Oregon’s Software Industry: Global Players & Global Markets

By Scott Goddin & Ryan Brutger, Portland U.S. Export Assistance Center

As the rhetoric over U.S. outsourcing of business processes and other tech activities including software development has raged on, the continued growth of U.S. exports of software products and services speaks to both the global nature of the industry and U.S. competitiveness. From 2002 to 2004, U.S. exports increased from $324 million to $509 million. With roughly ten percent of Oregon’s high tech firms engaged in software development and related activities, participation in global markets is critical to success. Foreign demand will continue to fuel growth and the effort undertaken to target new markets will be crucial to maintaining local profitability, technological leadership and competitiveness.

Oregon’s software industry

According to an analysis undertaken by the U.S. Department of Commerce, Oregon’s “Silicon Forest” is recognized as a key component of the national economy’s high tech sector and, more particularly, the software industry. This area is home to over 2,319 Information and Communications Technology firms (ICTs), of which 216 were small to medium-sized (SME) software companies geared toward serving niche markets in embedded, prepackaged and customized software applications and services.

The software industry is a vital part of the Oregon, Pacific Northwest and United States economy. According to a March 2005 Bureau of Labor Statistics report, Oregon employed 7,000 software programmers (measured by an exceedingly narrow skills classification). According to the Software Association of Oregon, there were nearly 100,000 people employed by software companies and their associates in Oregon. This latter census more realistically reflects the range of functions within firms required to create, develop, sell and support software products and applications.

In many sectors, Oregon’s firms are positioned in highly sophisticated market niches, so they are often better known by industry “insiders” rather than achieving a more horizontal commercial notoriety. From applications ranging from semiconductor design and testing and display technology, to safety and security, to patient data management, Oregon firms are often industry leaders and key innovators. In this regard, market opportunities exist to serve burgeoning electronics industry manufacturers in China to providers looking to manage health care costs in “aging” (in a demographic sense) societies from Japan to Germany.

As a nationally recognized leader in the U.S. open source software movement, Oregon firms are well-positioned to support the development of software applications and services aimed at opportunities in global markets. The Open Source Development Lab (OSDL) – funded in part by IBM, HP, CA, Intel and NEC – offers state-of the-art computing and test facilities to developers around the world. This facility has served to attract interest and partnerships from notable international companies – including Nokia, Siemens, Mitsubishi, Toshiba, NEC and Hitachi, among others – while also developing relationships with leading universities around the world. These relationships – as well as ongoing work related to integrating open source operating systems into data centers, servers, desktops and mobile platforms – bode well for local firms engaged in and spinning off these technologies.

Why should Oregon’s software industry be expanding abroad?

The U.S. software industry derives more than half of its revenues from exports. In 2004, the world spent more than $59 billion on commercial packaged PC software, up from $51 billion in 2003. But over $90 billion was actually installed, up from $80 billion the year before. Globally, businesses and consumers will spend more than $300 billion on PC software over the next five years, according to IDC estimates.

Canada is by far the leading market for U.S. exports of products in the computer software category ($258 million in 2004, or 51% of total). Other top markets (all valued above $12 million) were:

• Korea (5.1% of total)
• Japan (4.2%)
• Mexico (3.9%)
• Germany (3.8%)
• United Kingdom (3.4%)
• China (3.2%)
• India (2.6%)
• Taiwan (2.5%).

Other significant markets (above $6 million) were: Brazil (2.2%), Hong Kong (1.7%), France (1.5%), Australia (1.3%), Italy (1.2%), and Singapore (1.2%).

A glaring anomaly, which understates the numbers, is the wide discrepancy between the size of world software markets, of which U.S. vendors have majority shares, and official U.S. export data, which are significantly undervalued. This is due to the following reasons:

(1)   Some U.S. exporters report only the value of the carrier media (disks or tape), disregarding the software content on Shippers Export Documents (SEDs) from which the trade data are taken.

(2)   A good portion of software is replicated in foreign markets from master disks.

(3)   An increasing amount of software is transmitted and sold electronically, much of which is not captured in the data

(4)   Only the value of the media has to be reported for customized software exports.

