[T-Edge Innovation] Quanshi’s Chen Xuejun predicts SaaS will become a hundred billion RMB industry in China

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(Chinese Version)

Information creation doesn’t need to depend on people; in the future, everything will be interconnected. When information is broadcast quickly enough, there is no point in managing it. The key to the SaaS sector’s success lies in the ease of use and manageability, whereas the traditional B2B software is complicated and difficult to use. These days, China’s innovation environment is steadily improving, but this has made us all a bit too optimistic about start-ups and entrepreneurs. When you’re the underdog and nobody pays attention to you, you want to persevere.

At the T-Edge Innovation Conference, TMT and Business Value brought together the top innovators from China and the United States. The first summer event (click here for quick registration: “http://www.tmtpost.com/event/t-edge/2015summer/”) will be held at the end of May, with annual meetings being held each year in December. The first stop for the first forum of 2015 is Shenzhen, a city with closest and most active contact with Silicon Valley. Shenzhen is also the first stop on the tour for the BT Awards, which selects China’s most large-scale scientific and technological innovation projects. We have invited seven speakers to the preliminary forum discussions currently taking place in Shenzhen, heavyweights hailing from the forefront of innovation in Silicon Valley, the investment community, and the business community. The event has attracted hundreds of entrepreneurs and innovators who are in attendance.

(The T-Edge Innovation Conference is heating up. Click on our live microblog to keep up with the latest exciting content.)

TMT quote: SaaS is really hot in America. It’s garnered some attention in China, but far less than in the United States. At the moment, the Internet in China and in the US is pretty similar, and SaaS is the biggest area of difference in the Internet sector between the two countries. According to Chen Xuejun, CEO of China’s premiere SaaS business, Quanshi (which created G-Net), SaaS has very high efficiency in information transmission. Chen believes that SaaS is essentially the Internet. In the future, the SaaS (software as service) sector in China might be valued in the hundred billions (RMB)—this is already the reality in the United States. The main reason SaaS is replacing software is because the Internet allows information to be manufactured and broadcast more quickly than ever before.

10 years ago, if an entrepreneur wanted to set up an online meeting, no one would believe it could be done. I think that was a painful problem, because if I think of myself as a boss with my own business, I wouldn’t want to make all those people come to one site for a meeting. The cost is too high and the efficiency too low. In the US, 75 million people use this. There are so many people in China, SaaS really creates value and saves a lot of time.

The SaaS sector has been working hard to develop over the past 10 years. Ten years ago, everyone thought that there were three reasons why a company might purchase SaaS to use Internet services rather than software: its low cost, reducing hardware and operation investment; its low risk and high degree of safety; and the company’s own inability to operate the software. Ten years later, however, Chen Xuejun has his own understanding of the sector:

You don’t need to depend on people to create information; in the future, everything will be interconnected. When information is broadcast quickly enough, there is no point in managing it. The key to the SaaS sector’s success lies in the ease of use and manageability, whereas the traditional B2B software is complicated and difficult to use. These days, China’s innovation environment is steadily improving, but this has made us all a bit too optimistic about start-ups and entrepreneurs. When you’re the underdog and nobody pays attention to you, you want to persevere. SaaS is a good industry, and China will definitely produce many successful companies.

The following is the transcript of Chen Xuejun’s speech at the T-Edge Innovation Forum in Shenzhen, transcribed by TMT editors.

I am very happy to be able to share with everyone here in Shenzhen. This topic is a little bit big. SaaS means Software as a Service, and it’s really hot in the United States. What’s the market behind it? Our former IT industry focused on two sectors, hardware and software.  The software sector in the United States is already in decline. Why do we need to buy software? We eventually want to get results. SaaS is software as a service, which is the new definition given to the industry in the US. In the last three months, five venture capitalists in the US predicted the future for 10 sectors, and three out of these ten were ranked most promising, including the health care sector. Ranked first on the list is the subject of our talk today—business software.

Of these 10 industries of the future, the industry that is most likely to be subverted is also the largest industry, and that is business software. The reason is very simple: in the past few decades, people who use software to make business decisions were IT managers, e.g., software sales people or sales managers, not users themselves. We’ve been dealing with the most annoying software for our entire life, because whether we like it or not, when it comes to which accounting software to use, it’s the financial people’s call. But this entire set of affairs has been overturned in the United States today. As practitioners working in the software industry, the people most familiar with the industry, we have to recognize that it is already marching towards its end. In the future the SaaS sector in China might be valued in the hundreds of billions. This is already the case in the United States.

I’ll give an example. Today, my largest SaaS company is CRM. When I last went to the US, I saw an accounting software, SaaS-based. I think there are two industries that SaaS has trouble entering. One is accounting, the other is ERP. While in America, I saw American SaaS accounting software. I asked them about the market share for accounting software. They said in about three years they will hold about 30% of total market share. What’s the main reason businesses use the Internet for accounting? The reason they gave is one I hadn’t considered. I don’t think anyone here would consider it. They said it was security. I really didn’t understand this. We’ve always thought that a company’s internal accounting figures are secure, but that once they are put on the Internet they couldn’t be secured. But he said something that finally made me understand. He said, “Mr. Chen, do you give your money to your wife, or do you put it in the bank?” I said of course I put it in the bank; I couldn’t give it to my wife.

