software export” in 2003 was around US$2B (around 10% of total market size). Over 60% of this export figure was related to Embedded software value-add onto hardware
and equipment products.
Software Products and Services Market Size Comparison 2000-2003
0
50
100
150
200
250
300
China India S. Korea Japan EU USA
2000
2001
2002
2003
US$ Billion
2.58% 2.14% 2.69%
10.49%
30.05%
39.67%
As % of World-wide Market Total in 2003
Some History Behind all these Figures In the early days, just like its counterparts in other parts
of the world, Communication Industry and Computer Industry of China were treated as two separate industries and administered by two different ministries until 1998.
The digital Computer Industry (HW and SW) in China can trace its origin to 1950, upon the return of Prof Hua from the Princeton Institute of Advanced Studies.
华罗庚 （１９１０年－１９８５年）中国科学院副院长，应用数学研究所所长。主持过中国计算技术研究所的筹建及早期工作，为中国计算事业作出了杰出贡献。
摘自《人民日报》 1958年 8月 3日第二版
１０３型电子计算机 １９５７年１１月底开始研制，１９５８年８月１日试制成功，１９５９年年底投入正常运行，由７３８厂小量生产，并正式定名为１０３型计算机，是我国第一台小型电子管数字计算机（又称八一型计算机）。
In the 1950s, technology level of the Computer Industry in China was comparable to Japan. However, it lacked the industry capacity, economic strength, social stability to grow the industry like Japan in the following years.
Some History Behind all these Figures
In the late 1970s and early 1980s, the most pronounced problem in the re-vitalization of the computer industry was the lack of qualified professionals and the necessary equipment for the training of a new generation of professionals.
Programs were established under the then Ministry of Electronics to re-start the computer industry from the disruption caused by the “Culture Revolution”. Jump-start it as an assembly industry Gradually increase the local contents (metal work, power
supplies, PCB, peripherals, passive components, small-scale IC, ASIC…)
Chinese language support (GB2312-80 and later ISO-10646, CC-DOS, 2-byte UNIX kernel, Chinese terminals and printers, Chinese Windows…)
Strategic Business applications to drive the needs. Banking-mid 1980s Telecom-early 1990s, 3-Gold projects-mid 1990s eGovernment, SCM…..
Some History Behind all these Figures
In the late 1970s and early 1980s, the most pronounced problem in the re-vitalization of the computer industry was the lack of qualified professionals and the necessary equipment for the training of a new generation of professionals.
Programs were established under the then Ministry of Electronics to re-start the computer industry from the disruption caused by the “Culture Revolution”. Jump-start it as an assembly industry Gradually increase the local contents (metal work, power
supplies, peripherals, passive components, small-scale IC, ASIC…)
Chinese language support (GB2312-80 and later ISO-10646, CC-DOS, 2-byte UNIX kernel, Chinese terminals and printers, Chinese Windows…)
Strategic Business applications to drive the needs. Banking-mid 1980s Telecom-early 1990s, 3-Gold projects-mid 1990s eGovernment, SCM…..
Some of the Work by HK
Help to import some of the computers in the early 1980s for
the support of training in universities (Comenco, IMSAI,
SWT…)
Designed some of the early indigenous computers for local manufacturing in the mainland and acted as the sourcing partner for components (Greatwall, Zijin and UNIX Servers…)
Hong Kong investments and management know-hows have speeded up the growth of the electronic assembly and computer manufacturing industry in the Mainland.
Multi-byte UNIX kernel research was done in HK (Mainland, Taiwan and HK collaborative effort)
The I18N Group from Japan, Korea, US, Mainland China, Taiwan and HK at a Dinner Gathering in the summer of 1990 (Lamma Island, HK)
Some History Behind all these Figures (Telecom)
From 1949 to 1978, investment into the communication infrastructure only grew from 40 million RMB to 410 million RMB. By the end of the 1970s, long distant capacity has only grown 16,000 circuits.
From 1978 to 1990, total telephone switching capacity has grown from 5.75 million to 20.26 million circuits (in a period of 12 years, 352% growth).
From 1990 to now, in a period of 14 years, another 3,000% growth in telephone capacity.
