Goldman Sachs In-Depth Analysis of China's Software Industry: Decline in Employee Numbers, Per Capita Revenue Soars by 35%, Driving Margin Improvement
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Goldman Sachs' latest research reveals that China’s software industry is undergoing a profound operational efficiency revolution.
According to Wind Chasing Trading Desk, Goldman Sachs conducted an in-depth analysis of operational efficiency in China’s software sector in a report released on November 10, highlighting a structural transition in the industry from expansion in scale to a focus on profitability and efficiency.
The report states that from 2021 to 2024, the average number of employees in Chinese software companies fell from 13,300 to 12,600, but revenue per employee jumped from $101,000 to $135,000—a 35% increase. This trend marks a shift from labor-driven extensive growth to a stage of high-quality development focusing on products and innovation.
The report further notes that the effects of operational optimization have shown in the first half of 2025, with average operating profit margins in the software sector improving from -12% in the first half of 2024 to -6% in the first half of 2025. Profit margins in sub-sectors such as office software, automotive software, and image/video software have improved particularly significantly.
“Labor-driven” turns into “Product-driven”
Goldman Sachs observes that Chinese software companies are entering a new growth phase, shifting from “labor-driven” to “product-driven.”
The Chinese software industry is bidding farewell to manpower-intensive tactics. Data shows that after rapid staff expansion in 2021, the industry has entered a “slimming down” stage, with strategic focus shifting toward cost optimization and high-return core businesses.
The average headcount of Chinese software companies fell from 13,300 in 2022 to 12,600 in 2024. Despite fewer employees, revenue per capita soared from $101,000 in 2021 to $135,000 in 2024, a 34% increase. This indicates that companies are shifting investment toward higher ROI core and innovative businesses, while exercising strict cost controls.
While cutting redundant staff, companies have not reduced R&D, but instead have reallocated resources into core businesses and high-growth areas like AI, and secured healthier cash flow by increasing the share of recurring revenue sources such as subscriptions.
Goldman Sachs research finds that software companies with higher proportions of recurring revenue display stronger cash flow visibility. From 2021 to 2024, the average operating cash flow of high recurring-revenue companies stayed between $106 million and $141 million, while those focused on project-based or hardware/software integrated solutions saw operating cash flow between $37 million and $52 million. The recurring revenue business model brings better scalability, lower marginal and labor costs, and better business visibility.
Profit margin inflection point emerges
This transformation is not without cost. Goldman Sachs points out that one-off severance compensation expenses have put short-term pressure on the industry’s average operating profit margin (OPM) in 2024.
But positive signals are hard to ignore, as the effects of operational optimization are beginning to show up in financial reports, signaling that a profitability turning point is approaching.
After staff optimization began in 2023, we observed that one-off employee compensation has pressured short-term profit margins, but productivity gains are starting to show in the first half of 2025, pushing the average operating profit margin from -12% in the first half of 2024 to -6%. By segment, office software, automotive software, and video/image software have seen their profit margins continually improve from 2022 to 2024.
Overall, the road to efficiency improvement is still long, with much room for growth:
Revenue per employee at Chinese software firms continued to climb to $135,000 in 2024, but this trails far behind the $460,000 level at top global software companies in the same year.
This gap is attributed to global companies’ larger revenue scale, stronger pricing power, greater share of recurring revenue, and lower marginal costs. With the transition to subscription business models and customers spending more on value-added features, Chinese software companies still have considerable room to improve efficiency.
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The above content comes from Wind Chasing Trading Desk.
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