Development of the ICT Industry in Mainland China – the unique role of Hong Kong

1. Development of the ICT Industry in Mainland China– the unique role of Hong Kong • 2004.11.26 • A Joint Seminar Organized by • Hong Kong Institution of Engineers • (IT Division and Electronics Division) and • Hong Kong Computer Society Dr. C.K. Wong, Distinguish Fellow Hong Kong Computer Society

2. Contents • Full Scope of the ICT Industry in Mainland China • How this Industry Has Evolved • Hong Kong’s Role in the Two Decades of High-speed Growth of this Industry in Mainland China • New Opportunities and New Roles for Hong Kong in Moving Forward

3. Review of the Mainland China ICT Industry Material Science Semi-Conductor and Optics Technologies Component Design Component Manufacturing Full Spectrum of the ICT Industry in China Electronic and Optical Components Industry Electronics Products, Information Processing HW and Communication Equipment Industry Information Contents and Communication Services Industry Software Products, Software Services and other IT Professional Services Industry

4. Review of the Mainland China ICT Industry Digital Electronic Products Computer Peripherals Computing Hardware Data Com Equipment Systems and Embedded SW Full Spectrum of the ICT Industry in China Electronic and Optical Components Industry Electronics Products, Information Processing HW and Communication Equipment Industry Information Contents and Communication Services Industry Software Products, Software Services and other IT Professional Services Industry

5. Review of the Mainland China ICT Industry Infrastructure Services Providers Communication Services Providers Valued-added Information Services Providers Digital Contents Providers and Developers Full Spectrum of the ICT Industry in China Electronic and Optical Components Industry Electronics Products, Information Processing HW and Communication Equipment Industry Information Contents and Communication Services Industry Software Products, Software Services and other IT Professional Services Industry

6. Review of the Mainland China ICT Industry Software Tools Application Software Products Software Development Services Business Consulting Services System Architecture Design Services Security Design and Audit Services Other IT Related Professional Services Full Spectrum of the ICT Industry in China Electronic and Optical Components Industry Electronics Products, Information Processing HW and Communication Equipment Industry Information Contents and Communication Services Industry Software Products, Software Services and other IT Professional Services Industry

7. A Complex and Sustainable Eco-system of Industries The Consumers and Organizational Users of the Technologies Full Spectrum of the ICT Industry in China Electronic and Optical Components Industry Electronics Products, Information Processing HW and Communication Equipment Industry Information Contents and Communication Services Industry Software Products, Software Services and other IT Professional Services Industry Software Tools Material Science Digital Electronic Products Infrastructure Services Providers Application Software Products Software Development Services Computer Peripherals Semi-Conductor and Optics Technologies Communication Services Providers Computing Hardware Business Consulting Services Architecture Design Services Valued-added Information Services Providers Data Com Equipment Component Design Security Design and Audit Services Systems and Embedded SW Digital Contents Providers and Developers Other IT Related Professional Services Component Manufacturing

8. Some Statistics on the Overall Market Size of the ICT Industry in China 1996~2003 ICT Industry Output as % of GDP • In 2003, total realized value-added output of ICT industry in Mainland China was RMB 709B (US$88.6B)，~ 6% of the GDP for the year. • Component, Equipment and Software Industry accounted for RMB 400B (US$50B)，Communication Services RMB 309B (US$38.6B). • Projected Growth Rate in 2004 is > 30%。 • At the end of 2003, total installed base of telephones ~ 532million subscribers. Fixed line ~ 263M，Mobile ~ 269M. It has exceeded 600M by the end of 3rd Quarter 2004 (Rank Number 1 in the world). • Internet user base = 78 million (Rank Number 2 in the world). • Total ICT products and Services Sales = RMB1.88T (US$235B) (Rank Number 3 in the world).

9. Software Products and Services Sector of the ICT Industry in China In US$ Billion Total Market Size for SW Products and Services in Mainland China Source: CCID (RMB figures normalized at today’s US$ exchange rate) • Average annual growth from 1997-2003 is 34% • Local content and value-add is around 30% of the market size. (National target is to reach 60% by 2005- Unlikely to achieve based on current figures.) • “Software export” in 2003 was around US$2B (around 10% of total market size). • Over 60% of this export figure was related to Embedded software value-add onto hardware and equipment products.

