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.