The SaaS market in China

The SaaS market in China

The SaaS market in China

(This article was first published on Computerwoche.de as part of the IDG Expert Network)

Where is the SaaS market in China?

While we already have a large market in the West with key players such as Salesforce, Adobe, SAP, Dropbox, Atlassian and many more, there are hardly any SaaS players of comparable size in China.

There are hardly any SaaS players in China that are comparable in size to those in the West. Why is this the case and does this present an opportunity for European providers in the Chinese SaaS market?

The SaaS Market in China

If we look at China, we mainly see Tencent and Alibaba as Infrastructure as a Service (IaaS) providers. According to Gartner, Tencent and Alibaba are among the “top five” in the IaaS market together with Amazon, Microsoft and Google. Together, they were responsible for 12% of global revenue in 2019, which is a lot when you consider that Amazon alone is responsible for 45% of global revenue with AWS and everyone else has to share the remaining 55%. Microsoft, for example, can only boast 18 percent in second place.

In the West, the providers just mentioned have used their position and acted as enablers for SaaS models based on their own IaaS platform. For example, Adobe initially used AWS services on a massive scale to build its Creative Cloud products in 2011, before moving to Microsoft Azure. However, there are still no really large and dominant players in the Chinese SaaS market that are turning their products into services. The typical SaaS offering combinations of software including hosting and a billing model based on the use of the software, such as number of users or managed data sets, are almost completely absent. There are of course some exciting candidates such as Kingdee, Yonyou or Beisen, but it remains to be seen how these will develop.

market share china
SaaS Markt CHina Vendors 2018, courtesy LD INVESTMENTS

It feels like there are a few SaaS companies worth mentioning, but they are all located within the two mega corporations Alibaba and Tencent. For example, Aliyun (Alicloud) is a platform-as-a-service provider, similar to Amazon Web Services, alongside other cloud players such as Tencent and JD: In turn, the services offered are primarily intended for other companies to build their SaaS applications on. This makes these companies the aforementioned enablers for a SaaS business, but not SaaS providers themselves. Companies such as Adobe, which have completely transformed their core business into a SaaS offering.

Why is that?

Historically, cheap labor in China has meant that manual execution of most tasks is still cost-efficient. As a result, the benefit of (partial) automation through software is relatively small. For Chinese SMEs, which account for about 60 percent of China’s manufacturing GDP, the introduction of software or SaaS products is therefore not an intuitive decision in terms of cost reduction. In addition, widespread software piracy has contributed to the fact that many companies do not see the benefits of software and certainly have no desire to pay for it.

This mindset makes the introduction of SaaS offerings in China particularly difficult. Well-capitalized mid-sized companies are traditionally the starting point for SaaS companies to build a customer base. Both in the USA and in Europe. In comparison, Chinese SMEs usually have fewer reserves and do not have sufficient free cash flow to invest in systematic upgrades to their software or SaaS services. Without this important target group, Chinese SaaS companies must immediately try to turn to large enterprise customers. As only these are able to make the investments and realize the cost benefits in the short term or can no longer afford illegal software due to their international activities or have to prove certified company processes.

The Chinese business IT

Just to clarify: in principle, it is of course no problem for Chinese companies to pay for software products. However, the sector generally seems to be facing problems with the introduction of cloud-based services. This is largely due to the relatively low use of IT in business procedures and processes of all kinds, especially among SMEs. When migrating to the cloud, processes often not only have to be migrated, but also introduced and practiced in the first place.

The sales argument of reducing IT costs with the services is therefore not as strong as in Western markets and savings are only realized much later. In addition, there are the usual concerns regarding the stability and security of a public cloud, so that many companies in China – especially the large ones – are turning to a private cloud or hybrid cloud provision.

Another obstacle is the often very individual and confusing corporate structures and processes in Chinese companies. This makes every product customization a highly complex and time-consuming project in which it is almost impossible to reuse the customizations for other customers. This in turn hinders the widespread introduction of cost-effective SaaS services, which can normally only be provided cheaply and scalably in multi-tenant environments.

A vicious circle that is difficult for young SaaS start-ups to break. In general, SaaS startups therefore face the typical dilemma between adapting to generate actual revenue with a few large customers or concentrating on functions that can generally be used by everyone. The SaaS market China turns out to be a real extreme case in the broad introduction of SaaS services due to the aforementioned reasons.

The SaaS markets in comparison

Despite all these complexities, we see here a SaaS market in its early stages. With its usual lack of talent to scale, general mistrust of public cloud providers and the usual problems that IT migration always brings.

The Chinese SaaS market is also just starting out in terms of numbers. The total size of the Chinese SaaS market in 2019 amounted to just USD 5.5 billion despite high growth of 42% compared to the previous year. According to Tech In China, the market is growing significantly faster than the global market, but compared to the global turnover of 104 billion US dollars (Gartner), this corresponds to just five percent.

SAAS comparison

In order to determine whether this is just a below-average performance of the SaaS market in China or whether it is in line with the general development of the cloud business in China, a few simple auxiliary figures can be used. For example, the ratio between the Chinese and global gross domestic product (GDP) is around 16 percent. This is also pretty much the ratio of the Chinese IaaS market to global sales of IaaS services. It therefore seems permissible to compare the global figures for cloud services with those of the Chinese market. It then becomes clear that the SaaS market is significantly less developed than the other cloud services and that there is still huge potential for growth. The necessary prerequisites for SaaS services in the form of IaaS capacities are definitely available on the market.

The Alibaba Cloud Research Center has also come to this conclusion. As early as 2019, it pointed out the disparity between the number of companies in China and the USA and their SaaS sales. According to Alibaba’s report, the SaaS market in China has three times as many companies as the USA, but still only accounts for 24% of SaaS service revenue.

Opportunities for Western companies in the Chinese SaaS market

In China, SaaS offers a great long-term opportunity, as the working-age population in China is also shrinking compared to the non-working population. This fact leads to rising labor costs. In addition, the market is still very fragmented. For example, the top 10 companies offering SaaS in China together only account for around 30 percent of sales. This even includes the major foreign players such as Microsoft, SAP and Salesforce, which are all hot on the heels of the only notable market leader from China, Kingdee. The market is therefore still young and consolidation will take some time. This opens up opportunities for small companies, including foreign ones, with a high-quality product and an efficient strategy.

However, the time window for market entry is closing faster due to COVID-19. The associated introduction of cloud and remote work has accelerated development and the Chinese government has also recognized that the SaaS market in China is lagging behind. It is foreseeable that government targets will be adjusted quickly in this regard. This is because SaaS services are also playing an increasingly central role in keeping economic growth in connection with data and technology consistently higher than in the West. Government support measures are therefore likely to come soon. Up to a certain point, this will also open up opportunities for Western companies to enter the Chinese SaaS market.

Conclusion

The exceptional situation offers Western companies an interesting option for entering the Chinese SaaS market. Due to the complex processes and underdeveloped IT infrastructures in medium-sized companies, there is an opportunity to launch simple SaaS offerings very quickly with reduced functionality compared to their Western counterparts.

As soon as it has succeeded in gaining a foothold in the first relevant sectors, the company will continue to work with a local development team to localize the product at the hyper speed typical of China. Suitable western expansion stages will be added as required and depending on market conditions.