China Market Insights: One of the Biggest IT Growth One Of

China Market Insights: One of the Biggest IT Growth Markets in the World

Evan Zeng Research Director

3 June 2011

This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other authorized recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates. © 2011 Gartner, Inc. and/or its affiliates. All rights reserved. China Economy 2011: Uncertain Times

Negatives • Global economy is in a weak recovery mode • RMB appreciation is expected to Positives accelerate, potential impact to • Steady and rapid GDP/FDI growth exporttt trad e • Investment and export-dependent • Firm domestic demand will offset economic model lacks power to export slowdown grow • Stro ng g ro w th o f fix ed-asset • China GDP growth signals investment slowdown and fear of hard landing • Government's strong investment in • High CPI signals inflation, central industry upgrade, economic bank fffurther tightens the liquidity of structure transformation and money supply. regionally balanced development • GDP growth expected to remain above 8%-10% in the next four years vs. a worldwide average of 4% growth

1 Key Issues

1. What is the state of IT technology adoption and how big are IT opportunities in China? 2. What are the most promising technologies and local market insights in China? 3. What are the emerging opportunities in vertical markets and their business/IT priorities? 4. How can the bes t grow th oppor tuniti es in China be exploited in the next five years?

2 IT Spending Forecast 2011 and Beyond

End-User IT Spending Forecast, Market Situation: 2008-2014 • 2011 IT market predicted to be $274 billion (i.e., 27% Millions o f Do llars of the U. S. ) 1,200,000 • CAGR (2010-2014) for IT spending: 10.6% vs. 4% in 1,000,000 U.S. • Highly competitive market, global vs. local players 800,000

600,000 Market Opportunity:

400,000 • Market shift to boost virtualization/cloud computing • Government's strong push for ICT adoption, 200,000 infrastructure expansion 0 • 12th five-year plan's strategic focus 2008 2009 2010 2011 2012 2013 2014 • Industry upgrade and balanced regional development China U.S. IT Sppgending and Growth Rate 2010 ( ()$M) 2008 2009 2010 2011 2012 2013 2014 China 194,305 217,081 246,568 274,326 303,255 334,360 368,280 U.S. 956,920 931,605 972,846 1,008,330 1,047,369 1,090,045 1,135,469 China Growth Rate 12% 14% 11% 11% 10% 10% U.S. Growth Rate -3% 4% 4% 4% 4% 4%

3 IT Hardware Market

2008 Market Situation: 2009 • CAGR (2010-2014) of IT hardware: 14.3% vs. U.S. 2010 04%0.4% 2011 • The No. 2 IT hardware market in the world and will get close to the U.S. market size within the next five China 2012 years 2013 • Client computing market size will exceed U. S. by 2014 2013, major vendors are Lenovo, Acer Subsys • Enterprise computing major vendors: IBM and HP 2008 • Printing systems major vendors: HP and Canon 2009 • Storage subsystems major vendors: EMC and IBM 2010 Market Opportunity: 2011 U.S. • Big data is highest growth engine for storage 2012 • Client computing to grow more in rural and small 2013 cities 2014 • Infrastructure upgrade and expansion 0 50,000 100,000 150,000 • Data center consolidation and transformation Millions of Dollars • Managgped print service (MPS ) and commercial Client Computing Enterprise Computing printing Printing Systems Storage Subsystems • Cloud computing

4 IT Software Market

China Enterprise Software Markets Opportunities Forecast (2008-2011) • China is the biggest and fastest-growing software Billions of U .S . D oll ars market in Asia/Pacific; CAGR (2008 -2014) 14. 6% vs. 14 U.S. 8.45% • Government policies promoting and supporting 12 CAGR = 14.6% software industry grow the local and open source development community 10 • High-tech parks in Tier 1 cities support software industry development 8 • Local vendors compete more in enterprise applications (ERP/CRM/SCM), while foreign vendors 6 have a strong foothold in infrastructure software area 4 • Government's cloud initiatives will drive IT spending in applications redesign in cloud or virtualized 2 environment. Threats 0 • The government favors local software vendors over foreign vendors in government procurement • Software piracy is still a very serious issue in China, Infrastructure Software more in the consumer and SMB markets Enterprise Applications Software • The price -sensitive culture makes local software vendors with low-cost structures compete solely on Source: Gartner "Forecast: Enterprise Software Markets, Worldwide, 2008-2011, 1Q11 Update" (G00211727) price