10. As % of World-wide Market Total in 2003 39.67% 30.05% 10.49% 2.58% 2.14% 2.69% Software Products and Services Market Size Comparison 2000-2003 US$ Billion

11. 华罗庚　（１９１０年－１９８５年）中国科学院副院长，应用数学研究所所长。主持过中国计算技术研究所的筹建及早期工作，为中国计算事业作出了杰出贡献。华罗庚　（１９１０年－１９８５年）中国科学院副院长，应用数学研究所所长。主持过中国计算技术研究所的筹建及早期工作，为中国计算事业作出了杰出贡献。 １０３型电子计算机　　１９５７年１１月底开始研制，１９５８年８月１日试制成功，１９５９年年底投入正常运行，由７３８厂小量生产，并正式定名为１０３型计算机，是我国第一台小型电子管数字计算机（又称八一型计算机）。 摘自《人民日报》1958年8月3日第二版 Some History Behind all these Figures • In the early days, just like its counterparts in other parts of the world, Communication Industry and Computer Industry of China were treated as two separate industries and administered by two different ministries until 1998. • The digital Computer Industry (HW and SW) in China can trace its origin to 1950, upon the return of Prof Hua from the Princeton Institute of Advanced Studies. • In the 1950s, technology level of the Computer Industry in China was comparable to Japan. However, it lacked the industry capacity, economic strength, social stability to grow the industry like Japan in the following years.

12. Some History Behind all these Figures • In the late 1970s and early 1980s, the most pronounced problem in the re-vitalization of the computer industry was the lack of qualified professionals and the necessary equipment for the training of a new generation of professionals. • Programs were established under the then Ministry of Electronics to re-start the computer industry from the disruption caused by the “Culture Revolution”. • Jump-start it as an assembly industry • Gradually increase the local contents (metal work, power supplies, PCB, peripherals, passive components, small-scale IC, ASIC…) • Chinese language support (GB2312-80 and later ISO-10646, CC-DOS, 2-byte UNIX kernel, Chinese terminals and printers, Chinese Windows…) • Strategic Business applications to drive the needs. • Banking-mid 1980s • Telecom-early 1990s, • 3-Gold projects-mid 1990s • eGovernment, SCM…..

13. Some of the Work by HK Help to import some of the computers in the early 1980s for the support of training in universities (Comenco, IMSAI, SWT…) Designed some of the early indigenous computers for local manufacturing in the mainland and acted as the sourcing partner for components (Greatwall, Zijin and UNIX Servers…) Multi-byte UNIX kernel research was done in HK (Mainland, Taiwan and HK collaborative effort) The I18N Group from Japan, Korea, US, Mainland China, Taiwan and HK at a Dinner Gathering in the summer of 1990 (Lamma Island, HK) Some History Behind all these Figures • In the late 1970s and early 1980s, the most pronounced problem in the re-vitalization of the computer industry was the lack of qualified professionals and the necessary equipment for the training of a new generation of professionals. • Programs were established under the then Ministry of Electronics to re-start the computer industry from the disruption caused by the “Culture Revolution”. • Jump-start it as an assembly industry • Gradually increase the local contents (metal work, power supplies, peripherals, passive components, small-scale IC, ASIC…) • Chinese language support (GB2312-80 and later ISO-10646, CC-DOS, 2-byte UNIX kernel, Chinese terminals and printers, Chinese Windows…) • Strategic Business applications to drive the needs. • Banking-mid 1980s • Telecom-early 1990s, • 3-Gold projects-mid 1990s • eGovernment, SCM….. Hong Kong investments and management know-hows have speeded up the growth of the electronic assembly and computer manufacturing industry in the Mainland.

14. The Background It was a highly monopolistic industry operated by the government under the Ministry of Post and Telecommunication. Lack of economic strength and market demands to grow this industry in the first 30 years from 1949. By the early 1990s, economic critical mass has attained to fuel the demands. Gradual de-regulations of the industry and its detachment from direct government operations were required to support the growth. Post and Telecommunication were separated. Telecommunication administration became part of the Ministry of Information Industry in 1998. Hong Kong involvement was minimal in the early days. The new challenge in the convergence of the communication and information services industries presents new opportunities to HK. Some History Behind all these Figures (Telecom) • From 1949 to 1978, investment into the communication infrastructure only grew from 40 million RMB to 410 million RMB. By the end of the 1970s, long distant capacity has only grown 16,000 circuits. • From 1978 to 1990, total telephone switching capacity has grown from 5.75 million to 20.26 million circuits (in a period of 12 years, 352% growth). • From 1990 to now, in a period of 14 years, another 3,000% growth in telephone capacity. • By August 2004, total telephone capacity reaches 619 million. Fixed line at around 303 million and mobile at 315 million. • The emergence of a group of sizeable telecommunication equipment suppliers supporting this growth. Some of them are: 华为、中兴、大唐、巨龙, UTStarcom… • The successful development of technologies and products with indigenous intellectual properties. [e.g. Time Division Synchronous CDMA (TD-SCDMA) was proposed by China Wireless Telecommunication Standards group (CWTS) and approved by the ITU in 1999 ]

