China faces post-Olympic slump

With the Beijing 2008 Olympics over, increased attention has been given to the after effects that the event will have on the Chinese economy and, in particular, on the rapidly growing manufacturing sector. While other host countries such as South Korea (Seoul), Spain (Barcelona) and Australia (Sydney) saw a slowdown in economic growth after hosting the Olympics, the impact on Beijing and China is less clear cut due to the country's status as an emerging economic superpower. In Datamonitor's opinion, after the Olympics have ended, China's manufacturing industry will continue to slow as the business outlook within the manufacturing industry darkens.

In some respects, the Chinese economy has been slowing for some time now, with a marked increase in inflation one of the key indicators. Appropriately, the Chinese government made fighting inflation one of its top priorities for 2008, with somewhat less regard given to the impact on economic growth. This position has changed recently to mimic that of more developed countries, where strategies have been adopted to target sustainable growth while keeping inflation under control. The post-Olympic effect identified in the majority of the last 12 host economies will, in Datamonitor's opinion, compound this slowdown. Indeed, economic growth in China is expected to drop from 11.4% in 2007 to less than 10% in 2008.

Waning demand

In the manufacturing sector, the demand for Chinese exports has waned in recent months as Western customers face the pressures of the global credit crunch, increased fuel and energy costs, and weakened domestic demand. At the same time, Chinese manufacturers are under increasing pressure from higher production costs, power shortages and a scarcity of credit.

Recent research conducted by Datamonitor suggests that, while remaining slightly positive, the outlook for IT over the next two years has weakened within the Chinese manufacturing industry. Datamonitor believes that a weakening global economy, the slowdown in the manufacturing sector, and the traditional post-Olympic slowdown seen in host economies, will result in a reallocation of IT budgets within Chinese manufacturing companies. As seen with Western manufacturers, Datamonitor expects Chinese companies to shift the focus of their IT investment away from revenue generation strategies towards more cost-centric technologies.

While almost all technologies could be seen as cost-centric in some sense, Datamonitor believes that Chinese manufacturers will give a greater share of their IT budgets towards IT infrastructure such as server hardware, virtualisation technology, and other consolidation initiatives. Similarly, Datamonitor expects that core enterprise applications such as enterprise resource planning will continue to receive significant attention, as Chinese manufacturers look to enhance back-office processes such as finance and accounting, and drive standardisation.

Accordingly, IT services that are aligned with these disciplines will retain their priority. There will still be investment made in supply-chain technologies, however the 'pull through' created by Western customers demanding specific functionality will decrease in line with falling exports and global demand.

Wage growth expected to slow

Conversely, Datamonitor believes that there will be a decreased focus on automation technologies such as distributed control systems. A large component of automation technology demand has been spurred on by a rapid increase in the cost of labour; however, given the slowdown in the Chinese economy and the rapid rate of internal migration, the growth of wages is expected to slow. While automation will remain a key strategy of Chinese manufacturers, Datamonitor believes that the attention given to it will lessen. Enterprise applications that are seen as non-core, such as product lifecycle management and certain analytics, will receive less investment priority from Chinese manufacturers as the initial costs of implementation are seen as too financially risky in the short term.

As a result of changes expected in the allocation of IT budgets within Chinese manufacturing companies, technology vendors will need to adapt their go-to-market strategies to ensure that key pain points are targeted by their solutions and services.