5 IT Services Market

IT Services China, Market Situation: Forecast 2009-2014 • CAGR (2008-2014) for IT services: 17.6% vs. 5% in the U. S. Millions of U.S. Dollars 20,000 • No dominant player in the general market CAGR 2009-2014 = 14.6% • Customized and resource-intensive services • Wait-to-see cloud computing delivery model 15,000 Market Opportunity: • Government service economic initiatives in the 12th 10,000 five-year plan • Enterprises shift from hardware investment to productivity and operation efficiency 5,000 • SiService ven dors inves titflitdditit in portfolio standardization • Market shift to cloud computing delivery model • Lack of services experts and expertise in the market 0 Millions of U.S. Dollars 2008 2009 2010 2011 2012 2013 2014 400,000 300,000 Software Support, CAGR = 11.4% 200,000 Hardware Maintenance and Support, CAGR = 9.4% 100,000 Process Management, CAGR = 22.0% 0 IT Management, CAGR = 22.9%

Developpg,%ment and Integration, CAGR = 17.9% 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014 Consulting, CAGR = 24.9% China U.S. Source: "Gartner, China and U.S. IT Services Market Comparison" Source: Gartner (March 2011)

6 Top Technologies and Adoption Status

expectations Managed Print Service in China SaaS in China Data Deduplication Communications Outsourcing Machine-to-Machine Communication Services CRM, China Contact Center BPO in China TD-LTE IT Outsourcing — Infrastructure Services Infrastructure as a Service Long Term Evolution F&A BPO in China x86 Server Virtualization

ERP, China Packaged Application Services

Cu stom Application Services TD-SCDMA Domestic Office Productivity Suites Enterprise-Grade Domestic Linux (Client) Solid-State Drives Business Intelligence Platforms Blade Servers

As of July 2010 Peak of Technology Trough of Plateau of Inflated Slope of Enlightenment Trigger Disillusionment Productivity Expectations time Years to mainstream adoption: obsolete less than 2 years 2 to 5 years 5 to 10 years more than 10 years before plateau

"Hype Cycle for ICT in China, 2010" (July 2010) 7 One China, Four Markets — Geographic Focus

2010 GDP (Billions of Yuan) Provincial Economic Growth Plan by Province Under the 12th Five-Year Plan

Guangdong, 4,547 Jiangsu, 4,090 Shandong, 3,942 Inner Mongolia Zhejiang, 2,710 Heilongjiang Henan , 2,200 Hebei, 2,020 Liaoning, 1,750 Jilin Sichuan, 1, 690 Shanghai, 1,687 Beijing Hunan, 1,590 Liaoning Xinjiang Hubei, 1,581 Hebei East Coastal Region Fujian, 1,380 Tianjin Gansu Beijing, 1,378 Shanxi North Eastern Region Anhui, 1,226 Ningxia Shandong Inner Mongolia, 1,162 Central Region Shaanxi, 1,002 Qinghai Jiangsu Heilongjiang, 1,000 Henan Western Region Shaanxi Guangxi, 950 Anhui Shanghai Jiangxi, 944 Xizang Sichuan Hubei Tianjin, 911 Zhejiang Shanxi, 909 Chongqin g Jiangxi Jilin, 858 Fujian Chongqing, 789 Hunan Yunnan, 722 Guizhou Taiwan Xinjiang, 542 Yunnan Guangxi Guizhou, 459 Guangdong Gansu, 410 Hainan, 205 Ningxia, 164 Hainan Qinghai, 135 Tibet, 51

8 12th Five-Year Plan (2011-2015)

The 11th Five-Year Plan The 12th Five-Year Plan 2006-2010 2011-2015

Investment-driven Consumption-driven

Service/innovation on Rely on exports domestic market

High energy Energy efficiency and consumption and environmental pollution protection

Balanced regional Regional imbalance development

9 Government's 2011 Top Priorities

Analysis: Control inflation Improve the agricultural products distribution network and stimulate improve infrastructures of rural, medium and small cities (i.e., • Optimize logistics cost to construct commercial trade and logg,istics, culture, ,p, sports, tourism, GIS logistics centers and chain stores domestic services, e-commerce, and broadband networks) consumer • Upgrade supply chain management Encourage private capital to enter into different industries, such spending • Promote GIS, e-commerce and as national facility, utility, finance, society services, etc. broadband services

