While there were many drivers to China’s SaaS B2B market in 2020 – including remote work – adoption of SaaS still hasn’t reached its full potential. Even though the B2B China SaaS market has been growing roughly 30% annually according to CAICT, large Chinese enterprises especially in sensitive industries are in the early stages of leveraging public cloud SaaS, still preferring private clouds. However, small-medium enterprises (SMEs) have been more open to looking at public cloud SaaS when there is a robust product offering. In this article, we’ll take a look at current market dynamics, and what we expect this year.
MNCs in China: A great target for global SaaS providers
While many large Chinese enterprises are still emerging targets for most public cloud SaaS platforms in 2021, we anticipate that MNCs operating in China will continue to accelerate their adoption of SaaS. This will especially be true of SaaS that is tied to a larger global ecosystem such as Salesforce or Microsoft Azure. These companies not only want to bring their China operations into alignment with their global procedures, they also are looking to streamline efficiency as labor costs continue to rise in China.
For global SaaS providers that are weighing whether to enter the China market, an existing client base (in other markets) of MNCs operating in China can be the tipping point to making a market entry investment. As it is basically impossible to provide public cloud SaaS in China without being in the country (for a variety of reasons), Western SaaS providers generally have to make a larger initial investment compared to on-premise or desktop solutions. Having a ready customer base of MNCs can certainly help when justifying that investment.
SMEs are adopting SaaS solutions
The real growth for SaaS adoption in China continues to come from the roughly 32 million SMEs in the country. Over 40% of those SMEs were using SaaS by the end of 2019. CRMs, marketing solutions and finance are among the leading categories of China SaaS adoption by SMEs. Unlike large enterprises, SMEs generally do not have the capability to create and manage their own private clouds, making SaaS a more reasonable option. However, pricing for SMEs can be difficult as many are very price-sensitive in the face of lower-cost (and/or pirated) solutions from local providers. Similarly to large enterprises, they also prefer to make a perpetual transaction.
We should also note that often one of the key requirements for SME SaaS solutions in China is to be either mobile first or highly tied into mobile-based applications and platforms. Many business functions are processed on smartphones in China, and while there are certainly areas where desktop applications are still accepted (data analytics for example) productivity, finance, sales and other SaaS areas are more likely to succeed if they are useful on the small screen.
Large enterprises continue prefer private cloud SaaS
As it sits today, the SaaS model can be challenging for many large Chinese enterprises that have largely adopted private clouds – but that is changing. Until SaaS is more fully embraced by these large Chinese companies, SaaS providers are working around this limitation by installing their solutions in their private clouds. Other China SaaS providers offer desktop versions of their solutions, which can be more attractive to enterprises.
There are two main reasons why private clouds are preferred: enterprises often have their own complex processes and requirements that they are unwilling to bend; and regulatory, security and trust considerations make private clouds a much safer bet for Chinese enterprises. SaaS providers – local or foreign – that want to go after certain large Chinese enterprises are going to have to be comfortable going after custom deployments inside of private clouds.
The pricing model of China SaaS solutions is also a heavy sticking point for many enterprises in China – both large and SMEs. The majority of Chinese companies will demand a perpetual license model, e.g. paying for software once for a lifetime license. Additionally, companies often prefer a company-wide deal and do not want to buy on a per-seat basis. Again, a perpetual license is hard to line up with the subscription pricing model that Western companies and their investors prefer. So even if an enterprise buys a true, public cloud SaaS solution in China, they are unlikely to be “true” SaaS customers as they will not be paying monthly, annually or even bi-annually.
Let’s take a brief look at one high-growth sector in China – healthcare – to see what types of SaaS will be hot in 2021. Healthcare is a good example of different sized customers adopting different types of SaaS. While larger, public healthcare networks in tier-1 cites have implemented healthcare information management SaaS solutions, private healthcare providers are more interested in solutions on the business side of healthcare, including marketing. Moving forward, robotic process automation (RPA) and artificial intelligence applications are likely to gain traction in 2021.
In all, SaaS adoption in many sectors in China is on the rise, and Western providers that are looking for a high growth market in 2021 and beyond should start taking at least their first steps into China soon.
As China’s professional workforce has continued to grow, professional users have become more sophisticated and are very interested in using world-class software for their needs. However, especially for more vertical solutions, many global software companies do not yet offer their software legally in China. Customers are then left with a few suboptimal choices to get the software they want: use a VPN and internationally accepted credit card (still not very common) to download the software from overseas; work with a distributor that may or may not have the legal rights to the software; or use a pirated version (oftentimes without even knowing that China software piracy is happening). This kind of activity could easily lead to thousands (maybe tens or hundreds of thousands) of professionals using your software with no revenue benefit for your company.
In fact, we have run into cases where a pirated software version has been selling in China at the full, legal price! A Chinese company saw the value of the product, hacked the software, and sold it to customers at the global price.
