1. Information Technology and E-commerce Opportunities in China June 5, 2003 Jeff Rohlmeier Tu-Trang Phan U.S. DEPARTMENT OF COMMERCE Office of IT and E-commerce

2. AGENDA I. China market research trip – Jeff and Tu-Trang II. IT market overview, policy environment, and market opportunities – Tu-Trang III. E-commerce policy environment and market opportunities – Jeff IV. Bilateral and Multilateral Cooperation – Jeff and Tu-Trang V. Conclusion/Discussion/Q&A – Jeff and Tu-Trang

3. I.INTRODUCTION ExportIT China Report www.export.gov/infotech/ June 2002 market research trip –Cities visited: Beijing, Shanghai, Xian, 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

4. OTHER ExportIT REPORTS MARKET(S)RELEASE DATE Spain and ItalyJune 2003 France and GermanySeptember 2002 BrazilAugust 2002 JapanMay 2002 ArgentinaApril 2002 MexicoApril 2002 Hungary and Czech RepublicApril 2002

5. II. OVERVIEW of the CHINA IT MARKET and POLICY ENVIRONMENT

6. FACTS & FIGURES Population1.3 billion Economic Growth Rate8 percent GDP, 2002$1.3 trillion GDP per capita$1000

7. CHINA IT MARKET IN 2002 Worlds 2 nd largest IT hardware producer 3 rd largest electronic component and equipment producer 2 nd largest PC market Fastest growing telecom services market –Largest number of wireless and wire line subscribers

8. CHINAS 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

9. 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

10. POLITICAL DEVELOPMENTS National Peoples Congress met in March 2003 means new leadership New Minister of Information Industry – Wang Xu Dong

11. Politburo Standing Committee PositionOld LeadershipNew Leadership President and General SecretaryJiang ZeminHu Jintao PremierZhu RongjiWen Jiabao Communist Party Affairs ChiefZeng Qinghong NPC chairmanLi PengWu 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 RuihuanJia Qinglin Central Commission for Disciplinary Inspection Wei JianxingWu Guanzheng Politburo Standing Committee MemberLi LanqingLi Changchun

12. AGENCIES RESPONSIBLE FOR IT POLICY

13. IMPACT of WTO ACCESSION 1. Chinas 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.

14. 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.

15. WTO AGREEMENTS Name of AgreementTime Frame Commitment ITAUpon Accession TRIMSUpon Accession TRIPSUpon Accession TBTUpon Accession GPAObserver Status Telecom ServicesPhase-in Schedule

16. China has become the worlds second largest producer of IT hardware. Source: JEITA, The Yearbook of World Electronics Data, EIAK, MIC, November 2002

17. Source: IDC, 2003 IT MARKET in A/P and CHINA, 2002

18. 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

19. U.S. TRADE with CHINA in COMPUTER EQUIPMENT and PERIPHERALS Source: Official statistics from the U.S. Department of Commerce, the U.S. Treasury, and the International Trade Commission.

20. CHARACTERISTICS of the SOFTWARE MARKET Less than 1/6 of the IT market ($2.1 billion – IDC). Chinas 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.

21. 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

22. CHARACTERISTICS of the INTERNET MARKET 59.1 million users by January 2003 (CNNIC) –2 ND 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

23. OPPORTUNITIES in IT 1. Informatization to promote industrialization. 2. Go West campaign 3. Chinas accession to the WTO 4. 2008 Beijing Olympic Games

24. 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).

25. 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).

26. Electronic Commerce (continued) Nevertheless, despite the challenges faced by Chinas e-commerce sector, there is reason to be optimistic. Some observers estimate that Chinas 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.

27. 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).

28. 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.

29. Electronic Commerce (continued) Factors inhibiting further growth in Chinas 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.

30. Electronic Commerce (continued) Business-to-Consumer E-Commerce (B2C): –Only a small number of the countrys 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.

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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

37. Electronic Commerce (continued) Digital Divide: –Large cities account for over 30 percent of Chinas 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.

38. 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.

39. 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.

40. 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.

41. Electronic Commerce (continued) Data Privacy: –No legislation that would provide the countrys 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).

42. 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 governments 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.

43. 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. –Chinas 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.

44. IV. Bilateral and Multilateral Cooperation on ICT issues: E-commerce Ministry of Commerce represents Chinas 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

45. V. Questions? Comments? Tu-Trang Phan Senior Analyst U.S. Department of Commerce International Trade Administration Office of Information Technologies & Electronic Commerce (OITEC) PH: (202) 482-0480; FAX: (202) 482-3002 Tu-trang_phan@ita.doc.gov Jeff Rohlmeier Senior Analyst U.S. Department of Commerce International Trade Administration OITEC PH: (202) 482-0343; FAX: (202) 482-5522 Jeff_rohlmeier@ita.doc.gov