Analysis: Upgrade manufacturin g: R&D,,g,gyy,, branding, energy efficiency, M&A, • ICT sector: Broadband, "triple play" and technology innovation, higher value chain… "Internet of things," software and cloud Transform Foster strategic industries: ICT, broadband, triple-play, energy economic • Energy and environment: Clean energy, savings, environmental protection, clean energy, biotech… smart grid, energy savings, reduce structure and pollution industrial Improve energy and transportation infrastructure: clean energy and efficiency, transport hubs, services economic restructuring • Industry relocation to Central and Western Foster new rural financial institutions, further develop the China financial markets, regional balanced development • Other sectors: FSI coverage, integrated transport hubs and service economy

Analysis: Make education a priority: fiscal input to reach 4% of GDP in 2012 • Education: Invest in education systems Invest more heavily in job creation and balanced income and highlights e-learning, etc. distribution • Government: The national connected Improve Expand the rural pension system to cover 40% of the county, employment network, social security, people's promote urban pension system emergency response, public safety, food quality of life Reform the healthcare system, reform public hospitals, increase safety supervision system insurance coverage, construct rural and community health stations, encourage private capitals in health • Healthcare: Supply and management of Improve emergency response system and food safety basic d rugs, r ur al an d comm unit y h ealth inspections. station, public healthcare and hospital reform Source: Published China Government 2011 Work Report

10 Localize Global Best Practices for China

Local Vendors' Growth Path China's Market Is Highly Competitive

• From "l ow cos t" t o " good qualit y " • Numerous local competitors, some • From rural to urban getting really strong • From OEMs to branded • Customers are learning fast • From copycat to original design • The market is fragmented and varied • Labor in place to capital and technology focus • From China to global

Localize Global Best Practices to Success • Design new products for China • Follow your global standards of quality control and environmental protection • Install global-class manufacturing processes • Implement local geographic sales coverage

11 Emerging New Focus — FSI

Industry Development Trends IT Opportunity

Banking Infrastructure upgrade: Expanding capacity and coverage will need huge infrastructure upgrade and • City commercial banks prepare for IPOs expansions. and national coverage Cloud computing: Deploying virtualization and • Chinese banks expand into the global interested in cloud computing. market and foreign banks improve Multifunction IT system: Banks and insurers offer coverage iChiin China integrated financial services. • Accelerate developing online business and Application upgrade: Along with business expansion new business (e.g., trust services, high-end to enrich services and capacity. banking services, mobile payment, etc.) Securities: Profits of listed banks (1Q08-3Q10) • Expand domestic finance market and 2,000 120 upgrade the capacity of futures and stocks 100 exchanges 1,500 80 • Prepare for international stock exchange in 60 China 1, 000 40 20 Insurance 500 0 • Accelerate to offer integrated financial -20 services 0 -40 • E-insurance and collaboration with banks 1Q08 2Q08 1Q09 3Q09 1Q10 3Q10 Total profit(￥100M） Growth（%） Note: The number of banks increased from 14 to 16 since 2Q10. Source: Financial report of listed banks

12 Emerging New Focus — Telecom

Industry Development Trends IT Opportunity

• Three operators develop mobile Internet Network infrastructure: Upgrade access and services; mobile payment is on the rise expand coverage to rural areas, 3G optimization, FTTH in 300 cities, digital CATV, satellite • Promote the integration of triple-play communications network Mobile Internet: Huge investment in infrastructure • Deep dive in vertical industries to enhance and lots of IDC build out, mobile payment systems "informationization" rate Informationization: Wireless city, smart city, smart • Expand network coverage into rural areas grid, e-commerce, cloud computing platform, triple- play trials, video surveillance, remote metering, city • Enhance broadband strategy and upgrade management infrastructure, especially access to the network • Develop cloud services product and build out pilot cloud computing platform

Profit of Three Telecom Operators (1Q09-4Q10) Monthly New Subscribers 2008-2011(Unit: 10K) 500 70 1,200 400 50 800 300 30 10 200 -10 400 100 -30 0 -50 0 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Total profit(￥100M） Growth（%） Mobile users Broadband users

