SaaS in China
Besides my technical role in developing SaaS architecture guidance, I've had the privilege to be deeply involved in molding the SaaS industry in China. Over the course of the last year, I've travelled to different cities in China, working with my colleagues there to understand the needs and opportunities within the local Chinese software industry. It has become obvious to me that China has a very promising and large SaaS market. However, there are a number of barriers to entry and adoption that I think we can all play a part to overcome.
Here are my thoughts on the SaaS opportunities in China:
There are tons of small and medium enterprises in China, many still relying on only paper-based accounting to carry out day-to-day business transactions. Even when IT exists in big scale operations, the full automation potential is severely hampered by process and design oversights and bureaucracies. In fact, every time I travel through Beijing’s International Airport, I’m bewildered by the extent of disconnectedness within the process and technology that deals with passenger check-in, ticket issuance, payment and baggage handling. For instance, e-ticket in China is not the same as those in US or Europe. You still have to present an ID at the airport to retrieve your paper ticket from a service desk before heading to the check-in counter. My point here is not to criticize the system, but to highlight the fact that there are lots of head rooms for mass automation in China – even the slightest business process improvement through IT can bring significant business benefits. Hence the relevance of SaaS – no big fancy customized systems are required to reap justifiable returns on the decision to automate. The factories in Guangzhou, the retail chains in Shanghai, the import and export trading outfits in Fujian, and the human service agencies in Beijing are just some examples of industries that has little if any legacy systems in place. Because the nation as a whole is just taking baby steps in IT adoption, there will be fast growing demand for horizontal business applications like accounting, inventory management and human resource management offered as SaaS. The long tail is in fact very long in China.
Over 90 % of software sold in China is pirated. The ones who are losing out are not just companies like Microsoft, Oracle and SAP. China is also paying for the problem in loss of GDP and the lackluster local software economy with many small scale local software vendors that are struggling to stay profitable despite a potentially huge domestic consumer market. Anti-piracy measures have to take a long and short term approach, involving both education and technology. By changing the software delivery model, SaaS can be more effective at protecting software IP than most license protection technology in use today.
We all already know that before the Internet, news and information never traveled so fast and so wide. Now the combination of the Internet and SaaS can help overcome the tyranny of space and time to connect software service providers and consumers. As the Web becomes the natural channel for software distribution there is less need for software providers to establish distribution channels with brick and mortar computer stores and outlets in order to reach a broad market. In a nascent software consumer market with few established market channels, this is a godsend to the Chinese software vendors.
If you’ve travelled to China, you know that the Chinese can turn anything that moves into a delicacy, leaving nothing to waste. Perhaps it is this same mentality that gets carried over – the thought of maintaining on-premise servers, having redundant hardware idling around for fault tolerant reasons does not appeal to a businessman that is running a factory. Anything that is not visually perceived as utilized is considered wasted. Besides, paying lots upfront for perpetual software licenses and server side hardware is often seen as unjustified cost for capabilities that are tangential to core business functions. Just take a look at the exploding mobile phone market in China. The low-cost of adoption, the pay-as-you-go scheme sits better with the Chinese consumers.
Before you start drooling over the thought of starting your SaaS outfit in China, here are a few bumps to consider on your journey to the saasy middle kingdom:
Like SaaS adopters in other parts of the world, security and privacy of their data is utmost concern for using third party hosted business applications. In fact, it can be even harder to convince the prospective Chinese SaaS consumers since the Chinese are traditionally more conservative and skeptical of unknown parties.
The second barrier I believe is unique to economies where tax evasion is common business practice. The first time I heard this from a SaaS vendor in China, I had to ask for a second clarification to make sure I understood him correctly. In any case, businesses are concerned that cooked business data that is stored at the provider could come under the scrutiny of the Chinese tax authority.
Guan xi (Mandarin for relationship) has always been the cornerstone of business trust and dealings in China. Sometimes, a known brand can be the substitute for Guan xi. This situation placed Chinese software vendors in a tight spot because of two main reasons. First of all, most of them are not very well known even within China. Second, the SaaS model’s emphasis on low-touch and broad-scale makes it difficult to cultivate guan xi and trust between service providers and potential adopters.
One of the inconveniences of traveling and living in China is that you have to carry a fat wallet full of cash with you in order to pay for most daily commercial transactions. Unfortunately, the lack of non-cash payment systems is also a SaaS growth inhibitor because SaaS providers are finding it difficult to get timely collections from their tenants.
Many of the operational activities like provisioning tenants, monitoring the SLA are tasks that are unfamiliar to software vendors. The situation is even more jarring in China as there are very few hosters that can provide SaaS hosting services beyond the basic 3 P’s of ping, power and pipe.
Finally, the three headed monster that haunts SaaS ISV also roams in China. Many Chinese ISVs I’ve met are having a difficult time grappling with the necessary multi-tenant architecture shift for their applications.
Sounds like a very bumpy road? So this brings me to describe some of the efforts I've been involved in:
- The Suzhou SaaS incubation Center. The incubation center is a joint collaboration between Microsoft and China’s Suzhou Software Park - one of the many government funded software parks scattered around the country. Suzhou software park provides the lab facility for SaaS vendors to design, implement, test and eventually have their SaaS application hosted at the data center managed by the software park. Microsoft has been providing technology training and transferring SaaS architecture skills to technical personnel at the software park. You can find more information about the Suzhou SaaS incubation center here (the info in Mandarin only).
A firm handshake to establish the SaaS incubation center collaboration with Suzhou Software Park CEO:
A couple of Suzhou's many idyllic sides despite its fast growing software industry:
- Another project that is underway is a sample SaaS application that we are collaborating and delivering with Suzsoft, a local Chinese software vendor. We intend to use this sample application as a training tool to help Chinese software vendors learn about SaaS architecture practices and technologies that they can use to implement their solutions. This sample application features an import/export custom application that is somewhat unique to the needs of businesses in China. It will also feature Mandarin architecture documentations as the software community in China is still much more comfortable with their Chinese language. My colleague Wu Hao is managing this project. Contact him directly if you are interested. This sample application will be available in a couple of months.
Despite all the challenges of doing business in China, it is an interesting place for one to be amidst in the actions. I can never get enough of the rich historical and cultural gems that you encounter just in everyday travel and conversations, not to mention the diverse flavors of Chinese cuisines. So, t
his coming April, I’m taking on a short term assignment in Beijing to help build awareness and create new SaaS initiatives with the Chinese government and industry.
If you're a non-China based SaaS ISV and VC looking for opportunities in China, you may also like to know that we have a team in China dealing with China ISV and VC relationships. Contact me directly if you are interested in getting hooked up.
More news and information on Microsoft and China:
Tech news on Microsoft and Suzhou SaaS incubation center: http://www.chinatechnews.com/2006/10/11/4405-microsoft-signs-saas-deal-in-suzhou/
Dan’l Lewin’s article on Microsoft’s initiatives in China: http://alwayson.goingon.com/permalink/post/9674