Why would customers pay for a hacked version, when they could buy the real product at the same price? This is where it gets interesting. In one case involving one of our clients, a distributor applied for and was granted a local trademark, which gave them access to software development tax breaks, and then built a Chinese language pack, which wasn’t available in the legal version. It was this Chinese language pack addition that was worth the (pirated) price for end users (English versions also “sold”). Remarkably, the distributor was also policing ecommerce sites and actually taking action against other pirated versions as if the distributor was the real software provider. This was definitely a shock to our client.
Before we tell you how we resolved this situation, let’s look at some reasons that Chinese customers, if given the opportunity, prefer to purchase locally, even if it means paying over the global price!
Chinese users want licensed products
While some global companies are aware of these users through anecdotal evidence or “call home” logs, many software providers are completely unaware that they may have a large, existing userbase waiting for them in China. What is especially important to understand is that most Chinese professionals would much rather be using a fully licensed version of the software on their computers. Among other positives, they understand that licensed versions get updates, offer support and training, and are inline with the Chinese government’s push to reduce piracy. Get them onboard, and you will have a near instant group of brand champions. With all this said, what are some of your options to capture this pre-existing userbase to build a large opportunity?
Fight China software piracy by getting active in the market
First of all, to make any kind of significant progress, you need to be active in the China market. While your level of engagement can vary, at a minimum you need to be able to: offer an easy way for users to download your product; offer payment options that are widely used in China; offer official receipts (this requires either your own entity or a partner’s entity); and offer documentation, training and support in Chinese (and easily accessible with the Great Firewall of China). All of this can be offered without having to go through a full China market entry process if you have the right partner to assist you.
Documentation, training and support will be especially attractive to get existing users of non-licensed software to switch to paying your company, even if your price for a legal version is significantly higher. These users have likely had to figure out how to use your software on their own, either by trying to understand English documentation, or through poor translations. While this doesn’t necessarily have to be hosted on a website within China, we always recommend it. Regardless, an active community of users – and timely responses from your support team – will also be welcomed by Chinese professionals, and will benefit your brand as well as your sales through word-of-mouth.
For both existing China software piracy users that you’re trying to bring over, and for new legitimate users, putting your software download locations inside of the Great Firewall will also help with sales, as hosting outside of China can result in excessively slow downloads or even timing out. Additionally, by offering local payment methods and official receipts, it will be much easier for professional users to expense their purchases.
Legal means have strengthened in China
So what happened in the case above? We are pleased to say it ended well, but it’s important to note that not all piracy situations in China end favorably for the legitimate provider. In this specific case, ADG approached the distributor, and after numerous discussions we convinced them of our seriousness in pursuing legal action to nullify their trademark, as well as other further actions. After several months of negotiations we were able to convince them to work with our client. In exchange for covering some costs towards protecting our client’s trademark (and to continue to ferret out other pirated versions), the one-time pirate agreed to transfer over the intellectual property it had stolen, to shut down its website, and to let our client us the Chinese language pack it had developed. Today, the company is a legal distributor for our client and continues to sell the solution.
So, if you are seeing some sales from China, or know that your products are being hacked and pirated there, this might indicate a real market opportunity for you. Additionally, with the significant inroads the Chinese government has made towards cracking down on piracy in recent years, if you commit to entering the market, you may have a strong likelihood to reclaim that lost revenue, and generate new legal users.
Western companies do not succeed in China based on their technology alone. For enterprise customers, business case, fit, commitment to the market, and relationships are also important aspects to getting a deal over the finish line. For consumers, it’s all about the brand and its associated social validity. In both segments, pricing is often a secondary, and flexible, consideration. Western technology companies that attempt to create a China business entity alone, or through hiring a single person on the ground, cannot reasonably expect to make substantial headway on any of these fronts in less than 18 months at a minimum. There are two main reasons why:
Forming a go to market strategy
After a company makes their first China-related hire, it will usually take a company around 6 months to form a go-to-market strategy and evaluate the competition and opportunity. Even if this timetable is acceptable to a company, it still needs to validate this strategy, which can only truly be done through real business conversations and research with multiple, trusted connections that are already involved in the market. However, this type of engagement with Chinese companies and partners can’t happen yet, because…
You need China business entity in place
Serious conversations – and virtually nothing else – can’t happen without a China business entity and the associated licenses, IT infrastructure, payment systems and a multitude of other operational necessities required to conduct business in China. This includes an in-country website, social media accounts and any other brand-related activities. Companies new to China have to navigate numerous fundamental tasks – not to mention the more complicated and/or unknown obstacles – of setting up a China business entity before they can even begin to implement a strategy. Constructing a China business entity can easily take another 6 months to complete, meaning that – at best – any company entering China on its own won’t even be “in-market” for at least a year. This brings us back to the first point…
Building trust and relationships
As we’ve said, Chinese partners and potential customers won’t begin serious discussions with a Western company until its entity is in place. There are many reasons for this, but foremost is that trust hasn’t yet been built and they won’t be assured that the Western company is serious about China. However, the real business issue for a Western company in this situation is the lack of having – or even being able to build – corporate, brand and personal relationships and trust. Further, there is no predictable timetable for building these connections, so when we say “18 months at a minimum” this is factored into that timetable. While heavy spending can somewhat alleviate barriers to cooperation and acceptance (as in any market), Chinese customers are mainly swayed by social proof and relationships, which can be hard to buy and take time (often years if done from scratch) to generate.
