China’s SaaS Market: Prospects for Foreign Investors

China’s software program as a service (SaaS) market is likely one of the fastest-growing industries within the nation. China Briefing examines key progress drivers and challenges confronted by market gamers, and discusses prospects for overseas funding.

The Chinese language software program as a service (SaaS) business is beginning to growth. The market has nearly doubled in simply over two years from 2018 to 2020, to an output worth of RMB 49.82 billion (US$7 billion).  

On this article, we analyze the prospects for overseas firms pondering of getting into the Chinese language SaaS market.

Software program as a service

SaaS is a software program supply mannequin whereby software program is offered on a subscription foundation over the web quite than put in straight on the client’s personal {hardware}.

The benefits are that no extra software program or {hardware} must be put in, the setup is way faster, and software program updates are normally included within the subscription.

The disadvantages are that clients have much less management over software program customization, delicate information can usually be accessed by the supplier, and the software program requires web connection to be used.

SaaS market dimension and segmentation in China

The Chinese language SaaS market continues to be comparatively small, indicating that there’s vital room for overseas corporations to be robust opponents in each developed and underdeveloped product segments. 

China’s SaaS market’s progress charge soared in 2018, decreased considerably in 2019, and grew once more in 2020 due to the COVID-19 pandemic. The market reached a peak of RMB 53.8 billion (US$7.56 billion) within the first quarter of 2021, up 48.7 % from 2019. The capital market’s stance towards SaaS is stabilizing and the product market is maturing. The Chinese language SaaS market’s CAGR is estimated to succeed in roughly 34 % by 2024. 

Presently, enterprise administration, information evaluation providers, workplace communication instruments, and data safety providers are probably the most demanded products in China’s SaaS market. Compared to the market dimension of every section in 2019, data safety providers, information evaluation providers, workplace communication instruments, and operation administration companies have all grown at a fairly speedy tempo. 

Different enterprise segments are nonetheless within the very early phases of enlargement however are anticipated to develop because the SaaS market develops. 

Taking a look at regional variations, in 2020 the SaaS market dimension in japanese China reached RMB 40.02 billion (US$5.62 billion), accounting for 80 % of the whole output, adopted by RMB 6.1 billion within the western area, RMB 2.27 billion (US$319 million) within the central area, and RMB 1.42 billion (US$196 million) within the northeastern area. When it comes to market dimension, the highest three provinces are Beijing, Guangdong, and Shanghai, adopted by Shandong, Zhejiang, Henan, Jiangsu, Sichuan, Hebei, and Liaoning. 

Historic and projected market progress

Compared to the worldwide SaaS market, China had early-stage experimental improvement from 2004 to 2005 and later round 2010.  

From 2013 to 2015, the Chinese language SaaS market grew at round 65 %  to 75 % every year earlier than leveling out in 2016. After 2016, with rising “cloud” consciousness and enterprise acceptance of SaaS, China’s SaaS sector kicked off a brand new wave of enlargement, with the native SaaS market getting into the quick lane. 

From 2018, the sector skilled a progress charge of 35 % to 45 % year-on-year till 2020, when the SaaS market dimension exceeded expectations, rising to about RMB 50 billion (over US$7 billion), highlighting enlargement prospects for overseas firms. 

Market fragmentation: A possibility for overseas entrants

The home SaaS market is fragmented, with dominant corporations in every horizontal SaaS hyperlink (comparable to procurement, HRM, CRM, OA, and video conferencing) and every vertical SaaS sector (comparable to e-commerce, catering, logistics, and schooling). Total, distributors within the lowest layer of the sector are actually exploring market section wants, distributors within the center layer are looking for growing area, and distributors within the prime layer are dedicated to breaching the expansion ceiling. 

The highest gamers are Kingdee (with a market share of 6.8 %), Kingsoft cloud, China Youzan, and Weimob. The highest 10 firms when it comes to market share management solely 35.6 % of the market. 

No massive market leaders have emerged but, nor have native corporations expanded out of China. That is primarily as a result of the home market continues to be growing, and corporations are benefiting from home progress. Certainly, the adoption of SaaS by Chinese language SMEs, which accounted for 60 % of China’s output GDP as of 2022, is problematic since investing within the software program of any sort is just not a discovered reward loop, and automating or documenting utilizing software program is just not a typical observe. As well as, Chinese language SMEs usually don’t have the money reserves to speculate in upgrading in a methodical method. 

Such an absence of consolidation implies that even small overseas entrants with a high quality product and an efficient technique will be capable to compete within the Chinese language SaaS market. 

What’s driving progress in China’s SaaS market

Shift to cloud infrastructure

China is starting to shift away from commodity {hardware} to cloud-based infrastructure.

From 2017 to 2019, the expansion charge of commodity {hardware} fell by 5 % and was changed by progress in cloud-based providers income. Because of this, China’s public cloud is predicted to greater than double in dimension within the subsequent few years, rising from US$32 billion in 2021 to an estimated US$90 billion by 2025. 

In 2022, mixed cloud and non-cloud enterprise useful resource planning (ERP) software program income is projected to succeed in US$1.89 billion. 

SME progress

Massive firms and state-owned enterprises (SOEs) have been slower to take up SaaS software program as a result of they’ve usually made pre-existing capital funding in conventional enterprise software program and {hardware}.

