Information Technology and E-commerce

Opportunities in China

June 5, 2003

Jeff RohlmeierJeff Rohlmeier

Tu-Trang PhanTu-Trang Phan

U.S. DEPARTMENT OF COMMERCE

Office of IT and E-commerce

AGENDAI. China market research trip – Jeff and

Tu-TrangII. IT market overview, policy environment,

and market opportunities – Tu-TrangIII. E-commerce policy environment and

market opportunities – JeffIV. Bilateral and Multilateral Cooperation –

Jeff and Tu-TrangV. Conclusion/Discussion/Q&A – Jeff and

Tu-Trang

I. INTRODUCTION

ExportIT China Report www.export.gov/infotech/ June 2002 market research trip

– Cities visited: Beijing, Shanghai, Xi’an, Chengdu, and Guangzhou

– Interviewed: national, provincial, and municipal government officials U.S. and Chinese IT companies IT end-users from banking, telecom, and educational

sectors

Meetings and experience over past several years

OTHER ExportIT REPORTSMARKET(S) RELEASE DATE

Spain and Italy June 2003

France and Germany September 2002

Brazil August 2002

Japan May 2002

Argentina April 2002

Mexico April 2002

Hungary and Czech Republic April 2002

II. OVERVIEW of the CHINA IT MARKET

andPOLICY ENVIRONMENT

FACTS & FIGURES

Population 1.3 billion

Economic Growth Rate 8 percent

GDP, 2002 $1.3 trillion

GDP per capita $1000

CHINA IT MARKET IN 2002

World’s 2nd largest IT hardware producer 3rd largest electronic component and

equipment producer 2nd largest PC market Fastest growing telecom services market

– Largest number of wireless and wire line subscribers

CHINA’S IT INDUSTRY IN 2003

$76 billion 33 million additional fixed phone lines 52 million additional mobile phone

subscribers $198 billion in sales of electronic

information products $25 billion investment in fixed assets in

the telecom sector

Source: Ministry of Information Industry

TENTH 5-YEAR PLAN (2001-2005)

Accelerate e-commerce development Promote the use of IT in sectors, such as

banking, finance, taxation, and trade Increase the use of IT in rural areas (“Go

West” initiative) Reform of SOEs Promote S&T research Promote development of IC and software

sectors

POLITICAL DEVELOPMENTS

National People’s Congress met in March 2003 means new leadership

New Minister of Information Industry – Wang Xu Dong

Politburo Standing CommitteePosition Old Leadership New Leadership

President and General Secretary Jiang Zemin Hu Jintao

Premier Zhu Rongji Wen Jiabao

Communist Party Affairs Chief Zeng Qinghong

NPC chairman Li Peng Wu Bangguo

First Vice-Premier in charge of the economy

Huang Ju

Secretary of the Political and Legal Affairs Commission

Luo Gan

Chairman of the Chinese People's Political Consultative Conference

Li Ruihuan Jia Qinglin

Central Commission for Disciplinary Inspection

Wei Jianxing Wu Guanzheng

Politburo Standing Committee Member Li Lanqing Li Changchun

AGENCIES RESPONSIBLE FOR IT POLICY

IMPACT of WTO ACCESSION

1. China’s telecom services market open to foreign investment.

2. Lower tariffs under the ITA.

3. Increased trading and distribution rights.

4. No more tech transfer and local content requirements.

IMPACT of WTO ACCESSION

5. Improved IPR protection through TRIPS.

6. Tech standards and conformity assessment requirements will be consistent with international practices.

7. National treatment for internal taxes.

8. Eliminate export and import subsidies.

WTO AGREEMENTSName of Agreement Time Frame Commitment

ITA Upon Accession

TRIMS Upon Accession

TRIPS Upon Accession

TBT Upon Accession

GPA Observer Status

Telecom Services Phase-in Schedule

China has become the world’s second largest producer of IT hardware.

10

25

40

55

70

85

Year

Bill

ion

s o

f U

.S. D

olla

rs

United States 89.1 85.5 70.9 70.2

China 18.45 25.5 28.1 35.2

Japan 48.3 52.15 39.2 31.488

Taiw an 21 23.1 20.1 17.3

1999 2000 2001 2002

Source: JEITA, The Yearbook of World Electronics Data, EIAK, MIC, November 2002

Asia-Pacific

51%14%

35%Hardware

PackagedSoftwareServices

China

17%

73%

10%

Source: IDC, 2003

IT MARKET in A/P and CHINA, 2002

CHARACTERISTICS of the HARDWARE MARKET

Represents 73 percent of total IT market in 2002 ($16.2 billion – IDC).

