The Race To Become China's Microsoft

Software makers battle each other, U.S. rivals, and pirates

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 Americans 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 a success story like Kelihua has 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. He 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 with lowinterest loans, tax breaks, and by 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.

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 made by non-Chinese companies, it gave UfSoft a 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 rapidly changing accounting rules. "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 American 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 are also developing publishing software in Tibetan, Mongolian, Vietnamese, Arabic, and Japanese.

HAYES HOOK-UP. 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's 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.

Despite all the growth, rampant software piracy poses a major problem. 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 piracsy 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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