15. Opportunities in the Full Spectrum of the ICT Industry (with the exception in the more regulated Telecom Sector) Electronic and Optical Components Industry Electronics Products, Information Processing HW and Communication Equipment Industry Information Contents and Communication Services Industry Software Products, Software Services and other IT Professional Services Industry Software Tools Material Science Digital Electronic Products Infrastructure Services Providers Application Software Products Computer Peripherals Software Development Services Semi-Conductor and Optics Technologies Communication Services Providers Computing Hardware Business Consulting Services Architecture Design Services Valued-added Information Services Providers Data Com Equipment Component Design Security Design and Audit Services Systems and Embedded SW Digital Contents Providers and Developers Other IT Related Professional Services Component Manufacturing Sector targeted for Strategic Growth in the coming years From an OEM Assembly Industry moving into ODM and OBM manufacturing Very high-growth in the past 2 decades, particularly in the last 10 years. Moving very aggressively into VAS Services Internal demand is very strong. It is an area targeted for strategic and value-add growth in Software Products and Services New Opportunities and Roles for Hong Kong

16. Will Focus our Discussion on these Two Opportunities Some of the Strategic Growth Areas that Hong Kong can Capitalize on: • IC Design (Due to high growth of the HW and electronics industry, Mainland China is the largest single market for IC in the world. High demands for ASIC supporting the Appliances, Communication, Wireless and Mobile Equipment, RFID, Consumer Electronics, Instruments and related industries…..) • Design of ODM and OBM Electronic Products and their Export Markets. • Value-added Services for the Telecom Industry (e.g. Digital Contents and Entertainments) • Application Software Products (e.g. Supply Chain Management Solutions, Financial Services Solutions….) • Overseas Software Engineering Services

17. An Analysis of the Software Products and Services Market in the Mainland • Local value-added Software products and services only account for 30% of the total market (~US$20B in 2003) • The target for local value-add in 2005 was to reach 60%. (will not be able to achieve in the near future without more aggressive and innovative strategies.) A big gap to be filled! • Software industry as a whole has suffered from a syndrome of high-turnover, high-growth but very low profit-margin. • 日前，在电子信息百强企业揭晓仪式上公布的一项数据让人吃惊：2003年中国软件类企业平均销售收入下降2%，利润率更是史无前例地下滑了57%，营业利润率仅仅维持在2%。 • 软件行业太“软”-> 质量太“软”、心太“软”、利润太“软”。 • Software Services (e.g. SI) is a very competitive, crowded and high-risk industry in the Mainland. • This type of crisis is forcing the SW industry to review its practices to quickly attain maturity. • SI Certification program • Professional Certification program • Progressive use of SW products instead of custom-built solutions • Educating the user community in IT Governance

18. Software Products (ISV) Software Products (ISV) Opportunities for HK IT Service Firms 项目完成后的审查咨询 项目完成后的审查咨询 策略研究和咨询 策略研究和咨询 系统集成项目监管和审计服务 Project Management and Audit 系统集成项目监管和审计服务 Project Management and Audit 结构设计 结构设计 系统建造的投标管理 系统建造的投标管理 The Changing Software Services Industry in the Mainland • Local Software Services industry will further evolve to improve accountability and professional quality. • An interlocking industry chain will be developed based on international best practices • SW development and Systems Integration are becoming engineering disciplines instead of an art form practiced by gurus or “magicians”. Hardware Products 系统整合、软件开发和其他外包服务 Systems Integration, SW Development Outsourcing Services 项目完成后的支持和维护 策略研究和咨询 项目业主/客户 (Project Owner or Customer)

19. 软件客户化 内地SI市场 谘询服务 系统实施 需求管理 自主產权软件產品 系统设计 项目监理 项目管理 合同法规 客户关系管理 業务流程设计 銷售 Complementary Capabilities Mainland SI Firms HK SW firms Software Products for the Mainland China Market • Demand for high-quality and affordable software products (particularly applications for various industries) is increasing rapidly. • Take advantage of CEPA arrangement to bring SW products into mainland China under Hong Kong brand. • Hong Kong becomes the productization center for local SW, as well as SW products from mainland and international SME software firms. • Hong Kong value-adds on product localization, productization, quality control, branding and marketing

20. A High Potential Area -- Offshore Software Engineering (OSE) As inevitable as water flowing from high maintains to valleys Worldwide Outsourcing Spending Forecast 2000-2005 (US$Billion) Source: Accenture • OSE is part of the global trend for the outsourcing of services from higher-cost areas to lower-cost alternative locations. • “Manufacturing Service” is one of the largest scale offshore outsourcing economic activities in the history of mankind. Asian countries have been the primary locations of such outsourcing activities since the 1960s. IT outsourcing in 2001 is US$193B (70% of the total) CAGR for 2000-2005 is 13% and is forecast to maintain this rate for next 3-5 years.

