|
Taiwan's ASP MarketThe most significant effect of the Internet on markets is the Web's ability to change industry structure and consumer behavior. The information technology software industry is no exception. Software vendors are not only enterprise e-enablers but through the Internet, they can also become Application Service Providers (ASP). By being an ASP, these vendors can not only break through the traditional industry value chain but also build a mutually beneficial relationship with customers, creating a community structure. These ASP application possibilities are the most effective weapons and opportunities for information technology vendors. Based on the survey conducted by US-based Information Technology Association of America (ITAA), more than one-fifths of North American companies are already using ASP. Most use ASP in financial and accounting, customer relation management, e-commerce, and workgroup applications. The greatest effective use is the opportunity to use a technology one notch up. Moreover, it is estimated that within a year, around 18.7% of enterprises will be using ASP while 23.9% will be evaluating its use. This means that by June 2001, the North American ASP penetration rate will be around 40% to 60%. ASP has already become the most important area of the future of enterprise information application. The reason for the spectacular growth of the ASP market in North America is mainly due to three factors. The first is due to the supply side. Close to 90% of vendors in the world are concentrated in North America, offering easy choices for enterprises in choosing ASP vendors. Moreover, the establishment of an ASP association has been effective in educating the market and strengthening enterprise willingness to adopt ASP technologies in their business. The second factor is due to the demand side. Internet startups and high-tech companies use ASP from early on. The third side is due to the business environment. The growth of information systems outsourcing and the maturation of Internet infrastructure are the keys in propelling the North American ASP market from the budding stage to a fast-paced growth. Therefore, to analyze Taiwan's ASP development conditions, this article will first delve into the inherent costs of the whole information application and the level of maturity of the information systems outsourcing market. Later, this article will analyze the domestic market demand and use from the two factors of enterprise applications and product maturity. Lastly, taking the ASP value chain and community view, the article analyzes recent moves by Taiwan's major vendors, market strategies, and competitive advantages. The ASP Infrastructure Since the actual cost of business application use of ASP usually exceeds budget, domestic information systems outsourcing is still in its infancy, and companies lack a multi-functional integration experience, the current state of the country's infrastructure is still not conducive for ASP market development. Moreover, businesses are concerned with security and service quality—both ASP market bottlenecks. Vendors are thus worried about how to urge businesses to use ASP application models. Total Cost of ASP Exceeds Budget Based on the report issued by the Executive Yuan's Accounting Department on personal computer use in 1999 and company yearly budget for IT shows that 70% of businesses have IT budgets less than NT$50,000 per year (see Figure –1). Around 20% of businesses spend between NT$50,000 to NT$300,000 per year. Although 80% of companies use packaged software as their main IT use, most of these software are of the word processing or spreadsheet type. In addition, even if PC use penetration rate is more than 65%, only 16% of the companies have setup a server. This shows that close to 90% do not have any Intranet experience. If the salary of an MIS employee is assumed to be NT$48,000 on the average per month, then 90% of these companies cannot possibly pay for an MIS person for the whole year, given the above figures. It is thus clear that for nearly 90% of these businesses, their IT budget excludes Internet connection fees and also a salary for an MIS person.
Figure –1 Taiwan Businesses IT Budget for 1999 Main Development Methods for Taiwan Business Application Software Purchase of Packaged Software In-house Development Outsourcing Taiwan Businesses 1999 IT Budget Analysis Unit: NT$1,000 Source: Executive Yuan, Accounting Department, MIC/III September 2000
ASP's strength lies in using the Internet to share the burden of IT costs. This means that not unless businesses reach a certain level of IT use, ASP will not necessarily mean costs savings. This is especially true for enterprises lacking Intranet experience since adopting ASP means an additional cost in Internet connection and management fees. Based on current Internet fees that can reach NT$6,700 per month, small and medium scale firms will certainly find the high ASP implementation cost prohibitive (see Table –1). Moreover, looking at an ASP vendor's cost structure that mainly involves Internet connection, database center, software licenses and maintenance/support, the software purchase budget allocated by small and medium scale enterprises is definitely inadequate. ASP vendors are thus in a dilemma of how to attract these companies through low cost ASP services and still make a profit out of it.
Table –1 Comparison of Taiwan and US IT Use from 1999-2004
Source: MIC/III September 2000 Relative Immaturity of the IT Outsourcing Services Market Based on the statistics of the Executive Yuan's Accounting Department, Taiwan's total IT expenses in 1999 was NT$157.2 billion (see Figure –2). From this spending, although NT$42 billion was for information systems outsourcing services, it only accounted for 27% of the total expense. However, since ASP use is basically applications software, its advantage is in daily maintenance and management of systems. Therefore, ASP's potential target market is not necessarily information systems outsourcing service, software development, systems integration, systems planning, consulting and training, and Internet services. In reality, MIC's December 1999 survey on the eight outsourced items of large enterprises such as data processing, desktop PCs, local area network, website management, backup centers, EDI, ERP and total outsourcing, a mere 11% was already outsourced. This shows that Taiwan's information systems outsourcing service market is still in its early stages. Ovum estimates that 70% of the worldwide ASP market in 2004 will be concentrated in the North American region while Internet and outsourcing services will be mostly found in Asia-Pacific countries, most especially in Japan and Australia. Therefore, the information systems outsourcing market is still in its infancy and is ASP's key growth indicator.
