本文初稿于2月23日，更新于3月1日
The sudden outbreak of Covid-19 has forced as many as 200mn Chinese knowledge workers to work remotely from home in the past 2-3 weeks. Remote working tools like Zoom Video, Dingtalk (Alibaba), Enterprise WeChat (Tencent), and Lark (Bytedance), and document collaboration & storage tools like WPS and Baidu Wangpan, have witnessed a surge in both DAUs and user engagement. As such, any Chinese public companies remotely related to the “cloud” concept have enjoyed a hockey stick rise in market capitalizations (A-share’s Chinext index reached a three-and-a-half-year high). Pundits argue that the Covid-19 outbreak will bring about a golden age for China’s cloud software, as businesses and governments of all kinds catch up on digital transformation. We are optimistic about the end goal, but cautious on the bumpy road ahead.
China’s software industry is at least 10 years behind that in the US (only 25% of enterprise IT spending is on software, versus 62% in America; China accounted for 3% of global software industry, versus 40% for US). The same prediction of “SaaS inaugural year in China” reappeared over and over in 2015, 2017 and 2019, but every time it proved as fake news. The hurdles of China SaaS adoption are structural, and it remains to be seen whether a single epidemic outbreak can change the situation.
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Labor costs
: ROI of software investment mostly derives from efficiency increases. The same efficiency could be reached by deploying more labor hours in China. Meanwhile, engineers are also cheap in China, and therefore companies big enough often find home grown solutions as cost effective as packaged software.
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Business structure
: State-owned enterprises (SOEs) still account for majority of China’s economy. Except for a few giants, mostly in the TMT sector, private companies tend to be smaller, less profitable and more vulnerable to external economic shocks. SOEs and TMT giants tend to prefer home grown solutions, and private companies have limited budgets for software. Therefore, SaaS companies in China need to embrace a far smaller total addressable market and face a higher hurdle in proving their value propositions to prospective clients.
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Business management style:
Chinese companies are managed by people, not by established process or procedures. Pre-specified procedures vary largely even within the same sector and are easy to sway by sudden changes of mind on the part of managers and regulators. Standardized software is hard to apply to different industries and companies, and requires greater degree of customization. Therefore, Chinese SaaS companies tend to have steady margin much lower than their US counterparties. Besides, many Chinese companies run IT budgeting on projects, and thus prefer Capex and lump-sum purchases over continuous operating expenses. Hence, one of the key benefits of SaaS vs. traditional software licenses, the ability to translate upfront investments to ongoing expenses, is much less appealing in China.
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Ecosystem
: Most US SaaS companies deploy their own IT infrastructures on public IaaS vendors (Amazon Web Service, Microsoft Azure, Google GCP), resulting in lower upfront costs. Interconnection between different SaaS tools can stimulate demand for each other, and frenemies abound throughout the industry value chain. 40% of US VC dollars are invested into software and SaaS IPOs in the recent years have enjoyed decent returns. However, in China, penetration of IaaS is much lower, cloud startups are fighting for one’s own survival, and VC investors are still on a learning curve when it comes to the 2B business.
