The ICT Landscape in the PRC Market Trends and Investment Opportunities

33188 Public Disclosure Authorized The ICT Landscape in the PRC Market Trends and Investment Opportunities Public Disclosure Authorized FINAL REPORT Public Disclosure Authorized MARCH 2005 Public Disclosure Authorized Preface Information and Communications Technologies (ICT) are increasingly an important tool for supporting sustainable development and economic growth in developing markets. By embracing communications at unprecedented rates, people around the world have demonstrated their appreciation for the contribution of ICT to the betterment of their lives. It took 113 years from its invention for the fixed telephone to reach ten percent global penetration. It took 15 years from its invention for the mobile telephone to reach the same penetration, and ten percent of the World’s population are now Internet users less than twelve years after the birth of the World Wide Web. China’s growth story, for ICT companies specifically, has been astonishing. China, often referred to as the “factory of the world” has traditionally had a strong manufacturing base, including a core focus on the electronics industry. In addition, in the past 10 years, we have seen an explosion of the mobile phone population to over 300 million subscribers, larger than any other country in the world. Further, the country’s total number of Internet users has surpassed 90 million subscribers. Historically, sectors such as electronics manufacturing and mobile communications applications have enjoyed the benefit of growth, while we can already see new nascent sectors come up including media driven business, broadband applications and cutting-edge IC design houses. While much of the growth in the ICT sector has been funded by foreign investments, mainly through the private and public equity markets, it is anticipated that many sectors require substantial and ongoing funding. It is anticipated that such funding by international investors will continue to outpace domestic funding sources The International Finance Corporation (IFC) is committed to maintain and increase support to private sector businesses in China, in the ICT space. While in the past 15 years IFC has committed to over US$1.8 billion of investments in China, we envisage an increased participation in the domestic ICT sector, by providing a full array of financial products and services along with technical assistance regarding such matters as corporate governance. This study is sponsored and funded by the Swedish International Development Corporation Agency (SIDA). IFC would like to express its sincerest gratitude and appreciation to SIDA for its important contribution and support. The study represents an important tool and roadmap for private investors in supporting the ICT industry in China. Another key consideration is IFC’s role in mobilizing funds by working with domestic and international financial and strategic partners. 2 Mohsen A. Khalil Javed Hamid Director Director Global Information and East Asia and Pacific Communications Technologies The International Finance Corporation 3 PRODUCED FOR IFC BY SPINTRACK AB AND BDA CHINA LTD: BJORN SODERBERG TED DEAN SPINTRACK AB BDA CHINA LTD [email protected] [email protected] J OHANNA BJORKSTROM XIA WEI SPINTRACK AB BDA CHINA LTD [email protected] [email protected] LIU BIN FANG MEIQIN BDA CHINA LTD BDA CHINA LTD [email protected] [email protected] S P I N T R A C K A B DROTTNINGGATAN 99, 7 TR., SE-113 60 STOCKHOLM, SWEDEN PHONE: +46-8-528 00 310 FAX: +46-8-528 00 315 WWW.SPINTRACK.COM [email protected] BDA (China) Ltd. #2908 North Tower, Kerry Center, 1 Guanghua Road, Beijing, 100020, China PHONE: +86-10-8529-6164 FAX: +86-10-8529-6163 www.bdachina.com [email protected] 4 Executive Summary The following report is the public deliverable of an IFC project which was funded by the Swedish International Development Cooperation Agency (Sida). The project was carried out, and the reports produced by Spintrack AB in close collaboration with and with significant contributions by BDA China Ltd. General Market Conditions in China Growing consumer demand coupled with continued growth in the export-led manufacturing sector has fuelled growth in China’s gross domestic product (GDP). Continued growth in imports and exports tells a similar story of robust economic growth. Despite this growth, private companies (particularly smaller IT companies) in China have traditionally had limited choices when it comes to raising capital domestically. Instead, Chinese IT companies have turned to foreign investors to fill the void. Foreign investors have responded aggressively. In recent years, the initial public offerings of a growing number of Chinese companies and the sale of still more companies to foreign IT companies has proven to investors that they can exit from their investments in China. As a result, the pace of investment has accelerated. In 2004, venture capitalists invested USD 1.269 billion in 253 Mainland China or Mainland-related companies according to the research