Figure –2 Taiwan's Total IT Spending and Outsourcing in 1999 Taiwan's Total IT Spending in 1999 Others Hardware Software Communications Personnel Others Total: NT$157.2 billion Note: Data gathered from July 1998 to June 1996 Taiwan's Total IT Outsourcing Services Spending Software Development and Maintenance Systems Integration Equipment Management Internet Services Data Processing Consulting and Training Others Complete Systems Planning Total: NT$42 billion Source: Executive Yuan, Accounting Department, MIC/III September 2000
Table –3 Bottlenecks of IT Outsourcing by Taiwan's Large Enterprise in 1999 Importance Partner Relationships Management Outsourcing Contract Management Service Quality Management Data Security Management Human Resources Reorganization Corporate Culture Barriers Intra/Extra Organizational Communications and Dealings Source: MIC/III September 2000
ASP Vendors Lack Multi-Functional Integration Experience ASP vendor should have the core capabilities of systems integration, network management and service experience. However, from the background of the companies wishing to offer ASP services, not one has all three of the above requirements. ASP's biggest difference from pervious enterprise application information systems is that integration must be done first and then services are offered through the Internet. The integration work should be migrated from the corporate demand side to the supply side vendor. Therefore, ASP vendors should be able to integrate various resources. In addition, Taiwan's software industry structure is markedly different from North America's. The distinction between Independent Software Vendors (ISV) and Systems Integrators (SI) servicing the business market is not as delineated as in North America. Majority of ISV's also do SI work. Applications software experience is also mainly in-house developed that results in a lack of standard for integrating business applications software. Aside from integration interface of applications software, there is a need to clarify the responsibilities that ASP, ISV, and SI or Internet service providers (ISP) have toward customers. The blurry ASP business model thus has led enterprises to adopt a wait-and-see attitude toward ASP services. ASP Market Demand Generally, simple, standard, and non-key applications are what enterprises think of first when using ASP software. From the local business outsourcing experience, companies are more willing to outsource new applications such as e-commerce or CRM. Therefore, the local ASP market will have to start from being applied horizontally. Local vendors will also enjoy some advantages. In the long run, the front-end application market size will be larger than the back-end application market. Horizontal Applications to Lead Vertical Applications Due to the special characteristics of business IT applications, software can be divided into horizontal applications and vertical applications (see Figure –4). Horizontal applications refer to non-segmentation of software because of special application needs of each industry. The usual types of software under this classification are financial and accounting systems, procurement management systems, human resources systems and IT infrastructure. Vertical applications are application software developed according to the special needs of each industry. Since horizontal application software is usually standardized, for ASP vendors, this means less customized version software, lower support service and training costs. Moreover, vendors can rapidly build a customer base and win a larger market share. Given the sensitivity of doing business and low integration needs, enterprises will thus be more willing to use ASP services. Horizontal application thus will be the ASP market's first foray. Nevertheless, horizontal application software cannot satisfy particular needs of each industry. Vertical application thus will come into the market. To achieve depth and expand coverage of application software, ASP vendors will seek to integrate vertical and horizontal applications, leading to the third trend in the ASP market.
Figure –4 ASP Vendor Market Strategy Source: MIC/III September 2000 Local Products Win Over Foreign Imports The market can be divided based on sales: big North American businesses with yearly income of more than US$1 billion, medium scale businesses with yearly income between US$50 million to US$1 billion, and small scale businesses with yearly income of less than US$50 million. With this classification, if companies with yearly revenues of NT$1.5 billion are considered as large businesses—which in 1999 numbered around 1,200 companies—then Taiwan's industry structure can thus be classified as primarily a medium scale enterprise market compared with the North American industry structure. Taiwan's medium and small-scale businesses can be categorized as equivalent to small businesses in relation to the North American market. Once overseas products adopt an ASP model—when ASP vendors servicing the large scale enterprise market downsize to Taiwan's medium and small scale enterprise market—the differences in industry structure will lead to difficulties for these vendors to make their business take root in the local market. For example, products used in the North American market are unsuitable for Taiwan's medium and small-scale enterprise market. Just by looking at the local ERP demand by medium and small-scale businesses wishing to adopt ERP, more than 74% chose to use locally developed ERP systems (see Figure –5). In this business scale, the trend clearly demonstrates the upper hand local products have over imported products.