Local PC makers dominate the domestic market. Hardware market driven by

– price declines – government support of e-gov initiatives– 2008 Olympic Games (data storage)

Reliable after-sales service essential for success

U.S. TRADE with CHINA in COMPUTER EQUIPMENT and PERIPHERALS

543 473 579

2,8454,183

6,367 6,050

9,252

-2,302-3,710

-5,603 -5,264

-8,673

764 786

-10000-8000-6000-4000-2000

02000400060008000

1000012000

1998 1999 2000 2001 2002

Year

Mill

ions

of U

.S. D

olla

rs

Exports Imports Balance

Source: Official statistics from the U.S. Department of Commerce, the U.S. Treasury, and the International Trade Commission.

CHARACTERISTICS of the SOFTWARE MARKET Less than 1/6 of the IT market ($2.1 billion –

IDC). China’s software purchasers are becoming

more sophisticated. Linux vs. Microsoft Windows Government support of software industry

– State Council Document 18– Software parks and bases

Software piracy is still a problem.

$385. 91 $1, 342. 82

$1, 772. 10

$191. 58$1, 128. 86

$983. 33$2, 601. 44

$412. 79 $1, 076. 31

$5, 525. 37

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2007

Year

IT consulting Implementation Support services

Operations management Training and education

CHARACTERISTICS of the IT SERVICES MARKET Implementation

services is largest segment

Steady growth expected in the next 4 years– CAGR of 26 percent,

2002-2007 Local companies

dominate the market– Established network

for computer hardware Source: IDC, 2003

IT Services Market by Segment, 2002 and 2007

CHARACTERISTICS of the INTERNET MARKET 59.1 million users by January 2003 (CNNIC)

– 2ND largest home Internet population– But, only 5 percent of population has access to

the Internet Access mainly through dial-up connections

(57%),but broadband connections is growing.– By 2008 – 37 million homes will use broadband

State control of the Internet

OPPORTUNITIES in IT

1. “Informatization” to promote industrialization.

2. “Go West” campaign

3. China’s accession to the WTO

4. 2008 Beijing Olympic Games

III. Electronic Commerce China may have the greatest potential of all

Asia/Pacific countries to experience exponential growth in its e-commerce sector.

59 million Internet users in China, a growth of nearly 73 percent since June 2001 (Source: CNNIC).

E-businesses in China are multiplying almost as fast as Internet users. 78 percent of all Chinese websites are now operated by “enterprises” and 5 percent are operated by “businesses”. (Source: CNNIC).

Electronic Commerce (continued)

However…– Only 34 percent of Internet users in China are

currently purchasing goods and services on-line. (Source: CNNIC).

– Only 11 percent of Chinese “enterprise” websites and 45 percent of Chinese “business” websites offer “e-commerce services”. (Source: CNNIC).

Electronic Commerce (continued)

Nevertheless, despite the challenges faced by China’s e-commerce sector, there is reason to be optimistic.

Some observers estimate that China’s e-commerce sector (B2B and B2C) will grow from $15.6 billion (2002) to $98.8 billion in 2006. (Source: UNCTAD).

Central government has stepped up its national “informatization” campaign/developing a legal framework for e-commerce.

Electronic Commerce (continued)

Business-to-Business (B2B):– In 2000, it was estimated that there were an

estimated 370 B2B websites in operation in China and that the size of the B2B market was approximately $9 billion. (Source: US&FCS China).

– Recent studies indicate that the Chinese B2B market will continue to expand, perhaps totaling as much as $22 billion by 2006. (Source: UNCTAD).

Electronic Commerce (continued)

State enterprises and joint ventures have begun to implement B2B strategies. However, the vast potential for B2B e-commerce in China not yet realized.

Current B2B market in China is exemplified by a small number of innovative firms that supply e-business infrastructure products and solutions as an extension of their normal operations.

Electronic Commerce (continued)

Factors inhibiting further growth in China’s B2B sector:– Traditional “cash and carry” culture/Lack of

online payment use.

– Slow, unreliable postal/package distribution system.

– Lack of confidence in the overall security of doing business online.

Electronic Commerce (continued)

Business-to-Consumer E-Commerce (B2C):– Only a small number of the country’s consumers

are actually purchasing good and services online.

– Nevertheless, while the B2C market may appear comparatively small in China, the sheer size of the potential B2C market in the country warrants the attention of online merchants.

Electronic Commerce (continued)

Large cities of Beijing, Shanghai, and Guangzhou, are beginning to favor e-commerce over traditional methods of purchasing goods and services (including books, computer equipment, mobile phones).

The development of B2C Internet portals (e.g. Sina.com, Sohu.com) are making e-commerce more convenient and efficient than ever for consumers.

Electronic Commerce (continued)

However, several factors have conspired to hamper growth of the B2C market in China:– security concerns – inconvenience of payment – late delivery – unreliability of the merchant

Nevertheless, an increasing number of Chinese consumers appear to recognize the benefits of e-commerce: reduced cost, efficiency and the enjoyment and curiosity of shopping online.

