IT Expansion in China

Last week I wrote a post that covered many of the observation I made on my recent trip to mainland China. Given my background in IT, a natural area of interest for me was the build out of IT in China businesses that are not directly aligned with U.S. or European counterparts… in other words, what are the independent businesses doing when left on their own.

I don’t believe it is surprising to assert that growth in China to date has come independent of any investments in technology made by the government or business. Cheap labor has made possible productivity gains that would require substantial technology investment in developed countries, but as a I pointed out in my last post, wage inflation is no longer a hypothetical, it is happening as we speak therefore it is timely to consider what the IT implications are in China.

I’m tempted to write about telephony solutions but will resist the urge because irrespective of any other factor this is a given growth area, it simply has to be and growth estimates for 3G network expansion over the next couple of years are in mid-double digit rates. Consumers will be the primary beneficiary of 3G network expansion with businesses lagging as mobile applications are dependent upon a centralized IT methodology that does not currently exist in small and mid sized China businesses.

That last point was the key takeaway I learned in my site visits, the enterprise application market in China for everything but the very large and multinational businesses does not exist. When you visit a mid sized manufacturer, say 1-2k employees, what you will find is a networked PC environment rather than a server based environment. White collar workers use personal productivity applications, email, and file sharing to conduct business.

I did see some rudimentary data center buildout, mostly focused on networking and file storage, and interestingly the rack-based equipment I saw was predominately coming from U.S. based secondary markets rather than purchased new in China. The expansion of data center capability could foretell a scenario where server based applications expand but I believe that is still remote given the lack of local support and consultancy options and significant expenditures for the acquisition and support of such applications.

If on premise server applications are an unlikely growth area then does that mean SaaS and other hosted applications have an advantage? I think that this is unlikely because regional data networks are spotty in terms of robustness and the trust issue related to data storage.

Salesforce.com has been hosting a China edition for several years but in reviewing their materials it is evident that their successes are coming in the Hong Kong region which might as well be a separate country from Mainland (you still have to go through a border crossing when entering Mainland from Hong Kong and the internet in HK is far different from Mainland). You simply cannot run a Mainland focused business from Hong Kong… different language, cultures, governmental controls, etc.

In reviewing the current and near term IT capabilities I believe it is plausible that workgroup solutions will expand that enable better project management and collaboration with near-network and far-network resources. Centralized financial management solutions are less likely given the cost and specialization required for such applications, and server based solutions that control factory shop floor resources are so far off that I wouldn’t even try to predict what the future holds for them.

Shop floor automation will develop over time, and point in fact I did see an expansion of CNC equipment in operation from my last visit. Labor cost inflation is also causing manufacturers to expand CNC investments in areas beyond core milling and machining; I saw a pretty cool CNC carving machine that produced wax moulds for lost-wax bronze casting, a process previously done with a small staff of highly experienced craftsman.

So what would I do if I were running a mid-sized enterprise software company targeting manufacturing sectors? For starters I would establish a base of operations in Mainland with strong local or Taiwanese partnership (never underestimate the influence of Taiwan in businesses operation in China). I would also focus on offering low cost and quick to implement solutions that target workgroup constituencies with business benefits firmly rooted in team efficiency and workflows. Lastly, on pricing you have to start from scratch… whatever you are selling your products and services for in other markets won’t apply in Mainland China, whether on a per user or per server basis.

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The Industry that China is Quietly Killing
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