The above scenario is not only likely to be extremely costly, but is also slow and fraught with pitfalls, not the least of which is attracting, hiring and especially retaining qualified and experienced Chinese staff. Many Western companies that have tried this route have bowed out of the market after as little as 1 to 2 years, because their high costs, lack of momentum and competition have all made China unsustainable for them.
Get the right kind of help
Some companies that have set up a China business entity on their own and have encountered inevitable obstacles end up leaning on global management consulting firms to try to help them through. However, these firms – at best – can only offer strategic direction at 30,000 foot level, and not the kind of daily actionable advice that running a business in China requires. Further, these firms do not carry out these directions, instead leaving companies to try to implement them on their own, which again, just slows things down.
What’s more, even companies that have knowledgeable advisors on China – for instance VC investors that have supported other portfolio companies with their China GTM plans – often make the decision to go forward on their own, even knowing all of the above. Why? Because they are generally against the idea of “handing the keys” over to a third party and not completely owning the business, especially when a local Chinese partner is hired. While this is a fair consideration, with a trusted partner and contractual safeguards, companies shouldn’t let this stand in their way of getting needed help to launch their China business entity.
China Singles Day 2020 (aka “11/11”) has come and gone. We’re going to skip the usual “look at the huge numbers” – they are always huge – and instead focus on how it was structurally different in this unprecedented year.
Less hype but more livestreaming
Overall, 2020 marked the lowest hype of any recent China Singles Day in recent years because of the continued impact of the coronavirus worldwide. While China’s economy has been doing better than almost any major economy in the world since it brought the virus under control within its borders, Chinese consumer activity has been one of the last areas of the economy to come around towards pre-pandemic levels. Platforms and vendors seem to have grasped this, and toned down marketing this year around the sales event.
On the other hand, as we’ve seen throughout the year, livestreaming celebrities continued to be a central focus – and driver – of online sales. The demand has been so high for some of these celebrities leading up to China Singles Day 2020, that some outlets used up to 50 additional hosts for one channel!
More time to shop and more platforms for China Singles Day
To both spur more activity and lessen the load on delivery bottlenecks, the largest ecommerce platforms – Alibaba’s Taobao and Tmall, as well as JD.com – started their November 11 China Singles Day sales on November 1 this year. Yesterday, they were joined by many other platforms, including Suning, VIP.com and Pin Duo Duo domestically, as well as some global platforms including Mytheresa, Net-a-Porter and Fartech.
Offline & enterprise continue to jump onboard
Real estate and car dealership showrooms continued to move towards alignment with online sales this year, with over 3,000 real estate projects in over 200 cities working with Tmall for promotions. JD.com and Suning also worked with realtors, with some realtors offering a limited number of apartments for as much as 50-70% off of the listing price.
On the enterprise side, Alibaba’s cloud service, Aliyun, was offering discounts to companies, and we expect to see more of this kind of synergy in the future for enterprise software, IoT, mobile and healthcare tech providers in the future.
Tuya runs one of the largest IoT platforms in China and focuses on smart home and consumer oriented products with a global presence in over 200 countries. With over US$300 million in venture capital, the Hangzhou based company provides its 10,000+ customers a full suite of platform services to help its customers (mainly device manufacturers) quickly bring their products to market.
Tuya’s business model is to partner with chips providers and module makers to develop reference designs that can be easily integrated into devices that will be compatible with Tuya’s ecosystem of partners. Tuya supports a wide variety of technologies including Bluetooth, WiFi, mesh, GPRS and Zigbee — however, only Tuya modules can be used on the platform.
A few large appliance manufacturers in China leverage Tuya’s tech, including TCL and Changhong. Walmart, the Home Depot and AT&T are among its customers in the United States.
Tuya is processing 20 billion device requests and 6 million AI interactions daily, and supports 36 categories of devices.
ADG’s Take on Tuya
Tuya has done an excellent job partnering with the industry by providing it with the tools and integrations needed for device manufacturers to get their products to market quickly around the world. Some of the more sophisticated manufacturers, that have their own technical resources, will often prefer to work directly with their own chip and module vendors. The platform, on the other hand, requires partners to purchase Tuya qualified chips and modules from its partner network to take advantage of its platform.
Similarly, for products that need deep customization, the Tuya model doesn’t work well. Nevertheless, for companies targeting China sectors that are light on resources, and/or are providing standardized products such as light bulbs, routers, security cameras, etc., Tuya can be an attractive partner. On the down side, for products outside of China its security and data management policies remain unclear, and you can find a number of negative reviews of Tuya Smart’s functionality and design on the Google and Apple app stores.
Nevertheless, Tuya has growing influence and is looking for more partners around the world that can bring added security, features and services to its platform. It is no small feat that it can boast Jeff Immelt as a member of its Global Strategic Committee!
Please let us know if you’d like to discuss the IoT market in China further!