Goldman Sachs deeply analyzes the Chinese software industry: number of employees declines, per capita revenue surges by 35%, driving profit margin improvement

Goldman Sachs' latest research reveals that the Chinese software industry is undergoing a profound revolution in operational efficiency. According to the Wind Trading Desk, Goldman Sachs conducted an in-depth analysis of the operational efficiency of the Chinese software industry in a report dated November 10, which revealed that the software industry is transitioning from past scale expansion to a structural shift focusing on profitability and efficiency. The report states that from 2021 to 2024, the average number of employees in Chinese software companies decreased from 13,300 to 12,600, while revenue per employee significantly increased by 35% from $101,000 to $135,000. This trend marks a shift in the industry from a labor-driven extensive growth model to a high-quality development phase centered on products and innovation. The report further indicates that the effects of operational optimization have begun to manifest in the first half of 2025, with the average operating profit margin of the software industry improving from -12% in the first half of 2024 to -6% in the first half of 2025, particularly notable improvements in profit margins in sub-sectors such as office software, automotive software, and image/video software. "Labor-Driven" to "Product-Driven" Goldman Sachs observed that Chinese software companies are transitioning from a "labor-driven" to a "product-driven" new growth phase. The Chinese software industry is bidding farewell to the human resource warfare strategy. Data shows that after experiencing rapid personnel expansion in 2021, the industry has entered a "slimming down" phase, with its strategic focus shifting to cost optimization and concentrating on high-return core businesses. The average total number of employees in Chinese software companies decreased from 13,300 in 2022 to 12,600 in 2024. Despite the reduction in workforce, revenue per employee surged from $101,000 in 2021 to $135,000 in 2024, an increase of 34%. This indicates that companies are shifting towards core and innovative businesses with higher returns on investment and implementing strict cost control measures. While companies are reducing redundant personnel, they have not cut back on R&D but have instead reallocated resources to core businesses and high-growth areas such as AI, and by increasing the proportion of recurring revenue from subscriptions, they have achieved healthier cash flows. Goldman Sachs' research found that software companies with a higher proportion of recurring revenue exhibit stronger cash flow visibility. From 2021 to 2024, the average operating cash flow of high-recurring-revenue companies remained at levels between $106 million and $141 million, while companies primarily focused on project or hardware/software integration solutions averaged only $37 million to $52 million in operating cash flow. The recurring revenue business model has stronger scalability, lower marginal and labor costs, leading to better business visibility. Profit Margin Turning Point Emerges This transformation has not come without a cost. Goldman Sachs pointed out that due to one-time severance compensation expenses, the industry's average operating profit margin (OPM) is under short-term pressure in 2024. However, positive signals cannot be ignored, as the effects of operational optimization are beginning to show in financial reports, indicating that the industry's profit turning point is approaching. After starting personnel optimization in 2023, we observed that one-time employee compensation exerted pressure on short-term profit margins, but the effects of productivity improvements began to manifest from the first half of 2025, driving the average operating profit margin from -12% in the first half of 2024 to -6%. ** From an industry perspective, the profitability of the office software, automotive software, and video/image software sectors continues to improve from 2022 to 2024. Overall, the road to efficiency improvement remains long, and there is still considerable room for enhancement: The per capita productivity of Chinese software companies is expected to continue rising to USD 135,000 by 2024, but there is still a significant gap compared to the USD 460,000 per capita revenue of the world's top software companies in the same year. This gap arises from the larger revenue scale of global enterprises, stronger pricing power, a higher proportion of recurring revenue, and lower marginal costs. With the transition to a subscription business model and increased customer spending on value-added features, there is still considerable room for efficiency improvement for Chinese software companies.