Figure –5 ERP Demand of Taiwan's Medium and Small Scale Businesses Not Needed Implementing ERP Application Platform Analysis Planning Stage ERP Software Source by Origin Foreign Local Source: MIC/III September 2000
Front-end Applications Lead Back-end Applications In terms of product, IT applications at the start of the 1990's were mostly back-end support systems such as financial and accounting systems, invoice/order/warehousing management systems, human resources management systems, and manufacturing resource planning (MRP) or MRP II. By the second half of 1997, enterprise resource planning (ERP) was the buzzword. ERP promised to effectively integrate the distributed IT system resources of all the departments within a company. The interest in the ERP market not only propelled Taiwan's IT application technology up by a notch but also signaled a maturing back-end application systems. By the start of 2000, customer oriented front-end applications slowly started replacing the back-end systems role of supporting business operations, becoming a necessary new addition to large-scale enterprises. Based on the maturity of products, back-end applications are mature products while front-end products are newcomers. Looking at the market, the greater dependence of large scale enterprises on information systems technology make them early adaptors. IT service companies thus seek to focus on the large-scale enterprise market and passing over the needs of the medium and small-scale enterprise market. This further widens the IT application rift between the two ends of the market. Nevertheless, the increasingly saturated, large scale, and front-end application market translates to greater chances for front-end application vendors to introduce newer items and stimulate renewed demand from the large scale enterprise market. Competition in the back-end application market for the medium and small-scale enterprise customers will thus heat up whereas ASP is the weapon that big software vendors use to penetrate the medium and small-scale enterprise market.
Figure –6 Taiwan's ASP Market and Application Software Strategy Front-end Application Enterprise Demand Increases, Competitors Few Back-end Application Market Maturity High, Intense Competition Market Maturity Average, Vendor Competition Intense Large Scale Enterprises Medium and Small-Scale Enterprises Source: MIC/III September, 2000
The above discussion shows that when the ASP market is divided based on product and business model (see Figure –6), the market for back-end application in the large-scale enterprise is saturated and highly competitive. Moreover, company MIS staff is already quite familiar with back-end applications. Definitely, ASP vendors will shy away from this market. The local software developers' domain—back-end systems of medium and small-scale enterprises—will be faced with the threat coming from large overseas ASP models. Local software makers have the advantage though of intensive localization experience but at the expense of incompatible systems that may mean the death knell for local makers. Increasing globalization of the industry will put more pressure on software integration rather than localization. Thus, market threats will intensify. In-house IT staff may lack the needed skills to adopt the emerging front-end application market since it is a new IT use. ASP business opportunities will thus figure more than back-end application systems.
Analysis of the Major ASP Vendors Based on the industry value chain, the main companies in Taiwan's ASP market can be divided into ISV, ISP, SI, IT application platform vendors, and pure ASP vendors. Customer-based classification divides vendors into enterprise groups or systems integrators with a customer base and startups without a customer base. These two classifications, industry value chain and customer base, will be used to analyze Taiwan's major ASP vendors. Hinet Adds Value from being an ISP Hinet is the first ISP vendor in Taiwan to offer ASP services, enjoying the advantages of having a complete network infrastructure--adequate bandwidth, equipment facilities, and a data center. Hinet offers ASP services through its HiB2B portal. Hinet's ASP idea is to be a portal site, considering application software as content. Hinet offers a quick online connectivity infrastructure. Currently, product content mainly includes SAP, QAD, Hwa Maw ERP software, and Hwa Feng's financial and accounting software.
Table –2 Hinet's Main ASP product offering
Source: Hinet, MIC/III September 2000
Origin Counts on Superior Service Although ISPs and service vendors have joined up to penetrate the ASP market, this is not something new since, for example tie-ups have been made between KPMG and Qwest, Deloitte and Sprint, AC and GTE (ServiceNet), and the joint venture of PWC and Telstra Telecom. Origin's strategic partnership with Hinet is the first case of a local ISP cooperating with a big overseas IT service firm. Origin has the advantage of being a mature application software developer, a deep talent pool, and extensive large-scale network platform management experience. This is more apparent in the ERP software market where it stands level with SAP, QAD, and BAAN. In addition, workgroup software from Lotus also has a foothold on the local market. Origin though has no experience with the local medium and small enterprise market. And whether or not big application software will suit the medium and small-scale enterprise market will be a key test for Origin.
Table –3 Origin's Major ASP Product Offering
Source: Origin, MIC/III September 2000
Dinghsin Computer's Domain Advantage Dinghsin, both with strong ISV and a systems installation experience, is not only the local leader in Taiwan's ERP market but also a pillar for the domestic manufacturing and logistics industry. Dinghsin's main ASP strategy is to form alliances. In an ASP's industry value chain, the company takes on an ISV role, offering ASP vendors a necessary ERP product. Dinghsin's advantage--aside from a localized product—is having a broad customer base from large to small-scale enterprise, domain know-how in the manufacturing and logistics industry, and a comprehensive customer service system. Such advantages offer great potential for developing its ASP business. The company's weaknesses lie in a lack of network management skills and experience in fast-track integration of application software.