Electronic Commerce (continued)

Financial Services:– Increasing variety of online services.– However, online banking and brokerage services

in China are currently focused almost exclusively on the B2B market.

– The lack of Internet security for personal banking is one reason why online banking in China is limited.

– Nevertheless, all indications are that China will continue to experience growth in both its Internet banking and online brokerage sectors.

Electronic Commerce (continued)

Electronic Learning:– While Chinese consumers, in general, have

refrained from purchasing goods and services online, Chinese students are widely engaging in online education services (“e-learning.”)

– Two main reasons why e-learning has become so popular: 1) State Council and Ministry of Education efforts; and 2) Premium on education in China.

– Inhibiting factors: untrained faculty; lack of facilities; lack of broadband; cost of Internet.

Electronic Commerce (continued)

Legal/Regulatory/Policy Framework:– Nationwide “informatization” campaign– However, China currently lacks a national

framework comprehensive enough to many aspects of e-commerce.

– No clear delineation of responsibilities for e-commerce policy in China.

– Nevertheless, authorities have instituted (or are developing) legal, regulatory and policy initiatives in several key areas.

Electronic Commerce (continued)

E-Government:– “Government Online” program successful– Over 3,300 websites in China use the “.gov.cn”

domain name. (Source: CNNIC). – Local governments have made progress in

applying information technologies.

– e-government workshops

Electronic Commerce (continued)

Digital Divide:– Large cities account for over 30 percent of

China’s total online user population.– Qinghai, Ningxia, and Tibet collectively account

for less than 1 percent. – China has instituted a “Go West” campaign, part

of which encourages e-businesses to relocate to western provinces.

Electronic Commerce (continued)

Electronic Payments:– Online payment mechanisms (credit cards, etc.)

are not widely developed or used in the country. – National financial network not yet equipped for

use of efficient payment mechanisms or instruments.

– Information security concerns not yet addressed.

Electronic Commerce (continued)

Electronic Authentication (E-Signatures):– MOFTEC to draft a comprehensive Electronic

Signature Regulation.– Would provide legal effect for e-authentication.– Not clear if law will be minimalist, transparent,

technology-neutral.

Electronic Authentication (continued)

Information Security:– Internet Security Law (2000) aimed at

guaranteeing information security in telecom and e-commerce.

– However, law stops short of imposing civil and criminal penalties for most cyber-security violations.

– Law has not yet been implemented in all of the country.

Electronic Commerce (continued)

Data Privacy:– No legislation that would provide the country’s Internet

users with any measurable degree of personal data protection.

– First draft civil code to emphasize the protection of privacy rights.

– Unclear how this code will be applied to personal data exchanged online.

Content Restrictions and IPR: See Overview of IT Market (Part II of presentation).

Electronic Commerce (continued)

Taxation of E-Commerce:– July 2000: Task force appointed to look into

possibility of taxes on electronic transactions in an effort to boost government’s finances.

– However, China has refrained from imposing duties on e-commerce.

– China likely to continue this policy while “informatization” efforts proceed and while it implements WTO-compatible laws and trade practices.

Electronic Commerce (continued)

Summary: Market Opportunities in E-Commerce:– Several institutional/societal factors (such e.g. lack of

credit card usage and inefficient delivery systems) have combined to restrain more rapid growth of e-commerce in China.

– However, U.S. e-commerce companies should note the shear size and overall potential offered by the Chinese market.

– China’s B2B market will likely continue to offer U.S. companies the greatest opportunity for export sales.

– In general, in the short-term, the Chinese B2C e-commerce market may offer less opportunity than B2B.

IV. Bilateral and Multilateral Cooperation on ICT issues:

E-commerce Ministry of Commerce represents China’s interests in the

Asia Pacific Economic Cooperation (APEC) E-Commerce Steering Group (ECSG).

U.S. Department of Commerce has participated with China in E-Commerce summits in 2000 and 2001.

2002: Joint U.S.-China roundtable on e-commerce in Washington, D.C.

IT and Telecom U.S.-China Joint Commission on Commerce and Trade

(Ministry of Commerce and Ministry of Information Industry) APEC Telecommunications and Information Working Group

with the Ministry of Information Industry

V. Questions? Comments?

Tu-Trang PhanSenior AnalystU.S. Department of CommerceInternational Trade AdministrationOffice of Information Technologies & Electronic Commerce (OITEC)PH: (202) 482-0480; FAX: (202) 482-3002Tu-trang_phan@ita.doc.gov

Jeff RohlmeierSenior AnalystU.S. Department of CommerceInternational Trade AdministrationOITECPH: (202) 482-0343; FAX: (202) 482-5522Jeff_rohlmeier@ita.doc.gov