By August 2004, total telephone capacity reaches 619 million. Fixed line at around 303 million and mobile at 315 million.
The emergence of a group of sizeable telecommunication equipment suppliers supporting this growth. Some of them are: 华为、中兴、大唐、巨龙 , UTStarcom…
The successful development of technologies and products with indigenous intellectual properties. [e.g. Time Division Synchronous CDMA (TD-SCDMA) was proposed by China Wireless Telecommunication Standards group (CWTS) and approved by the ITU in 1999 ]
The Background
It was a highly monopolistic industry operated by the government under the Ministry of Post and Telecommunication.
Lack of economic strength and market demands to grow this industry in the first 30 years from 1949.
By the early 1990s, economic critical mass has attained to fuel the demands. Gradual de-regulations of the industry and its detachment from direct government operations were required to support the growth.
Post and Telecommunication were separated. Telecommunication administration became part of the Ministry of Information Industry in 1998.
Hong Kong involvement was minimal in the early days.
The new challenge in the convergence of the communication and information services industries presents new opportunities to HK.
New Opportunities and Roles for Hong Kong
Electronics Products, Information Processing
HW and Communication Equipment Industry
Digital Electronic Products
Computer Peripherals
Computing Hardware
Data Com Equipment
Systems and Embedded SW
From an OEM Assembly Industry
moving into ODM and OBM manufacturing
Information Contents and Communication Services
Industry
Digital Contents Providers and Developers
Valued-added Information Services Providers
Communication Services Providers
Infrastructure Services Providers
Very high-growth in the past 2 decades, particularly
in the last 10 years. Moving very aggressively
into VAS Services
Electronic and Optical Components
Industry
Component Manufacturing
Semi-Conductor and Optics Technologies
Material Science
Component Design
Sector targeted for Strategic
Growth in the coming years
Software Products, Software Services and other IT Professional
Services Industry
Software ToolsApplication Software ProductsSoftware Development ServicesBusiness Consulting Services
Security Design and Audit ServicesOther IT Related Professional Services
Architecture Design Services
Internal demand is very strong. It is an area targeted for strategic and value-add growth in Software Products and
Services
Opportunities in the Full Spectrum of the ICT Industry (with the exception in the more regulated
Telecom Sector)
Opportunities in the Full Spectrum of the ICT Industry (with the exception in the more regulated
Telecom Sector)
Some of the Strategic Growth Areas that Hong Kong can Capitalize on:
IC Design (Due to high growth of the HW and electronics industry, Mainland China is the largest single market for IC in the world. High demands for ASIC supporting the Appliances, Communication, Wireless and Mobile Equipment, RFID, Consumer Electronics, Instruments and related industries…..)
Design of ODM and OBM Electronic Products and their Export Markets.
Value-added Services for the Telecom Industry (e.g. Digital Contents and Entertainments)
Application Software Products (e.g. Supply Chain Management Solutions, Financial Services Solutions….)
Overseas Software Engineering Services
Will Focus our Discussion on these Two Opportunities
An Analysis of the Software Products and Services Market in the Mainland
10%
30%60%
SW Export
Local Value-Added
Imported SW
Local value-added Software products and services only account for 30% of the total market (~US$20B in 2003)
The target for local value-add in 2005 was to reach 60%. (will not be able to achieve in the near future without more aggressive and innovative strategies.) A big gap to be filled!
• Software industry as a whole has suffered from a syndrome of high-turnover, high-growth but very low profit-margin.
• 日前，在电子信息百强企业揭晓仪式上公布的一项数据让人吃惊： 2003 年中国软件类企业平均销售收入下降 2%，利润率更是史无前例地下滑了 57% ，营业利润率仅仅维持在 2%。
• 软件行业太“软” -> 质量太“软”、心太“软”、利润太“软”。
• Software Services (e.g. SI) is a very competitive, crowded and high-risk industry in the Mainland.
This type of crisis is forcing the SW industry to review its practices to quickly attain maturity. SI Certification program
Professional Certification program
Progressive use of SW products instead of custom-built solutions
Educating the user community in IT Governance
The Changing Software Services Industry in the Mainland
Local Software Services industry will further evolve to improve accountability and professional quality.
