I recently got back home to China, after years working overseas in venture capital. I’ve spent much of this time focusing on software-as-a-service (SaaS). So I’ve been asking myself a question: Where are China’s giant SaaS companies?
While the US has Amazon, Facebook and Google, China has Alibaba, Tencent and Baidu. While the US has Salesforce, Adobe and ServiceNow, China… well, China has no equivalent.
When I talk about Software-as-a-service (SaaS), I mean it to be both a licensing and a delivery model: software that is charged on a recurring basis and hosted in a multi-tenant cloud. Salesforce, Workday, and ServiceNow are SaaS, while Microsoft Word is just software. Not all software is SaaS, but increasingly the two words have become interchangeable, particularly in the Western business environment among a new generation of software.
Lillian Li recently returned to China after working at Salesforce Ventures and Eight Roads Ventures in London.
A version of this article originally appeared in Lillian’s new longform China tech newsletter, Chinese Characteristics.
In China, mass SaaS adoption has the potential to address many of the country’s workplace challenges. From a macro perspective, the end of the demographic dividend—in which the working-age population is greater than the population that does not work—will result in rising labor costs. SaaS can help bridge the labor gap by automating workflows and increasing the productivity of workers. As Covid-19 has triggered short-term demand for remote work, digitized workflows will prevent the virus, in the event of a resurgence, from wreaking weeks of lost productivity and income.
Chinese SaaS today
As a baseline, here is a chart of the 20 biggest US tech companies by market cap on August 29th this year: enterprise companies account for 55% by numbers and 40% by value.
Most of the enterprise companies are SaaS or something very close to it.
In contrast, here is a chart of the 20 biggest Chinese tech companies by market cap. Enterprise companies account for 30% by numbers and 3% by value. There are no SaaS companies among them.
The SaaS companies are not hiding in the private market either. Here are the top 20 companies on the latest Chinese unicorn list from CB Insights (Ant Group was spun-off Alibaba, so it is not shown here):
While one might argue that there are big SaaS companies, these are all housed inside mega-corporations like Alibaba and Tencent. Aliyun, alongside the other cloud players such as Tencent and JD, are Platform-as-a-Service providers similar to Amazon Web Services: you need to build other SaaS applications on top of them for these platforms to achieve their full potential. For example, I can’t use Aliyun to do my taxes off the shelf per say, but if my data was stored in the cloud I can definitely utilize a SaaS offering to perform the task more quickly.
The strategy of software like Dingtalk, Lark, Wechat Work, and others is to attract users and lock them into the parent vendor, rather than behave as platform-neutral offerings which prioritize user needs. From this perspective, I think it’s good that Alibaba and others are educating the market on how software can be useful, but this may create long-term problems for the SaaS market if it reinforces the impression that software should be free.
Estimates for the Chinese SaaS market range from $3.7 billion to $6 billion for 2019, less than 6% of the total world SaaS market. In the chart below, compiled by Bain & Company, we can see that China lags behind the developed world on investments in IT relative to its size.
What’s stopping SaaS adoption?
For Chinese SMEs, which account for roughly 60% of China’s production GDP, adopting SaaS is not an intuitive decision. Historically, cheap labor in China has meant that manual execution is still feasible for most tasks, and automating or documenting through software is rare. Coupled with this, Chinese SMEs generally do not have sufficient cash reserves to invest in systematic upgrades. When they do have the investment capacity, the ubiquity of software piracy in the 2000s has left a general lack of desire to pay for software. Many companies often do not see the value in utilizing software.
This mindset makes SaaS adoption in China particularly hard. Well-capitalized mid-sized firms are traditionally the takeoff point for SaaS companies in both the US and Europe. Without this firm client base to build upon in China, many SaaS companies must try marketing to more challenging enterprise customers straight away.
For Chinese enterprise companies, paying for software is not an issue, but the sector faces serious problems with cloud adoption. In a report on cloud adoption in China, McKinsey notes that as Chinese companies typically have less advanced technology stacks. Cloud migration is complicated and costly as they must typically create the hardware and software needed for the shift. As a result, public cloud vendors in China can’t claim that their services will reduce IT costs, at least over the first few years of migration, as they do in other countries. Even when companies manage to migrate to the cloud, they still face many concerns around the stability and security of a public cloud. Most opt for a private cloud or hybrid cloud deployment.
Another obstacle is demands for high-level customization. Most Chinese SaaS companies have difficulty with their customers’ convoluted internal company structure, processes, and workflows. This not only makes customisation highly time-consuming, but also doesn’t allow for much re-use of the work for other clients. For SaaS startups, the typical dilemma is between customizing to earn actual revenue, or focusing on features that everyone can use.
This is a challenge faced by SaaS providers in all markets, but China is an extreme case of no overlap between customisation product features and standardised product features list for most companies.
For example, three factories in the same industry will have different workflows internally to monitor the quality of their production line. In buying a production monitoring software, they would expect the product to reflect their respective workflows rather than change their processes to a more standardised one. On top of that, one will have in-house legacy systems built on old code that they want to port over to the new system, another might want to have a visualisation tool customised with their brand aesthetics and specific metrics (even if the software vendor doesn’t provide visualisation tools and had no plan to), the list of requests goes on and on. Many investors have complained that most Chinese enterprise SaaS companies are IT consulting services in disguise.
Other hindrances to SaaS adoption—including the inclination to build in-house, distrust of public cloud services, and even the lack of talent in scaling Chinese SaaS companies—reflect a SaaS market in its early stages, rather than a mark against the Chinese market in particular.
Based on the observation that enterprise startups tend to follow consumer startups, I would order the China, Europe, and US tech ecosystems as follows:
While adoption hurdles can be complicated, the advances made by western startups have shown that the issues can be solved with time. VCs who have traditionally focused on consumer startups and were chasing the hyper-growth model that allows for quicker returns to investment (or death) have started to look for new opportunities. I frequently see Chinese commentators complain that since 2015, consumer startups have been yielding diminishing returns to capital. VCs have also started to focus more on the enterprise software segment and will hopefully have more patience for the longer timeline that business-to-business startups take to reach scale.
Many Chinese SaaS offerings like Bytedance’s Lark are incredibly comprehensive in functions, but they lack a killer feature (like Roam Research’s bi-directional links) that sparks joy. In trying to be all things to all people, these SaaS offerings often appear as pastiches of successful western startups, and they don’t account for the Chinese market’s nuances. China’s SaaS startups and consumer corporates are still trying to figure out issues like how to meet crucial needs and how to manage customer success in the Chinese market context. The lack of a quick feedback loop from a client base doesn’t help either.
The state of play of Chinese SaaS may seem dire, but there’s reason for hope. A lot of the influences mentioned are waning (such the end of demographic dividend will mean increasing labor costs in the future). At the same time, new trigger points have emerged as COVID has accelerated the adoption of cloud and remote working, and opportunities have arisen as the government has made a push for cloud adoption.
One Chinese SaaS company—Agora, which enables developers to add HD interactive broadcast, voice, and video—recently saw a successful recent IPO; it boasts a current market cap of $4 billion—a sign of things yet to come.