Foreign companies that canít get licenses to operate networks may find another route to extracting revenue from Chinaís growing communications market. Systems integrators who specialize in building and managing Internet infrastructure are enjoying a boom period thanks to increased spending by Chinaís existing and emerging national carriers and cable companies.

In July a survey by the China Internet Network Information Centre found that there were 16.9 million Internet users in the country compared to 8.9 million uncovered in a similar survey in January. In addition, Dresdner Kleinwort Benson Research claims that the growth of Internet users will translate into vastly greater demand for Internet bandwidth.

To cater for this demand, Chinaís carriers have planned for substantial investment to build and upgrade the national Internet backbone and provincial networks. Foreign networking companies have been quick to recognize the opportunity of network builds of this scale.

Cisco Systems, Nortel Networks and Lucent Technologies all have been among the first equipment manufacturers to benefit from growing information technology spending in China and have reported gross margins of between 43% and 65%. However, the geographical spread and scarcity of local contacts and support teams may mean foreign network-equipment manufacturers increasingly rely on domestic ñ or domestic subsidiaries of foreign ñ systems integrators to penetrate the market.

These integrators are able to offer end customers a wide range of services from network design and planning to implementation. Typically, 70 to 80% of systems integratorsí top-line revenue is composed of hardware/network-equipment pass-throughs on which they make very thin margins, usually in the low single digits.

However, services are the most attractive part of a systems integratorís business. Dresdner Kleinwort Benson estimates adjusted gross margins of about 48% could be achieved by some players after stripping out hardware costs and matching net revenue against corresponding staff costs.

However, the report warns that staffing costs may be set to rise. Currently, entry-level annual salaries for graduate engineers are about RMB36,000 per annum ($4,300) and salaries for engineers with three to five year's experience are RMB96,000-120,000 p.a.($11,600-14,500). Average turnover of personnel is about 15%, a level which is expected to exert upward cost pressure on companies operating in China and consequently sap margins in the long term.

To create sustainable longer-term profitability Dresdner Kleinwort Benson thinks systems integrators will need to develop internal expertise to enable them to offer value-added services such as network security. The report suggests players with greater financial resources may accelerate growth of their knowledge bases through acquisition.

In addition to their IP backbone businesses, some companies are developing new business lines to service the Internet community and help the government and offline enterprises implement their e-commerce strategies. Current new services being offered include provision of e-commerce solutions such as e-tendering and electronic service delivery by Computer & Technologies Holdings (C&T) and provision of an online logistics platform by Prosten Technology for the COSCO group in Shanghai.

Other activities aimed at connectivity service providers include development by AsiaInfo of software for email management and a web-traffic package. AsiaInfo is also developing IP and wireless billing software aimed at national carriers that offer VoIP and IP-based data services.

These business lines are not expected o deliver large volumes of sales in the short term but over time are predicted to diversify the revenue mix and provide companies with additional high-value revenue streams.