An interlocking industry chain will be developed based on international best practices
SW development and Systems Integration are becoming engineering disciplines instead of an art form practiced by gurus or “magicians”.
项目业主 / 客户 (Project Owner or Customer)项目业主 / 客户 (Project Owner or Customer)
策略研究和咨询策略研究和咨询
系统整合、软件开发和其他外包服务Systems Integration, SW Development
Outsourcing Services
系统整合、软件开发和其他外包服务Systems Integration, SW Development
Outsourcing Services
项目完成后的支持和维护项目完成后的支持和维护
Hardware ProductsHardware Products
系统集成项目监管和审计服务Project Management and Audit
系统集成项目监管和审计服务Project Management and Audit
结构设计结构设计项目完成后的审查咨询项目完成后的审查咨询系统建造的投
标管理系统建造的投标管理
Software Products (ISV)Software Products (ISV)
策略研究和咨询策略研究和咨询
系统集成项目监管和审计服务Project Management and Audit
系统集成项目监管和审计服务Project Management and Audit
结构设计结构设计项目完成后的审查咨询项目完成后的审查咨询系统建造的投
标管理系统建造的投标管理
Software Products (ISV)Software Products (ISV)
策略研究和咨询策略研究和咨询
Opportunities for HK IT Service Firms
Software Products for the Mainland China Market
Demand for high-quality and affordable software products (particularly applications for various industries) is increasing rapidly.
Take advantage of CEPA arrangement to bring SW products into mainland China under Hong Kong brand.
Hong Kong becomes the productization center for local SW, as well as SW products from mainland and international SME software firms.
Hong Kong value-adds on product localization, productization, quality control, branding and marketing
内地SI市场
客户关系管理
需求管理
项目管理
谘询服务
業务流程设计
软件客户化
銷售
系统实施
系统设计
项目监理
自主產权软件產品
合同法规
HK SW firms Mainland SI FirmsComplementary CapabilitiesComplementary Capabilities
A High Potential Area -- Offshore Software Engineering (OSE)
OSE is part of the global trend for the outsourcing of services from higher-cost areas to lower-cost alternative locations.
“Manufacturing Service” is one of the largest scale offshore outsourcing economic activities in the history of mankind. Asian countries have been the primary locations of such outsourcing activities since the 1960s.
248 273 306353
406449
050
100150200250300350400450500
2000 2001 2002 2003 2004 2005
Worldwide Outsourcing Spending Forecast 2000-2005 (US$Billion)
Source: Accenture
IT outsourcing in 2001 is US$193B (70% of the total)
CAGR for 2000-2005 is 13% and is forecast to maintain this rate for next 3-5 years.
As inevitable as water flowing from high
maintains to valleys
Offshore Software Engineering Services
Pressure on Profitability Capital Investment Control More nimble and smaller
organizations adaptive to changes Offshore locations as new
markets and revenue opportunities
Merger and Acquisition activities promote the use of offshore services for broader coverage
Global business potential encourages many governments to offer tax benefits and other advantages to attract offshore business
Debates over “sending jobs away from home” by politicians
Shrinking of “wage-gap” in offshore locations
Increased concern over data privacy and confidentiality
New technologies and solutions have dis-intermediated some of the more labor-intensive business processes.
The Drivers: The Challenges:
Essential Elements in OSE Business
Predicable results over a period of time
Customer Receives:
People Processes Technology
Infrastructure
Service Provider Assumes Responsibility for:
Under Contract to Perform SW Engineering WorkUnder Contract to Perform SW Engineering Work
Pe
op
le In
tera
ctin
g
with
Cu
sto
me
rs
Process and Quality Management
Technology Infrastructure
People Delivering the Services
Capabilities Comparison of Some Outsourcing Locations
IndiaIndia
ChinaChina
Hong Kong
Singapore
Mexico
Philippines
Holland
Ireland
UK
Australia
Low
High
High
• Mature Judicial System• IP Protection Laws• Favorable Labor Laws• Mature Management Talents• Breadth and Scalability of
Services• Political Stability• Government Incentive• Infrastructure
Telecommunication Transportation Living conditions
• Qualifications and Capabilities• English Language Skills• Cost Differentials
• Breadth of Technical and Business Skills
• Quality of Work and Work Ethic
Size of indicates number of qualified workers.