21. Offshore Software Engineering Services The Drivers: TheChallenges: • Pressure on Profitability • Capital Investment Control • More nimble and smaller organizations adaptive to changes • Offshore locations as new markets and revenue opportunities • Merger and Acquisition activities promote the use of offshore services for broader coverage • Global business potential encourages many governments to offer tax benefits and other advantages to attract offshore business • Debates over “sending jobs away from home” by politicians • Shrinking of “wage-gap” in offshore locations • Increased concern over data privacy and confidentiality • New technologies and solutions have dis-intermediated some of the more labor-intensive business processes.

22. Service Provider Assumes Responsibility for: Customer Receives: Process and Quality Management People Interacting with Customers • Predicable results over a period of time • People • Processes • Technology Infrastructure Technology Infrastructure People Delivering the Services Essential Elements in OSE Business Under Contract to Perform SW Engineering Work

23. Ireland Singapore Australia Holland Hong Kong UK Philippines Mexico • Breadth of Technical and Business Skills • Quality of Work and Work Ethic Size of indicates number of qualified workers. • Qualifications and Capabilities • English Language Skills • Cost Differentials Capabilities Comparison of Some Outsourcing Locations Location Attractiveness: • Mature Judicial System • IP Protection Laws • Favorable Labor Laws • Mature Management Talents • Breadth and Scalability of Services • Political Stability • Government Incentive • Infrastructure • Telecommunication • Transportation • Living conditions High India China Low Source: McKinsey & Company High People Strength:

24. Comparing Against the India Software Industry

25. Ireland Singapore Australia Holland Hong Kong UK Over Time and Capabilities Improvement Initiatives China (mainland + HK) Philippines China Mexico The Combined Capabilities of Mainland China and HKSAR Location Attractiveness High China (mainland + HK) India Low High People Strength • Overall Capabilities of Mainland China and the Hong Kong SAR are complementary in the OSE Marketplace. • Their combined strength can become a powerful force in the international OSE market.

26. Capability Spectrum of the Combined Strength International Sales and Marketing Software Construction Work Customization Work Code Development Management Component and Product with Own IP System and Architecture Design Usability Design Implementation and Support. Services Requirement and Spec. Management Overall Project and Quality Management Customer Relationship Management Contract Admin and Legal OSE Market Capabilities of Mainland China Software Firms Capabilities of Hong Kong Software Firms Full Capabilities for the Successful Penetration into the OSE Market

27. An Operating Model used by a Hong Kong OSE Firm Software Factory (or Development Center) located in the City of Shenzhen Associated Companies and SI Partners in North America with focus on selected Industries. Software Design and Project Management Office located in Hong Kong • Requirements analysis and breakdown • Architecture design • Usability and user interface design • Testability design and test planning • Detailed spec. of subsystems and modules • QC enforcement and integration testing • User documents compilation • Change management • 2nd line post-implementation support • Business Development and Process Development • Sales/Marketing • Customer requirements articulation and Clarification • Customer relationship management • Change management and customer expectation management • Domain knowledge expertise • Implementation services and support • 1st line post-implementation support • Code modules and subsystem Development • Customization work based on pre-built components • Component Assembly and subsystem testing • Compilation of Engineering Notes and Test reports • Configuration Management • Packaging and Release Internet based tool for the management of these processes and to support collaborative work

28. Conclusion • Hong Kong has contributed to and benefited from the period of high-speed growth of the ICT industry in the Mainland during the 1980s and 90s. • Mainland China is moving very quickly into its next stage of growth in this ICT industry and all the sub-sectors. • We must quickly discover and assume our new roles in this changing environment. Old formula for success may no longer work. Our role as a “middle-man” in 引进来is diminishing; we must strengthen our role as mainland’s “preferred partner” in its desire and needs to 走出去. • There are immense opportunities for the new generation of explorers equipped with the skills and vision to navigate in a broader landscape. 路不是找出来的；勇敢的人把路走出来！

29. Thank You! ckwong@iaspec.com