Table –4 Major Product Offering of DingHsin Computer
Note: Redevelopment to adopt to Yu Meng's ASP integration platform Source: DingHsin, MIC/III September 2000
DongChie Looks to Business Groups as its Customer Base From Teco Group's MIS department, DongChie spun off to form an information services company. Aside from offering an e-business solution for the Teco Group, DongChie has also made moves to establish itself in the local information systems outsourcing market. Teco's e-business experience has helped the IT service company find a niche in the e-enterprise market. The successful transformation of Teco's MIS group enabled the business conglomerate to have an effective partner. DongChie's biggest advantage is its mother company's lead in the industrial and home electronics industry. From a workgroup point of view, DongChie has thus a comprehensive distribution and customer base. The information services provider has not only sped up and effectively upgraded Teco's e-business, it has also strengthened the competitive advantage of Teco in the industrial and home electronics industry and in the supply chain system as well. By entering the market with a distinct vertical application orientation, DongChie has made use of its customer base and community clout—traits that make DongChie stand out from the rest. However, the company is burdened by the uncertainty of whether or not medium and small-scale enterprises can also use large enterprise application software. Mutually competing firms do not use the same ASP vendor.
Table –5 Major Product Offering of DongChie
Source: DongChie, MIC/III September 2000
HeHsun Develops its Own Application Software Among the local ASP startups, HeHsun specially develops its own products for the medium and small-scale enterprises, allowing for increased expandability, integration, and adaptability. HeHsun has made its own ERP and workgroup software by taking IBM San Francisco software as its base and looking at Oracle and Lotus application structure. The company enters the market through the horizontal application level. By configuration and customization, HeHsun has managed to lower staffing and ASP service costs and thus the company has chosen to develop its own software. Its customer target from early on was the buying and selling manufacturing industry. HeHsun's weakness is that it lacks real market competition experience and brand name recognition. How to attract medium and small-scale enterprises and build a customer base to use its applications software will be the company's greatest challenge.
Table –6 Major Product Offering of HeHsun
Source: HeHsun, MIC/III September 2000
YuMeng Integrates Popular Local Brands From the industry value chain point of view, the ChingYe Group, Microsoft, and Compaq joint investment on YuMeng created the country's strongest ASP startup. YuMeng enjoys the advantages of having an abundant resource of software, hardware, and SI. Microsoft's .NET plan that calls for a US$2 billion investment in three years to promote an ASP product has given YuMeng a head start in office automation and workgroup software targeted for the ASP market. Compaq's hardware and information systems integration experience has shortened YuMeng's network management learning curve. ChingYe Group's domain know-how of the financial industry gives YuMeng a solid foundation in the ASP market by promoting enterprise financial management systems and customer service standards. YuMeng is distinguished by its self-developed ASP platform and integrating local brand name application software. Its main weakness is a lack of customer base and attracting power. Future challenges lie in how to manage a diverse and complex strategic partnership.
Table –7 Major Product Offering of YuMeng
Source: YuMeng, MIC/III September 2000
Hwa Feng Offers an ASP Management Platform Computer Associates (CA) and Acer Group's investment on Hwa Feng formed an ASP startup that offers both ASP and ASP platform solutions. Aside from helping ISV's an ASP business, it also introduces an Intranet management platform—Hwa Feng's target market. CA's worldwide ASP market installation and its complete enterprise management software product gives Hwa Feng a clear advantage in network management packages. Moreover, Acer Group's strength in the software industry and abundant resources also gives the startup a head start in the local market. However, Hwa Feng is weak in integration of various applications software and attracting a broad ASP customer base.
Table –8 Main Product Offering of Hwa Feng
Source: Hwa Feng, MIC/III September 2000
Conclusion Summarizing the above discussion, the Taiwanese ASP market is in its nascent stage. Vendors still do not have a fixed standard and enterprises are adopting a wait-and-see attitude. The most pressing consideration is the high cost of bandwidth and Internet use. In the future, the local market will enter the key indicator of a growth phase, including the startup of operations of fixed network entrants that will solve the bandwidth problem and lower Internet fees. The formation of an ASP alliance and the education of the market on ASP will push for the establishment of fixed industry standards, thus galvanizing business confidence on ASP solutions. The shortage of MIS staff faced by many companies will be a blessing in disguise for ASP vendors since medium and small-scale companies will find their information systems requirements solved by ASP. A strengthened computerization translates to competitive strength for Taiwan. Thus, it is to the government's best interest to support the ASP industry. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
