The Market for ITAD Vendors in China – An Analysis of Current Practices and Opportunities

By Umang Saini & Amjad Afanah, UCLA Students

With an estimated population of 1.4 billion and a large IT industry, China would seem to offer extraordinary opportunity for firms specializing in IT asset disposition (“ITAD”). This article documents the findings from a six-month consulting assignment conducted by MBA students from UCLA’s Anderson Graduate School of Management to study the state of the ITAD industry in China and the potential risks and rewards for any global ITAD company trying to enter that market. Our findings are based on over 150 interviews conducted in the U.S. and China with industry experts, potential customers, competitors and ITAD partners. In addition, we attended five relevant IT conferences in the U.S. and China to collect data from a wide spectrum of experts. Our focus was on evaluating the potential market for secure data erasure (software) solutions in China.

IT Industry in China

China has a large and growing IT industry. In 2009, the IT hardware market in China had total revenues of $22 billion, having grown at a compounded annual growth rate of 10.3% over the previous five years. This accounts for roughly fifty percent of the Asia-Pacific computer hardware market value. The IT industry in China is primarily concentrated in Beijing, the Yangtze River delta with Shanghai at its center, and the Pearl River delta.

Each area is home to numerous multi-national corporations (MNCs) and offers attractive opportunities for new ITAD market entrants to establish operations. Beijing, in particular, holds an edge over other locations since; most major state-owned enterprises (including banks and telecommunication companies) are headquartered there, governmental regulations related to IT policies are issued there, and it has a large talent pool of IT professionals.

ITAD Industry in China

IT assets are typically used for five to seven years, as compared to the three to five- year lifecycle common in the western countries. As a result, these assets have little or no resale value. Our research indicated that out of the three most common ITAD approaches of secure data erasure, degaussing and shredding, degaussing and shredding are most commonly used in China. Overall, there is very little awareness for the need to securely erase data from IT assets before they are retired and/or resold.

We looked at a number of industry verticals to see what potential each of them held for ITAD vendors including the existing ITAD vendors. Our findings are summarized in the table below.

Industry Vertical Findings
ITAD Vendors
  • Choice of data destruction methodology dictated by end customers
  • Degaussing and shredding are most common approaches used
  • Secure data erasure (software erasure of data) is not common
  • Value recovery though resale of precious metals from IT assets is primary driver for vendors
Foreign Banks
  • High awareness for data security and proper data destruction
  • Two to three percent market share in China leading to low consumer base
  • IT policies mandated at global headquarters
Chinese Banks
  • High awareness of need for data security and data destruction
  • Some banks employ 400,000 or more employees
  • Branches of the same bank follow independent ITAD policies: some store hard disks while others use degaussing/shredding to destroy IT assets
  • Showed interest in secure data erasure solution
Government and State-Owned Enterprises
  • ITAD regulations exist on paper but enforcement is inconsistent
  • Difficult to secure large accounts but once successful, repeat business is easier and frequent
  • Government and state-owned enterprises control about 40% of the Chinese economy
Multi-National Corporations
  • High awareness of need for data security and data destruction
  • Even though ITAD policies decided at global headquarters, local operations have a say in which local company(ies) with whom they do business

While there are other potentially attractive target market segments for ITAD vendors entering China, the five segments identified and profiled above represent the major beachhead segments. However, partnerships with local Chinese companies are key if the new entrant wishes to succeed in its Chinese operations. Sales to Chinese companies are largely dependent on relationships one has with key decision makers, and local Chinese partners can provide these requisite connections. Partnering with established and trusted Chinese companies can also help mitigate concerns surrounding intellectual property protection. ITAD vendors typically target enterprise and government customers, where piracy and loss of intellectual property are less significant issues.

Foreign vendors selling IT products in China are typically required to obtain two permits from the Chinese government: i) A sales permit from Information Security Products from Ministry of Public Security; and, ii) Certification for Classified Information System Products from State Secrecy Administration. These permits can be obtained directly from the government or with the help of a local Chinese partner. In terms of competition, none of the global ITAD vendors has entered China at this time. We talked to some local Chinese ITAD companies such as Heshengda and found that even they were focused on the degaussing and shredding side of the business.

Opportunity Assessment

There is intense competition between degaussing and shredding vendors in the Chinese market and these strategies for IT asset disposition dominate the Chinese market. A significant opportunity exists for ITAD vendors who can offer a secure data erasure (software) solution. However, significant market awareness and development activities will need to be undertaken in order to realize the full potential of the opportunity. Partnering with local Chinese companies that have established contacts in target customer segments is a critical prerequisite to generate business opportunities. The types of organizations offering the biggest opportunities to new ITAD vendors entering China are government and state-owned enterprises, MNCs and Chinese banks.