13 Emerging Focus — Government

Industry Development Trends IT Opportunity

• Urbanization population will exceed 50% of Smart city and smart grid: Various IT solutions, total population 2010-2015, require R&D center for trials, system integration, optical fiber resource-saving and emission reduction by utility company Smart card: Development and system integration • Smart city programs launch across China, with various government systems. 120 cities invested to build digital city, 53 "Internet of things:" Pilot projects in city industrial as pilot parks and strong government R&D support • Smart Grid construction by 2020, invest 17 Healthcare: Regional health integration IT platform, billion yuan in 2010 and 30 billion yuan in electronic medical record, HIS, remote telemedicine 2011 Education: Digital campus, CERNET, digital • Smart Card adoppption and development libraries, virtual labs, remote education systems, etc. Cloud computing: Government-led cloud • "Internet of things" draws attention computing city projects • National integrated government systems: pension, medical insurance, social and citizen services GDP Growth 8% • Hea lthcare re form pl an to i nves t 850 billon More-sustaiblinable econom ic growt h yuan (2009-2011) CPI Growth 4% • Raise proportion of annual government education expenditures from 2.6% to 4% of Stabilizing commodity prices GDP Job Creation 9M • Strong push for adoption of cloud computing Increase employment and promote social harmony

14 Emerging Focus — Manufacturing

Industry Development Trends IT Opportunity

• Industry restructuring and relocation to Topppp five application software: BI/BA,/CPM promote high-end equipment manufacturing software, quality management systems, MES, SCM, CRM • Five subsegments are the focus: Top five BI/BA/CPM provider: IBM, HP, Microsoft, aeronautics, aerospace, high-speed rail, Oracle, SAP marine equipment, smart equipment Top five technology to invest: cloud computing , • Electrical equipment manufacturing expand unified communications, green IT, security, capacity in West and Central regions virtualization • New-energy cars develop fast and M&A Most-employed IT service provider: HP, IBM, becomes the focus in the auto industry PricewaterhourseCoopers, Dell, Oracle • Gt'10t"itlitiGovernment's 10 sectors "revitalization plans" increased manufacturing profits by Trends in High-End Equipment Manufacturing 71.8% in 1H10, industry upgrading is ongoing Labor cost rising

Upgrading Relocating

15 Emerging Focus — Transportation

Industry Development Trends IT Opportunity

• National highway construction is rapid High way: Tolling system , monitoring system , smart city, communication systems • Heavy invest in intercity railways, 2.15 trillion yuan (2010-2012), 42 PDLs planned Port industry: digital ports, Port EDI, Dock processing system, Logistics information platform, • City subway construction is a hot item, warehouse mgmt, etc 2,100 kilometers of subway lines are Logistics: Infrastructure upgrade, logistics public planned by 2015 in 22 cities information platform, supply chain management, • Intelligent transportation system booms GPS, RFID, etc Others: Video surveillance, unified communication, • Investment in the aviation industry, and green IT, various vertical IT applications, etc. national plan to promote port upgrades

Investment Growth of Subsegments — Total Growth of 27% (1Q10-1Q11)

Railway 46 Civil Aviation 27. 2 Highway 22.4 Urban Public Transit 21.8 Water 9.5

0 10 20 30 40 50 Percent Source: China National Statistics Bureau

16 Recommendations

Next Monday morning 9 RiReview your Chi Chittna strategy an dbid business p lan 9 Re-evaluate existing China business model to capture the market shift Near term (the next 12 months) 9 Research the China market to capture the growth opportunities 9 Redeploy resources to cover geographic regions Longer term (the next five years) 9 Redesign China business model to capture growth opportunities 9 Localize products and services, management and marketing 9 Consider adding local R&D and support resources

17 Related Gartner Research

Î Market Insight: What IT Services Providers Need to Know About China's 12th Five-Year Plan Tina Tang (G00211601) Î Hype Cycle for ICT in China, 2010 Jim Longwood, Denise Ganly (G00205573) Î User Survey Analysis: IT Spending by Manufacturers in China, 2010 Kenneth F. Brant, Derry N. Finkeldey (G00205325) Î Survey Analysis: Cloud Computing Will Grow Quickly in China Vincent Fu (G00209574) Î Comppp,,etitive Landscape: Servers, China, 2010 Jennifer Wu, Uko Tian (G00175838) Î Market Insight: IBM's "Game Changer" in China Shows Channel Are Key to Success in SaaS Michele C. Caminos, Rolf Jester (G00174592)

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19 China Market Insights: One of the Biggest IT Growth Markets in the World

Evan Zeng Research Director

3 June 2011