The thing we have to remember is that every time a company’s core intellectual property or core financial data are lost, the reason is usually an internal one. In the past 20 years, how many times have losses like this been resulted from the sharable cloud? Very few. In fact, the most important issue, which seems very strange to us, is that SaaS is more secure. Of course this has many, many reasons. We have seen in many areas, for example in HR, where SaaS companies have now surpassed software companies. I believe that in a few more years, the software industry may be completely gone. In June of last year, the CEO of GE sent out an email that said “We’re not buying another piece of software.” The impact that this has on the software industry is enormous.

I have been working in SaaS for about 10 years now, when our understanding of SaaS was in its early days. A consulting company taught me why SaaS is successful. Why do businesses use SaaS for Internet services and not software? The first reason is cost. When companies purchase CRM or financial software, I have to buy software or hardware, find someone to operate and maintain it, and servicing is 25% of fixed invested assets. It’s cheaper to use services. The second reason is risk. The third is a question of the ability. The company’s ability to operate its software is poor.

My thinking on this has changed today. I think the success of SaaS is related to these things, but it’s not the most direct reason. I’ll give two examples.

The first example is of a CFO entrepreneur of a listed company. I think this guy will definitely succeed. Someone who makes angel investments should really invest. He’s created a repayment service. Two problems need to be resolved. The first is that his company has 5,000 people in sales, all of who want to borrow money for business. Finance is really annoyed by this, because there are so many procedures to borrow money. Repaying money is also annoying, because of the procedures too. Borrowing money is annoying, and repaying is difficult. Today this guy had lunch with a guest and spent 1500 RMB—I see that and have no idea whether it is true or not. He has a clever solution to the problem, which is to distribute company credit cards. Every employee would have a company credit card, and the information transmission is really fast. For example, if I have lunch out with my wife this afternoon, and we finish lunch at noon, that information will go through the bank’s credit card center and end up in my boss’s hand at noon. The sales don’t need to be refilled, as they have already passed through the bank. And this also gives my boss my location information, where I got in and out of the taxi, because I use credit cards to pay through taxi apps. When information is fast enough and accurate enough, you have already eliminated the need for management.

I think these are the main reasons why SaaS is doing away with software. First of all, with anything related to IT, there are really just two objectives: manufacture information and transmit information. The traditional way to manufacture information would be to have people do it, but this is too slow. Today, we don’t have to rely on people to create information anymore. As long as you are consuming as you go about your daily life, the Internet can pull out information about your actions and activities. Your effectiveness in producing information is really high, and the Internet records your information, transmits it—so why would you need to fill out information? The efficiency of information creation doesn’t need to rely on human beings, and in the future all will be connected. In the past, we thought you couldn’t hook a table up to the Internet. Now you just need to charge the table and connect. It’s scary; all our actions are recorded.

I asked the creator of this company why his company is worth 45 billion. There is very little sales software in China that surpasses 20 million, and I asked him why this is the case. He said it’s difficult to go against entrenched ideas. My idea is to help sales succeed. What does sales success depend on? It depends on information. For example, say that today I have 100 sales, that make 10,000 customers. Data can tell me who those potential customers are, because the competitors for those 10,000 customers are all your potential customers. The Internet can tell you where they are and what they’ve been up to recently. The only thing I worry about is that this will cause people to lose their jobs. Big data is really scary. We don’t need people to manufacture information, and information can drive people to work.

SaaS has really high efficiency in transmitting information; SaaS is essentially the Internet. In the past, information was stored in the traditional Local Area Network, even accounting and reimbursements. Because when the organization of your company becomes increasingly decentralized, like the building blocks that we were just talking about, you don’t necessarily want to manufacture your own. You don’t necessarily want to do your own design. A business is an ecosystem. You don’t have to possess everything yourself, because the ecosystem is connected to its cooperating partners. Constant connection raises efficiency to a high level. Looking back on the SaaS industry today, it will definitely defeat the software industry in the next few years, along with all of the software that you own today. Now I look to the US, where SaaS has replaced almost all of it.

China is strange. China has many industries in which if the US goes forward, China will follow, and moreover it will follow very rapidly. It hasn’t been more than two or three years since taxi hailing software appeared in the United States, and China has since come out with quite a few such softwares. The SaaS industry has a market worth a hundred billion in the US, and China’s largest SaaS company is ours, and we are low valued, at little more than 2 billion RMB. This is pretty hard to imagine.  

Why is there such a big difference between SaaS in the United States and SaaS in China? I think there are three problems that have yet to be resolved.

