An Introduction to China’s “Digital Economy” Yuan Yuehong, Li Jia Chinese University of Hong Kong Ma Jun Development Research Center, State Council of China outline: Internet software industry

Number of Internet Users (12/99)

Semi-annual Internet Growth Registered domain name in 12/99: 48695 Source: CNNIC

Semi-annual Growth Rates World annual user growth rate is 38% from 1998 to1999 1998 global Web population: 142 m; In 1999: 196 million. Source: Maryann Jones Thompson, "Tracking the Internet Economy: 100 Numbers You Need to Know," The Standard, September 13, 1999

Typical Chinese Internet User spending average 2 and half hours a day online (12/99) * per household income source: CNNIC. US # from GVU's WWW User Survey, http://www.cc.gatech.edu/gvu/user_surveys/

Purpose and Services of Usage Source: CNNIC

Some Other Numbers Internet aware rate: 5% human resource/recruiting web cites: 300 source: Xiao Zhaohu, "Old Model, New Development," China Computer , NO. 42, June, 2000 current ecommerce sites: 1100 Banking cards issued: over 100 million Citing vice minister of Information Industry of China, http://www.ccidnet.com/html//economics/eye/2000/06/22/61_2123.html

Discussion Internet development is in a very early stage, indicated by: low penetration rate young, single, male, educated user population used primarily for information and communication high growth rate at this stage is not surprising

Barriers to Internet Growth low per capita income, leading to: difficulty to pay for access cost low value per user to online business/advertiser under-developed telecom infrastructure: phone penetration: 13% ( 28% in cities), 12/99 (http://www.mii.gov.cn/tongji/yb/200001_7.htm) low average education level: illiterate population: 200 million S.&T. illiterate population: 500 million

Barriers to Internet growth (cont.) under-developed credit system banks unwilling to provide consumer credit consumers not trust online business, unwilling to furnish credit card # low IT utilization in enterprises about 1200 firms used ERP (source: Software World, No. 155, 1/1/2000, http://media.ccidnet.com/swm/155/06401.htm) improper incentive provided by currently economy system for firms to use Internet

Internet Growth Favorable Factors rapidly developing telecom infrastructure and alternative access channels: annual growth of phone lines: 20 million 43 million mobile phone users in 1999, adding 18 million a year; over 70 million people have access to cable TV, and adding 5 million a year (http://www.chinacatvnet.com/info/intr.htm) TV penetration: 86.1% (source: Cable TV and Information highway, http://www.chinacatvnet.com/info/info0004.htm

Internet Growth Favorable Factors (cont.) enthusiastic government Government Online Program calling for 30%, 60%, and 80% of all levels of government online by 1998, 1999, and 2000 Enterprise Online Program, 2000 calling for 100 large conglomerates, 10,000 midsize firms, and 1,000,000 small firms to be wired within a year growing sector of stock and private firms smaller and more efficient state sector

“Digital Divide”: a Potential Serious Problem for China Multi-dimensional digital divide: international, urban v.s. country, coastal v.s. inner provinces, income-based, etc. promote Internet access through postal offices, kiosks, public libraries role of international organizations

China Software Market: Small But Growing Fast Source: Development Research Center, http://www.drcnet.com.cn/jingji/hyjj-a-index.htm

Market Distribution Source: CCID—MIC, 1999

Industry Structure (1997-1998) Source: Xinhua Electronics News , “Overview of China’s Software Market & Industry,” Xinhua News Agency, http://www.idgchina.com/xinhua/software.htm

Increasing Concentration: Share of Top Five Vendors Source: CCID—MIC, 1999 and Development Research Center, http://www.drcnet.com.cn/jingji/hyjj-a-index.htm

Problems of China's Software Industry Small, not achieving economy of scale limited capability and little achievement in system software: rare examples: Hopen embedded OS, Cosix 64 low purchase power of software users + difficulty for software vendors to price-discriminate difficulty in enforcing copyright law

Favorable Factors for China’s Software Industry Development growing demand for software in a rapidly growing economy able to train good software engineers low software labor cost: USD $0.70, $1.80, $1.80, and $4.50 per hour in China, Mexico, east Europe, and Brazil (Source: NationBanc Securities number cited by Guang Ming Daily, www.gmdaily.com.cn/gm/19990609/gb/18082^GM13-017.htm) more modern ownership and management system in software firms

Favorable Factors (cont.) government emphasize software industry setting up software parks, giving special favorable treatment in tax, financing, etc. there are 14 software parks, over 700 software firms in the parks, with close to 60, 000 employee, with sales about $1.3 billion in 1999 opportunity provided by software paradigm shift: Internet, Java, ASP (software provided as services), open source software

Summary Both software industry and Internet are small and in very early stage growing fast many hurdles to overcome some strong points pointing to huge potential