There are additionally considerations concerning information safety as a result of delicate information is usually saved on cloud infrastructure and are accessible by the SaaS supplier. 

Small and medium enterprises (SMEs), nonetheless, have tighter capital budgets. This implies they’re extra interested in the SaaS subscription mannequin. 

Round 97 % of all firms in China are SMEs, they usually account for about 90 % of the nation’s personal sector. From 2012 to 2019, new registrations of personal firms elevated by a mean of 20.2 % yearly, and there have been about 20 million private-controlled corporations registered in China by the top 2019. All in all, the share of the personal sector in China has been steadily rising, from zero within the mid-2000s to 19 % of the whole (US$1.7 trillion out of US$8.8 trillion) in 2021. 

The continued progress of personal SMEs will proceed to deepen the market for SaaS merchandise significantly. 

The key problem for the business, nonetheless, is to construct curiosity in enterprise software program amongst SMEs, as much less skilled SMEs usually don’t perceive the advantages that the software program gives.

Wage progress

As wages proceed to rise and the price of labor turns into costlier, merely hiring extra labor will now not be as wise to unravel enterprise issues. Going ahead, corporations will more and more must deal with labor productiveness to save lots of prices.

The common personal sector wage in China has seen constant progress. 

From 2010 to twenty21, personal sector wages have been growing at a mean of 12 %. Sitting at 8.9 % progress in 2021, common personal sector wages grew to about RMB 62,884 (US$8,837), a rise of RMB 5,157 (US$724) over the earlier 12 months. And in the IT sector, the expansion charge reached 13.2 % year-on-year. 

As personal sector wages proceed to develop, SMEs will start to rely extra closely on productiveness, driving progress for SaaS options that streamline enterprise processes.

enter the Chinese language market: Key authorized necessities

Mannequin for promoting SaaS providers in China

There is just one authorized technique of getting into the Chinese language SaaS market as a overseas firm. This mannequin, utilized by each Microsoft and Apple to promote SaaS providers in China, is laid out under:

1. The SaaS software program should be positioned on a server in China. If the server is positioned exterior China, it’s unlawful to offer SaaS providers.
2. Regardless of regulation indicating that joint ventures can present SaaS providers, the supplier should be a fully-owned Chinese language entity.
3. International corporations can’t be issued web content material supplier (ICP) licenses. As such, the Chinese language entity offering the service should get hold of one itself.

The one different possibility is to function the server exterior China. This makes the connection pace a lot slower and isn’t really useful on account of its illegality. Moreover, the URL can simply be blocked by the federal government, so any firm severely desirous to enter the market mustn’t pursue this path.

Discover a Chinese language supplier

The central complication arising from the authorized necessities is discovering a Chinese language supplier that’s prepared to acquire an ICP license. Acquiring ICP licenses are very costly and the Chinese language licensee should pay all the prices. 

As such, the supplier will need to have the technical functionality to function the server in addition to the monetary sources to acquire the license. 

Mental property and safety

For extra established SaaS suppliers, one other downside is that the Chinese language supplier would possibly really be a competitor.

This brings with it mental property considerations given the Chinese language supplier may have entry to all the info and software program on the server. Moreover, the info on any server positioned in China might be accessed by the Chinese language authorities. Private information, “delicate” information, and cross-border information flows are all coated beneath information safety, which is the same but distinct downside from telecom operations licensing in China. In 2021, it grew to become clearer how China officers outline varied kinds of knowledge and whether or not that information should stay inside China or might be shared throughout borders. The passing of China’s Knowledge Safety Legislation additionally symbolizes a step ahead from prior draft legal guidelines, which initially took a extra stringent strategy to cross-border information transfers. 

Promoting SaaS providers is nonetheless usually safer than conventional software program supply strategies as a result of clients don’t have direct entry to the software program’s code.

International gamers get pleasure from market share regardless of native competitors

Usually, Chinese language enterprise practices make it troublesome for overseas corporations to achieve success if they don’t perceive them. As a result of partnering with a Chinese language agency is critical for getting into the Chinese language SaaS market, corporations should be accustomed with practices such because the idea of managing mianzi (face) within the technique of relationship constructing.

Home corporations additionally usually have a larger understanding of the Chinese language market, permitting them to tailor their merchandise to swimsuit the goal market. Amongst many elements, overseas corporations want to contemplate:

• Tailoring software program to suit Chinese language accounting and finance necessities;
• Offering common software program updates to maintain up with the fast-changing regulatory surroundings; and
• Conducting correct translations into Chinese language.

Home corporations even have unique entry to the profitable SOE market due to the federal government’s home procurement coverage for expertise merchandise. However, as a lot of the expansion is anticipated to come back from the SME market, this shouldn’t be an enormous concern.

Regardless of these difficulties, of the highest 10 firms when it comes to market share, in 2021 some core gamers nonetheless embrace overseas corporations comparable to Shopify, SAS Institute, Brightpearl, Revel Programs, and Lightspeed. This exhibits that by working with consultants to create the precise technique and tailoring the product to native wants, it is extremely attainable for a overseas agency to reach China within the SaaS market.

This text was first printed on April 11, 2019, and final up to date on October 4, 2022.