firm Zero2IPO. The number of deals was up 43% from 2003, and the funds invested increased 28% from the previous year. As the pace of investment has increased, valuations in some sectors have shot up, and there has been speculation that some sectors are becoming overcapitalized. But with the domestic venture capital industry still in its infancy and most foreign investors being new to China, investment flows have tended to be concentrated in a few “hot” sectors. Other sectors, where the regulatory risks are greater or the development cycle is slower are still starved for capital. The State of the IT and Telecom Sectors Uncertainty over how the government will address issues such as 3G licenses, potential restructuring of the state-owned telecom operators, development of Chinese technology standards, opening of the market to foreign telecom operators, development of a system for a Universal Service Obligation, and the control and censorship of content and applications offered over fixed-line and mobile telecom networks, remains a consistent concern of industry players, complicating their business planning and ability to raise capital. Ongoing reform is however gradually leading to a more transparent regulatory environment. As part of these changes, China’s regulatory agencies are shifting away from an economic planning function to act as more independent regulators. 5 The mobile subscriber base has now surpassed the fixed subscriber base, with fixed-line penetration of 25% (including PHS) and mobile penetration of 26% mobile (GSM and CDMA). The number of Internet users reached 94 million at year-end 2004. China’s Internet access market is in the midst of a migration from narrowband to broadband access. Total broadband users in China reached 26 million in 2004, compared with the 1.9 million in 2001. The timing of 3G license issuance, which operators will receive licenses, and the selection of technology standards remains uncertain. China Mobile is certain to receive a license for W-CDMA, and Unicom is expected to upgrade its CDMA network to EVDO, but whether both fixed-line operators will receive licenses and what technology they might deploy is still undecided with China’s TD-SCDMA standard representing the biggest wild card. The possible break-up of China Unicom is another complicating factor. It is widely believed that the government will delay the issuance of 3G licenses until the second half of 2005 at the earliest. IT Sub-Sectors Covered in the Report The report cover the following sub-sectors: - Infrastructure and Software Telecom Equipment The Chinese IC Industry and Fabless Chip Design The Chinese Software Industry Security Services - Applications Mobile Data Online Gaming E-commerce Digital Media Applications - Outsourcing Software outsourcing and IT Services Handset Design in China Telecom Equipment Foreign IT and telecom equipment vendors are well established in China. In fact, foreign firms in these sectors are among the largest foreign investors in China and the largest exporters from China. Domestic IT and telecom equipment vendors have emerged from the shadow of foreign market leaders and won significant market share in important market segments. In mobile handsets, domestic vendors have won close to 50% share in a market that was once completely dominated by foreign vendors. In ADSL, Huawei alone holds 44% of the 6 market, while two other domestic vendors, ZTE and Harbour Networks, hold an additional 16% and 9% share respectively. Thanks to improved R&D, domestic vendors are also expected to take a larger share of China’s 3G market, once licenses are issued. Huawei and ZTE in particular have mature 3G products and are likely to win a significant slice of operators’ capital investment in 3G networks. Increasingly, leading domestic vendors have global ambitions for their business. Lenovo’s recent purchase of IBM’s PC business for USD 1.25 billion in cash and stock is the most significant example of a Chinese company expanding overseas, but Lenovo is not alone. In fact, the Lenovo-IBM deal is part of a continuing trend of Chinese firms striking deals to expand their business overseas. The Chinese IC Industry and Fabless Chip Design Due to the growing domestic demand of electronic products and the development of foundries, the growth of the Chinese IC design market is set to continue. Nevertheless, despite the growth in demand and manufacturing capacity, China still trails other markets in terms of domestic design capability. In order to succeed, the Chinese IC industry will need to identify or create new applications (i.e. DTV) or market opportunities. Human resources continues to be a bottleneck with experienced IC designers and professionals with experience in managing the design process in short supply. Highly educated overseas Chinese are returning to mainland China, but not in sufficient numbers to fill the industry shortfall. The Chinese Software Industry The Chinese Software Industry has grown rapidly in the last few years, reaching RMB 163.3 billion (USD 19.67) in 2003.

Load more