Location Attractiveness:
People Strength:
Source: McKinsey & Company
India China Hong Kong SAR
Timing entering into OSE Market
Started in the mid-1970s, A high growth period in the 1990s
Late comer. Some early success in the Japanese Market since the 1980s.
Late comer. Some isolated success in the US Market in the 1990s.
Software Workforce
~ 800K, many well-trained professional with English speaking capabilities.
~ 650K, some areas of training need improvement, numbers are increasing rapidly.
~ 25K, Needs more breadth in training in order to enter into the OSE market. Currently, 50% are in the user organizations.
Size of the Software Firms
There are firms with over 10,000 software professionals
Primarily SME enterprise (Avg. size ~ 70 employees)
Primarily small enterprises (Avg. size ~ 20 employees)
Current Market Focus
OSE market (over 80%)
Internal Demand Driven(over 90%)
Internal Demand Driven(over 85%)
Current Industry Characteristics
OSE is the dominating business. Lack of SW products with own IP.
Application Development and SI dominating. Heavy reliance on 3rd party Tools.
Very small inward-looking industry. Highly innovative applications for the large users
Comparing Against the India Software Industry
The Combined Capabilities of Mainland China and HKSAR
IndiaIndia
ChinaChina
Hong Kong
Singapore
Mexico
Philippines
Holland
Ireland
UK
Australia
Low
High
High
Location Attractiveness
People Strength
China (mainland + HK)
China (mainland + HK)
China (mainland + HK)
China (mainland + HK)
Over Time and Capabilities
Improvement Initiatives
Overall Capabilities of Mainland China and the Hong Kong SAR are complementary in the OSE Marketplace.
Their combined strength can become a powerful force in the international OSE market.
OSE Market
International Sales and M
arketing
Custom
er Relationship
Managem
ent
Contract A
dmin and
Legal
Requirem
ent and Spec.
Managem
ent
Implem
entation and S
upport. Services
Usability D
esign
System
and Architecture
Design
Com
ponent and Product
with O
wn IP
Overall P
roject and Q
uality Managem
ent
Code D
evelopment
Managem
ent
Custom
ization Work
Softw
are Construction
Work
Capabilities of Mainland China Software Firms
Capabilities of Hong Kong Software Firms
Capability Spectrum of the Combined Strength
Full Capabilities for the Successful Penetration into the OSE Market
An Operating Model used by a Hong Kong OSE Firm
Associated Companies and SI Partners in North America with
focus on selected Industries.
• Code modules and subsystem Development
• Customization work based on pre-built components
• Component Assembly and subsystem testing
• Compilation of Engineering Notes and Test reports
• Configuration Management
• Packaging and Release
• Sales/Marketing
• Customer requirements articulation and Clarification
• Customer relationship management
• Change management and customer expectation management
• Domain knowledge expertise
• Implementation services and support
• 1st line post-implementation support
• Requirements analysis and breakdown
• Architecture design
• Usability and user interface design
• Testability design and test planning
• Detailed spec. of subsystems and modules
• QC enforcement and integration testing
• User documents compilation
• Change management
• 2nd line post-implementation support
• Business Development and Process Development
Software Factory (or Development Center) located in
the City of Shenzhen
Software Design and Project Management Office located in
Hong Kong
Internet based tool for the management of these processes and to support collaborative workInternet based tool for the management of these processes and to support collaborative work
Conclusion
Hong Kong has contributed to and benefited from the period of high-speed growth of the ICT industry in the Mainland during the 1980s and 90s.
Mainland China is moving very quickly into its next stage of growth in this ICT industry and all the sub-sectors.
We must quickly discover and assume our new roles in this changing environment. Old formula for success may no longer work. Our role as a “middle-man” in 引进来 is diminishing; we must strengthen our role as mainland’s “preferred partner” in its desire and needs to 走出去.
There are immense opportunities for the new generation of explorers equipped with the skills and vision to navigate in a broader landscape.
路不是找出来的；勇敢的人把路走出来！
