CHINA WATCHChina: An Emerging Software Power
China’s early success in global AI competition, bolstered by continued massive state investment and other advantages, could help it extend its dominance in international markets for manufactured goods to the software realm.
China’s early success in global AI competition, bolstered by continued massive state investment and other advantages, could help it extend its dominance in international markets for manufactured goods to the software realm.
China is the world’s manufacturing powerhouse. In 2024, it exported $3.6 trillion worth of manufactured goods—about as much as the combined exports of the United States ($2.1 trillion) and Germany ($1.6 trillion). Yet, in services, China’s story is different. Its $384 billion in services exports in 2024 ranked eighth globally but is only about one-tenth the value of its goods exports—the lowest ratio among the world’s top 10 services exporters. Germany, the next lowest, exported services that equaled 28 percent of its goods exports.
The biggest shortfall for China lies in software and IT services, which make up just 18 percent of its total services exports. That compares with 30 percent for the United States and 44 percent for Germany.
Analysts chalk up China’s underperformance to two factors: limited English-language skills among Chinese developers, and, more debatably, a long-standing engineering culture that favors hardware over software.
AI Could Be the Great Equalizer
That inequality may be about to change because of AI, although it is still over the horizon. Historically, new hardware—whether personal computers or smartphones—has triggered industry cycles by introducing new capabilities, while software has determined how effectively those capabilities are used. Software innovation ultimately drives the industry.
At this early stage of the AI industry cycle, hardware still dominates. In 2023, global data center hardware revenues reached $230 billion, with the United States taking 41 percent and China 28 percent. AI software and services, by contrast, brought in $160 billion. Over the next decade, both markets will grow but software will grow faster. Hardware revenues are forecast to exceed $1 trillion by 2033 (growing 15.8 percent annually on average), while software and services could soar to $2.5 trillion—an annual growth rate of 31.7 percent. The United States and China will continue to be the two largest providers of hardware, together holding about half the global market.
