The big picture - China's tech scene

The Tang dynasty period (618AD-907AD) is still said to be the golden age of Chinese culture. The Tangs created a strong economic environment and forged diplomatic relationships with foreign countries. People learnt foreign languages and creativity was encouraged and well-respected.

Some people compare those times with what China is gearing up to today. With 1.3 billion people living in a land that stretches more than 5,000km east to west, China's GDP was $2.3tr in 2005 and is growing at about eight per cent per year, the Chinese government says. The difference is that this time round the country is developing over a much shorter time frame. (Click here to see a timeline of tech achievements in China over the past 21 years.)

A common mistake when talking about China is to assume its entire population is driving the economy - "the billion people market", it has been called - but this is just a myth. Engaging the wider population may take years or may never even happen.

Much of the country is still underdeveloped and in poverty. It is home to 18 per cent of the world's poor, according to the World Bank. Currently more than 200 million people in the country still live on less than $1 per day and the World Bank is giving assistance to many areas, particularly in the west, it says.

So when experts talk about the technology economy in China, they are talking about a much smaller number of people who live in a few mainland large cities on the east coast such as Beijing, Dalian, Guangzhou, Shanghai and Shen Zhen as well as the island of Hong Kong where huge numbers of people live in densely populated areas.

For example, the internet population is only a fraction of the size of the population. Government figures suggest there are about 110 million internet users (less than one-tenth of the population) in China, about 60 per cent of whom have broadband. Although that is a small proportion, the absolute number is still high and the IT industry is contributing to a large part of China's growth.

Keli Liu, a renowned economic analyst and group editor-in-chief for CNET Networks China, says: "One-sixth of China's GDP is made up from the infotech industry which means it's a mainstream source of revenue in China." (CNET Networks is also the publisher of silicon.com.)

She adds: "From 2003 there was a boom in demand for consumer products mainly because of the changes in property laws in 1999 and 2000 where people could take out mortgages. The first developments were ready for move-in in 2002 and in 2003 people started to fill their houses with consumer electronics, such as digital cameras."

The rate of development in the Chinese tech world has been extraordinary. Just eight years ago the country produced no mobile phones but by 2005 it churned out 300 million handsets.

Liu says: "Out of all the IT products the fastest growing are mobile. In China there are 400 million handsets. Mobile phones and the wireless economy will be what drive China's progress. China's usage of wireless, such as PDAs, computers and mobile phones, has exceeded the US by five years.

"This is unique and it's a huge turnaround. China is very different from Europe in that sense. In Europe the development of 3G has largely been for business. In Japan it's for entertainment and in China it will be too. We are definitely behind Korea though - we have not had 3G licences [issued] yet."

But Kishore Suratkal, regional technology sector head of Macquarie Bank in Hong Kong, disagrees - he says mobile phones in China have had their day of fast growth.

He says: "You already have 400 million mobile phone subscribers. There's already been a mobility phase. There will now be incremental growth. In China and India the first phase [of adoption] was huge and rapid. It will take a lot of convincing to get more people onto a mobile."

Software is also making big waves in China. There are just over 13,000 software companies in China. In 2000, $400m-worth of software was exported from China. In 2005, that figure was $3.59bn and it will be $12.5bn by 2010, according to China's Ministry of Information Industry.

Liu says: "China-produced software can be broken down into four big sectors - HR, finance, education and tax. But of the software market, the fastest growing industry is games so the biggest market for internet cafés is in China.

She adds: "There are so many purchases of computers per year because of internet cafés - around four million - and it's the fastest purchase cycle in the world. If the average price is [Chinese yuan renminbi]5,000 [$500] per unit, the total of units sold per year is RMB2bn [$200m].

Overseas branded PCs have lost their appeal, says Liu, so it's locally branded ones that are mainstream. A local PC costs two-thirds the price of an international one, and has a higher spec.

Liu says: "Intel supports a lot of development in China so the refresh rate is very fast."

Suratkal also believes China is focusing on an internal market before looking at a global one. As a result, industries such as business process outsourcing (BPO) may fail to take off.

Jichang Guang, director of outsourcing for Tsinghua University and CEO of Startech, a software outsourcing company, agrees. He says: "China probably could do some things better in specific areas. Not in BPO. China has a disadvantage with the language. But on the other hand - R&D in embedded software or mobile phones - China is very strong."

According to data from Liu's book Tech shift in China - joint venture heroes and chip-driven change, the government buys about a third of all IT products, enterprises buy another third and consumers buy the rest.

She says: "Operating systems and databases are still made by overseas companies. But I think China's growth can be sustained for another 50 years because there are around one billion farming. The last battle is in the rural areas for PCs and mobile phones."

Internet penetration for big cities is nearly at 100 per cent. Network companies are now targeting second-tier cities.

Looking to the future, Liu says: "I don't know how China will develop but it will not be like India or the UK. The biggest problems are pollution, unemployment and domino-effect debt."

Suratkal agrees that there will be growth in the technology economy but it will be much slower than many people imagine. His company is hedging its bets on infrastructure.

He says: "There will be growth but it'll be at a slower pace. If they don't realise that, there could soon be a bubble situation. The reason is that China's still in the early stages of growth. You are still seeing infrastructure growth. In that early stage there is PC and mobile adoption but the next big demand for phones is when tech reaches the rural market."

But research from the World Bank shows a steady rate of growth for 20 years. In 1985 average income in China was $280 but by 2005 it had risen to $1,290. China contributed one-third of global economic growth in 2004.

The end of the Tang dynasty occurred when the regions in China became powerful enough to start to govern themselves. Comparatively, in economic terms, that's a long way off happening in modern-day China. So perhaps there is room for a little more growth. Or a lot.

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China's tech timeline: 1985 to 2006