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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

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Number of Internet Users (12/99)Country Users (1000) China is % of penetration

U.S. 110,825 9% 40.65%Japan 18,156 54% 14.39%U. K. 13,975 70% 23.64%Canada 13,277 74% 42.82%Germany 12,285 80% 14.97%China 8,900 100% 0.71%Australia 6,837 143% 36.40%Brazil 6,790 144% 3.95%Korea 5,688 172% 12.13%Taiwan 4,790 205% 21.66%China's # by CNNICOther #s by Computer Industry Almanac, as cited by sina.comhttp://tech.sina.com.cn/news/internet/2000-01-05/14751.shtmlChina's # is 6,308, 000 according to Computer Industry Almanac.Total population from CIA fact book, http://www.cia.gov/cia/publications/factbook/country.html

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Semi-annual Internet Growth

Computersusers Int'lTime Online (million) web site # bandwidth12/31/99 3500 9.8 15153 3516/31/99 1460 4 9906 24112/31/98 747 2.1 5300 14330/06/98 542 1.2 3700 85

Registered domain name in 12/99: 48695

Source: CNNIC

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Semi-annual Growth Rates

Computers Int'l Time online users web sites bandwidth12/31/99 140% 145% 53% 46%6/30/99 95% 90% 87% 69%12/31/98 38% 75% 43% 68%

World annual user growth rate is 38% from 1998 to19991998 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

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Typical Chinese Internet UserDec-99 Dec-98 US 10-12/98 US 4/95

single 64% 64% 30% 40%young (age 18-30) 76% (20-30) 68% (21-30)26% (21-30) 28%male 79% 86% 64% 80%college educated 77% 77% 58% 65%student or work for computer industry 34% 34%live in Beijing, Shanghai, guang dong 45% 49%per capita monthly household income (RMB 500-2000)65% (400-2000)70% $57K* $69k*

•spending average 2 and half hours a day online (12/99)

* per household incomesource: CNNIC. US # from GVU's WWW User Survey, http://www.cc.gatech.edu/gvu/user_surveys/

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Purpose and Services of Usage

purpose % of users services % of usersinformation 58% email 72%learning 12% search engine 50%entertainment 10% download software 44%work 7% chatroom 25%

web news 17%bboard 16%online game 14%stock trading 9%online shopping & other commercial activity8%Internet phone 8%

Source: CNNIC

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Some Other Numbers

• Internet aware rate: 5%

• human resource/recruiting web cites: 300source: Xiao Zhaohu, "Old Model, New Development," China

Computer , NO. 42, June, 2000

• current ecommerce sites: 1100

• Banking cards issued: over 100 millionCiting vice minister of Information Industry of China, http://www.

ccidnet.com/html//economics/eye/2000/06/22/61_2123.html

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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

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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

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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

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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

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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

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“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

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China Software Market: Small But Growing Fast

year China (growth %) % of hardware world (growth %)1996 1.1 13% 118.41997 1.4(22%) 11% 135.4 (14%)1998 1.7(23%) 11%

Source: Development Research Center, http://www.drcnet.com.cn/jingji/hyjj-a-index.htm

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Market Distribution

application software (accounting, ERP, Chinese document management61%platform (OS, database, ..) 39%domestic vendor 40%foreign vendor 60%

Source: CCID—MIC, 1999

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Industry Structure (1997-1998)

number of firms 5000private/employee owned 60%state owned 30%foreign/joint venture 10%average employee/firm 30# firms with employee over 500 10# firms with revenue larger than US$12 million 9revenue of largest Chinese firm in 1998 US$ 103 million

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

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Increasing Concentration: Share of Top Five Vendors

all software finacial software market1997 18% 71%1998 19% 88%

Source: CCID—MIC, 1999 and Development Research Center, http://www.drcnet.com.cn/jingji/hyjj-a-index.htm

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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

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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

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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

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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