Goldman Sachs' latest research reveals that China's software industry is undergoing a profound operational efficiency revolution.
The report highlights a structural shift in the sector—from previous scale expansion to a focus on profitability and efficiency. Between 2021 and 2024, the average headcount of Chinese software companies dropped from 13,300 to 12,600, while revenue per employee surged by 35%, from $101,000 to $135,000. This trend signals a transition from labor-driven, extensive growth to a product- and innovation-centric high-quality development phase.
Operational optimization effects became evident in the first half of 2025, with the industry's average operating profit margin improving from -12% in H1 2024 to -6% in H1 2025. Sectors such as office software, automotive software, and imaging/video software showed particularly notable margin improvements.
**From "Labor-Driven" to "Product-Driven"** Goldman Sachs observes that Chinese software firms are entering a new growth phase—shifting from "labor-driven" to "product-driven" strategies.
The industry is moving away from mass hiring tactics. After rapid workforce expansion in 2021, companies have entered a "leaner" phase, prioritizing cost optimization and high-return core businesses.
Despite headcount reductions, revenue per employee jumped from $101,000 in 2021 to $135,000 in 2024—a 34% increase. This reflects a strategic pivot toward higher-return core and innovative businesses, coupled with stringent cost controls.
While trimming redundant staff, companies have not cut R&D but instead reallocated resources to core operations and high-growth areas like AI. By increasing the share of recurring revenue (e.g., subscriptions), firms have achieved healthier cash flows.
Goldman Sachs found that software companies with higher recurring revenue demonstrate stronger cash flow visibility. From 2021 to 2024, firms with high recurring revenue maintained average operating cash flows between $106 million and $141 million, while those reliant on project-based or hardware/software integration solutions averaged just $37 million to $52 million. Recurring revenue models offer greater scalability, lower marginal and labor costs, and improved business predictability.
**Margin Inflection Point Emerges** This transformation has not been without short-term costs. Goldman Sachs notes that one-time severance expenses pressured the industry's average operating profit margin (OPM) in 2024.
However, positive signals are undeniable. The effects of operational optimization are now visible in financial reports, suggesting an approaching profitability inflection point.
After workforce optimization began in 2023, one-time severance costs temporarily squeezed margins. But productivity gains started materializing in H1 2025, lifting the average OPM from -12% in H1 2024 to -6%. Sub-sectors like office software, automotive software, and imaging/video software have seen continuous margin improvements since 2022.
**Room for Further Efficiency Gains** While Chinese software firms raised revenue per employee to $135,000 in 2024, a significant gap remains compared to global leaders, which averaged $460,000 per employee the same year.
This disparity stems from global players' larger revenue scale, stronger pricing power, higher recurring revenue share, and lower marginal costs. As Chinese firms transition to subscription models and customers spend more on value-added features, substantial efficiency gains remain achievable.
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