Move Over, Microsoft

Local software makers are climbing to the top in China

At Kelihua Co.'s research center outside Beijing, workers old and young are racing to meet the demands of one of the fastest-growing software markets in the world. In the center's busiest room, engineers in their 20s labor intensely over programs. Seated close to them are more than 100 retired teachers, developing the language, science, and math lessons for Kelihua products. With the State Education Commission's recent decision to equip 1% of China's 800,000 primary and secondary schools each year with computers and software, demand just keeps growing. "This market is almost infinite," says Song Chaodi, president of Kelihua.

Kelihua and a handful of other companies are emerging as top players in China's turbulent software industry. These companies hold great promise, provided they can overcome the obstacles that remain. Piracy, the plague of foreign software companies in China, is also the bane of companies like Kelihua. Chinese producers are briskly selling accounting, word-processing, and publishing programs--but they face giant competitors from the U.S. And like software makers globally, the Chinese cannot escape the industry standards set by Microsoft and Intel, standards that often give U.S. companies an edge.

But for the Chinese companies that survive, the rewards will be huge. A few years ago, the domestic software business was minuscule, and even now success stories like Kelihua have only $12 million in revenue--though operating margins approach 40%. But the growth is breathtaking, says Duh Jiabin, Microsoft Corp.'s general manager in China: "The industry in China will see an average annual increase of 60%--and that's a very conservative estimate." Duh sees a market with annual sales of at least $10 billion by 2002. By then, "local software companies will hold more than 50% of the China market," he predicts, up from around 15% or so now.

GOVERNMENT CARD. The government is nurturing the local industry by making low-interest loans, awarding tax breaks, and pressuring foreign software companies to set up joint ventures. "If China has already produced its own software, the government encourages customers to buy local," says Yang Jun, vice-president of China National Computer Software & Technology Service Corp. Kelihua chief Song knows how to play his government card by working closely with the State Education Commission in developing Kelihua's curriculum. Song also has made politically savvy moves, such as starting a software project to teach Mandarin to Cantonese-speaking students in Hong Kong after the handover.

The policymakers have also favored Beijing-based UfSoft group, an accounting software company. When China's Finance Ministry decided not to certify any accounting software produced by non-Chinese companies, it gave UfSoft the boost that has won it 40% of nationwide sales, the largest share of the Chinese financial software market, according to the United States Information Technology Office in Beijing. UfSoft regularly consults with the Finance Ministry to keep up with China's rapidly changing accounting rules. Now, UfSoft wants a similar position in management software. "Chinese-made applications software can more easily fit into Chinese society," argues Wang Wenjing, president and chairman of UfSoft.

American companies are not sitting still. UfSoft, for example, is going head-to-head with U.S. software powerhouse Oracle Corp. Despite being unable to get government certification for its accounting product, Oracle already has won over the China operations of U.S. companies such as Motorola Inc. and Johnson & Johnson to its software. It even persuaded star state company Baoshan Iron & Steel to install its accounting software, despite the certification rules.

While U.S. companies penetrate China, the Chinese are looking overseas. The software division of Beijing Founder Electronics Co. has sold its desktop-publishing programs to 80% of China's 3,500 major newspapers, magazines, and book houses. But it also dominates the Hong Kong, Singapore, and Taiwan markets. Founder's engineers work with calligraphers to develop new fonts, as well as publishing software in Tibetan, Mongolian, Vietnamese, Arabic, and Japanese.

Despite the rivalry between Chinese and U.S. companies, Founder has links with American business. When Microsoft was developing its Chinese-language version of Windows 95, Founder engineers spent several months at the Redmond (Wash.) headquarters to help develop a new way to standardize the Chinese characters used. Today, Founder works closely with Intel to develop more advanced forms of its color desktop-publishing software.

Stone Rich Sight Information Tech Co., the software arm of China's Stone Electronics, is counting on China's Internet use to win it big sales. With SRS' Chinese-language "enabling" software, users can receive Internet messages that were written with different software code. Already, SRS exports software across Asia and to the U.S., and at home it has hooked up in an Internet-related alliance with Microsoft, Hayes, and China's State Development Council. The customers of this government-run, for-profit service will be given a package that uses Hayes modems, Microsoft's Internet Explorer browser, and SRS' enabler software.

"LIFE-OR-DEATH ISSUE." Despite all the growth, rampant software piracy poses a major problem. Although companies that sell business software to large enterprises have been less affected, makers of educational and consumer software have been hit hard. Kelihua, for example, saw sales of its first-generation educational software plummet as pirates flooded the market with copies selling for a few dollars--compared with Kelihua's $200 price tag. In response, Kelihua has rushed to produce new products and offer an online help service and free upgrades. "For local companies, piracy is a life-or-death issue," says Jack Gao, country manager for Autodesk China, a company facing its own piracy problems.

Legitimate companies hope the huge appetite for software will continue to give them enough business to offset the piracy. "We're trying to occupy as much of the Chinese market as possible, because it's still a blank page," says Wang Jie, vice-president of SRS. It's a perilous business, but the winners will dominate a giant industry.

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