(5)   Shipments valued at less than $2,500 and software license documents do not require a SED. The unique features of software make it difficult to accurately measure U.S. trade and payment flows.

These export destinations track closely Oregon’s overall export markets and, while state by state software shipments are not disaggregated – broadly correlated – software often follows hardware markets of which Canada, Japan, Korea, China and the European Union were leading destinations for Oregon shipments.

China – From 2002-2004, software exports from the U.S. to China increased thirty- two percent with the U.S. having roughly one quarter of the import market. Application and customized software are the best prospects in this field. High-end products such as database management systems, systems management software, networking security software and industry application software will be the fastest growing prospects for foreign firms selling into the China market.

Japan – U.S. exports grew six percent between 2002-2004, tracking relatively flat domestic economic growth, but the U.S. held an estimated 75 percent of the import market. Best prospects will include: enterprise resource planning (ERP), data warehouse (DWH), system management, supply chain management (SCM) and security software and other software products that utilize improved hardware and network infrastructure.

Canada – U.S. exports grew 29 percent from 2002-2004 and the U.S. held over three-quarters of the import market. Software applications that integrate front and back office functions to merge the value-creation side of the business with the value-counting side of the business will be in demand, as will programs that align operations with customers’ buying habits. Specifically, applications such as CRM, enterprise resource planning, content management, website development, and maintenance applications that help reduce costs will have good sales prospects.

Brazil – U.S. software exports grew over 400 percent from 2002-2004. Brazilian firms will spend 28% of their IT budgets on hardware, 35% on software and outsourcing, and the remainder on items and services such as voice and data transmission. A notable tendency will be convergence of voice and data networks, such as IP virtual private networks (VPNs), which will require investment in greater bandwidth. Network security will also be a strong component of IT spending, but is primarily restricted to installation of firewalls rather than more complex security strategies. Companies will select solutions according to price and quality, rather than deciding because of the brand name or because of an existing relationship with a vendor.

Germany – U.S. software exports grew over 35 percent between 2002 –2004. The German market for software is the largest in Europe and ranks second in the world after the United States. Best prospects will include: IT-security, integrated enterprise applications to streamline back- and front-office operations; increasing investments in e-business applications and other enterprise applications such as customer relationship management (CRM) technologies, supply chain management software; as well as document management software (DMS). This, even though the ERP/DMS market is dominated by local vendors. As companies focus on efficient business processes, there will be a higher willingness to invest in cost-reducing equipment such as DMS.

France – U.S. exports to France grew over 50 percent between 2002-2004, with the U.S. holding over 50 percent of the import market. Higher end best prospects will include management consulting in IT systems, engineering services, facilities management and third-party maintenance applications (TMA), and packaged software especially integrated management software and PLM solutions which are expected to grow respectively by 5.7% and 7.5% each year until 2008.

Over the next year, the U.S Department of Commerce and the State of Oregon will support Oregon’s firms in a number of trade events targeted to opportunities in these growth markets. Additional market research and support is available to target company efforts and identify partners that can serve more strategic regional objectives. The question that firms will need to ask themselves is not when, but how they can become a global player in their market.

This article was written in collaboration with Ryan Brutger, a recent graduate of Lewis & Clark and international trade assistant a t the U.S. Export Assistance Center. Ryan would happily make the transition to gainful employment if you desire to bring his analytical skills to your marketing efforts.

Scott Goddin is director of the Portland U.S. Export Assistance Center (www.buyusa.gov/oregon) and has been working in international trade with the U.S. Department of Commerce for more than 20 years. He works with Oregon and Southwest Washington high-technology companies to develop international markets, specifically helping them to design market-entry strategies; find and evaluate distributors, VARs or agents; evaluate product or service delivery methods; and “internationalize” their companies.

Goddin has served as a U.S. trade negotiator working on Asian market access and standards issues for U.S. high-tech and communications companies and intellectual property rights issues in Korea, Taiwan and China. Goddin also has served in temporary assignments as a commercial attaché at American Embassies in Seoul, Taipei and Nairobi and has managed the office in Portland supporting local Oregon firms since 1997. You can learn more about export assistance www.export.gov. or contact Goddin directly at scott.goddin@mail.doc.gov.