First of all, we have to resolve the real problem. Because in the past when software was made, we just had to do it. When we do ERP, CRM, expense reimbursements, are we really resolving the main problem? I think we weren’t resolving the problem when we did things in the past, and this is an important question. Look at customer service. The US has a lot of software for SaaS. If you want to resolve a real problem for customers, it’s customer satisfaction. Like Xiaomi, The Xiaomi forum is a service software just like SaaS, and a lot of SaaS software in the US is just like the Xiaomi forum. There is asymmetry between businesses and information, and our customers are not connected to each other at all. This is a really annoying problem.

China’s SaaS industry wants to succeed, and today there are many people who want to invest in it. Don’t look at what the investor is doing, but rather look for the real problems that need to be solved, and whether those problems are really painful or not. I also think that China wants to copy America’s basic game plan for SaaS. For example CRM in America is different from CRM in China. In the US, CRM offers solutions that are data-driven and collaborative. This wouldn’t work for sales in China. In Chinese enterprises, sales are contracted. In most of China’s pharmaceutical industry, contracts are outsourced several layers for a single deal, and there is no interest in improving production. Each company works alone and does not share data. So we need to solve real problems. In the US, Mr. Zhai’s (who invented a truck tracking app) ideas might not work, because the problem’s already been resolved. So we need to look for real problems to solve.

The key words for Internet business are these: focus, perfection, reputation, speed. I think B2B might also be suitable, but not necessary. This is because if we look at all of the companies doing SaaS in the US, the average product cycle is four years, a four-year product cycle. Getting listed, IPO, the fastest I’ve seen that happen is eight years. In China, the capital market would not agree with the length of this process; for a company to go from zero to coming out with a product in four years time is too long. If the product hasn’t come out yet, where is the profit? There’s no return. Speed will not necessarily be able to solve a company’s problems. On my latest trip to the US, BOX had just been listed, with the Cloud Disk. I asked them why they succeeded. There was also a personal Cloud Disk that was even more impressive, valued at US $10 billion. BOX was valued in the billions of dollars.

I asked what they thought were the keys to success. The first was ease of use. When a company uses traditional B2B software, if not for Quanshi’s software service, it might be really complicated and too difficult to use. So the first thing is that it has to be simple. The second thing is manageability. The balance between these two things is very difficult for the SaaS industry. So there are some people who will have to deal with ease of use, while another group deals with manageability. This is where the difference between SaaS and the traditional B2C industry lies. But the most important thing is that China’s capital market sees the SaaS industry as extremely unreliable. It’s not the same. There aren’t any investors in China who could accept going four years without seeing any returns on their investment.  

Actually, I have been quite worried, including the times when Quanshi is succeeding, because there is a bitter history behind venture capitalists in China, and we have done things in order to survive that we once never thought we would do. I was telling Chen Hang, I have done many things in the past in order to nurture this little dream. Why else do we make money anyway, if not to really live. I feel thankful to US investors. My first round of investment came from an American. He allowed me to go for the first three to four years without earning any money. That was a time when I was really burning money. I wish that every Chinese investor could be as patient with SaaS, waiting three or four years for the product to come out without making any profit or withdrawing any money. China’s innovation environment is steadily improving, but this has made us all a bit too optimistic about start-ups and entrepreneurs. When you’re the underdog and nobody pays attention to you, you want to persevere. SaaS is a good industry, and China will definitely produce many successful companies, but these three points are very important.

I have been working on SaaS since 2006, and in terms of SaaS and China, I think one has to say it’s successful, having created about 300 companies that rank among the world’s Top 500. Now our income is almost 300 million, and we just recently incorporated what was once our second largest competitor. We now own more than 80% of the entire market. Originally, our work consisted mainly of online business meetings. What is the underlying problem we were trying to solve? Ten years ago, when we worked to facilitate online meetings, no one thought it could be done. I think it was a painful problem, because if I think of myself as a boss with my own business, I wouldn’t want to make all those people come to one site for a meeting. The cost is too high and the efficiency too low, because there are so many people in China. In the US, 75 million people use SaaS, and it really creates value and saves a lot of time. It solves a truly painful problem.

One real problem is a business’s efficiency. At the time we started, what underlying problem did we see? In today’s China, we can see a problem in the manner of working. In the past, work in Chinese depended on individuals; one didn’t need a team. One person could get things done, whereas now our work requires that we rely on more people. What future problems is Quanshi considering? What are our predictions for the future? Here is one big problem that I have been seeing recently: Our lives have already been profoundly influenced by social network, but our work is still the same as before in that it demands efficiency.

A couple days ago, a CEO said to me that whenever he went home he felt so happy, but whenever he returned to the office he felt inefficient. Now many people don't know their own staff working downstairs, and the number of people you recognize within your company won’t be more than about a hundred people. In an enterprise with 10,000 workers, people are not going to know each other for the most part. So why do we want to have a company at all? A company has no meaning in cases like this. We think that in the future, this will be a very big problem: we need to change the way we work. 

(If you feel you haven’t seen enough at the T-Edge Innovation Preliminary Forum in Shenzhen, more leading Chinese and American entrepreneurs will make appearances on May 29 in Beijing at the T-Edge Innovation Summer Summit. For more details and registration, click on the address below: