Inside the Chinese ERP Market. S e p t e m b e r A M R R e s e a r c h R e p o r t

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1 S e p t e m b e r A M R R e s e a r c h R e p o r t Inside the Chinese ERP Market Localization of value proposition, implementation services, and functionality is required to fit maturity and cultural differences in Chinese companies. by Qin Deng

2 Copyright 2005 by AMR Research, Inc. AMR Research is a registered trademark of AMR Research, Inc. No portion of this report may be reproduced in whole or in part without the prior written permission of AMR Research. Any written materials are protected by United States copyright laws and international treaty provisions. AMR Research offers no specific guarantee regarding the accuracy or completeness of the information presented, but the professional staff of AMR Research makes every reasonable effort to present the most reliable information available to it and to meet or exceed any applicable industry standards. AMR Research is not a registered investment advisor, and it is not the intent of this document to recommend specific companies for investment, acquisition, or other financial considerations.

3 Inside the Chinese ERP Market by Qin Deng Without more investment in product and service localization, the value and adoption of ERP will be limited to Western multinationals operating. The Bottom Line A gap in Chinese user needs and available ERP products and services is slowing adoption Executive Summary The size, growth, and sheer desire to gain a competitive edge lured global Enterprise Resource Planning (ERP) vendors to China. They have opened offices, signed local partners, and translated their software but few are finding success. While the ERP terminology has become widespread, the adoption of the systems outside of Western multinationals doing business in the region remains low. Less than 5% of the companies in China are using an ERP system, and the percentage of satisfied users is far smaller still. Apart from Chinese users inadequate perception of ERP, the key reason is the products insufficient flexibility to meet user needs. Further hampering penetration is the assumption that a Western-style value proposition, operating model, business process design, and supply chain integration model would quickly fit an emerging market like China. Chinese companies will evolve to some standards of global business, but they will do so in a uniquely Chinese way. Most Chinese users prefer to use the system to automate current processes rather than change processes to fit in an ERP system. As a result, the vendors that invest to define and understand the real functional and business needs will be the winners. Success will come by developing systems and services that meet key needs: Industry-specific systems for manufacturing and supply chains, not finance and administration Systems that support rapid changes, not labor savings or cost cutting Systems that can deliver results quickly This Report presents basic operational details of global vendors, local vendor information, and an analysis of market trends and areas for further improvement. AMR Research Report September AMR Research, Inc. 1

4 Table 1: ERP vendors operating Global ERP vendors operating Global vendors started to venture into the Chinese market in the late 1980s. With strong technology and capital advantage, they grabbed a considerable part of available market share by partnering with local service providers, distributors, and Value-Added Resellers (VARs). Vendor Year Established China Office Number of Employees Number of Customers Percentage of Customers Sold Locally Average Number of Users Per Site Digital China , % 20* Epicor % 15 IFS % 40 Infor % 25 Intentia * 30% 40 Kingdee ,800 23,000* 100% 20* Microsoft s Business Solutions ** 200* 100%* 30* Oracle ** 450* 85% 60* QAD % 23 SAP % 100* SoftBrands % 12 SSA Global % 30* UFIDA ,000 40,000* 100% 25* * AMR Research estimate Source: AMR Research, 2005 ** Includes employees working in other functions AMR Research, Inc. AMR Research Report September 2005

5 The total number of cumulative customers of global vendors is still just in the thousands, only a fraction of the potential market. While most of the contracts were signed locally, they are also mostly subsidiaries of multinationals operating. Few truly successful implementations exist in State-Owned Enterprises (SOEs) and private Chinese companies, which is where the real potential lies. Penetration (average number of users per site) is also low by comparison to Western implementations an indication that the users are lacking sufficient knowledge or comfort to command advanced IT tools. The instance of broad, integrated deployments is also extremely low. Our interviews with Chinese manufacturers show that even with ERP in place, many companies still prefer manual processes or old systems. Most cite inflexible change management operations as the top reason for sticking to previous control methods. Consider a typical case. A multibillion-dollar Chinese company spent millions (USD) to deploy a large ERP package, but it currently uses just two modules. It feels more comfortable working on its original systems in other areas because the internal processes were designed group by group; restructuring the company is more painful than keeping the current systems running. Also, some Chinese companies tend to buy a small number of licenses for their initial implementations, extending after a one-year trial period. But in the case of China, companies cite cautiousness about ERP not only because of concerns over the software and/or implementation services, but also because of concerns about their own knowledge level of such advanced application areas. This slow adoption is challenging for vendors, but it would be unwise for them to reject such small footprint requests, as the potential is enormous. AMR Research Report September AMR Research, Inc. 3

6 Local vendors claim lion s share of slowly emerging market In addition to the constraints discussed above, global ERP vendors are not experiencing tremendous success because of competition from some established local players. Those seeing some success are vendors that already have an established relationship with Chinese companies, mainly financial software firms. Chinese manufacturers, with support from the government, have a strong command of accounting software practices, opening the door for vendors like UFIDA, Kingdee, and Digital China. These vendors, with very large customer bases already UFIDA has 400,000 existing customers and Kingdee has 200,000 are adding manufacturing modules to their finance systems and competing robustly against global vendors on speed and cost. However, these firms lack deep, industry-specific manufacturing and supply chain functions, which will limit their relevance without significant investment. Nevertheless, it might lead to a spate of acquisitions either Chinese companies acquiring from the West or Western firms buying into the Chinese market. Global vendors provide coverage on most industries, but vertical industry depth is sporadic Table 2 shows the industries targeted by vendors in the Chinese market. (Notice that every vendor discussed in this Report targets High-Tech, Automotive, and Discrete Manufacturing.) The large vendors have broader industry coverage, while smaller players target niche markets. However, the difference between vendor target markets and their ability to serve current industry needs is significant. This will be illustrated in the concluding section of this Report AMR Research, Inc. AMR Research Report September 2005

7 Table 2: Targeted industries Vendor Chemical Pharma/ Medical Devices A&D High-Tech Auto Discrete Mfg. Digital China Epicor IFS Infor Intentia Kingdee Microsoft s Business Solutions Oracle QAD SAP SoftBrands SSA Global UFIDA Vendor Retail Wholesale Distribution Oil and Gas Financial Services Transportation Consumer Goods Digital China Epicor IFS Infor Intentia Kingdee Microsoft s Business Solutions Oracle QAD SAP SoftBrands SSA Global UFIDA Source: AMR Research, 2005 AMR Research Report September AMR Research, Inc. 5

8 Table 3: Local works comparison Market overview: Basic localization is done, but functional localization development still lags No significant difference exists, in term of language issues, among these vendors (see Table 3). The vendors also meet Chinese requirements on the format of finance reports. What is different among the vendors is the support operation. With a huge number of factories operating longer than business hours, those that can provide multi-tier, 24/7 support have a distinct advantage. Vendor Language on Screens Languages on User Support Translation Level Support Operation Development Operation Epicor Simple Chinese, Mandarin, Cantonese, documents Tier 1 local support (24/7) 2% of employees IFS Simple Chinese, Mandarin, documents, online self-service Tier 1 local support during business hours 17% of employees Infor Simple Chinese, Mandarin, Cantonese, documents, online self-service Tier 1 and 2 local support during business hours 4% of employees Intentia Simplified Chinese, Traditional Chinese, Mandarin, Cantonese, documents Tier 1 local support during business hours 15% of employees Microsoft s Business Solutions Simple Chinese, Mandarin, Cantonese, documents Tier 1 and 2 local support (24/7) 15% of employees Oracle Simplified Chinese, Traditional Chinese, Mandarin, documents Tier 1 and 2 local support (24/7) 25% of employees QAD Simplified Chinese, Mandarin, documents, online self-service Tier 1 and 2 local support (24/7) 60% of employees SAP Simplified Chinese, Traditional Chinese, Mandarin, documents, online self-service Tier 1 and 2 local support (24/7) 39% of employees SoftBrands Simplified Chinese, Traditional Chinese, Mandarin, Cantonese, documents, online self-service Tier 1 local support (24/7) 25% of employees SSA Global * AMR Research estimate Simplified Chinese, Mandarin, documents, online self-service Tier 1 local support during business hours 0% of employees Source: AMR Research, AMR Research, Inc. AMR Research Report September 2005

9 Chinese users demand fast implementation with a lot of customization. This means ERP packages need to be developed to fit in Chinese companies (i.e., lean and flexible). Vendors need strong local development teams to keep pace with this fast-growing and demanding market. However, few of these vendors have made any substantial development effort to support local requirements, though some are on the right track. SAP, for example, established a Research and Development (R&D) center in Shanghai in 2003 that has more than 300 employees now, with a target of 1,500 by Oracle and QAD also have begun to move a significant percentage of their R&D resources into China. On average, 70% of global vendors revenue comes from direct sales, while 45% of their service comes from partners. More sales and services will likely come indirectly from partners, especially local Chinese partners, because they can effectively bridge the gap between vendors and users and communicate in their own way. But capable thirdparty Chinese partners are still lacking. From the implementation point of view, most projects are relatively small, with the average contract size being less than $200K and average implementation time seven months. Prices are dropping too, due largely to fiercer competition, particularly from local vendors. There are even some local packages available for less than $10K (e.g., the lowest price of U860 from UFIDA is only $3K). SAP Business One is on market for around $10K as well. Local vendors are also influencing pricing structure. For example, some local ERP companies charge fairly low maintenance fees (sometimes less than 5%) and offer free first-year maintenance. This affects how the Chinese companies value maintenance; they usually ask for free maintenance and are reluctant to pay anything at all. In terms of future growth, more than half of the global vendors see strong potential in Supply Chain Management (SCM) and Customer Relationship Management (CRM). AMR Research Report September AMR Research, Inc. 7

10 Three-stage roadmap: The transition from the first to the second stage is critical to local and global vendors The development of ERP can be described in three stages: introduction, organic growth, and full maturity (see Figure 1). Figure 1: China ERP roadmap Stage 3: Full Maturity All Customer Base All Stage 2: Organic Growth Functional Localization Supply Chain Stage 1: Introduction Channels Compliance Service Technology Channels Compliance Service Technology Global Vendors Local Vendors Source: AMR Research, 2005 Stage 1: Introduction The introduction stage requires that vendors build a technology/service/sales channel and offer support for regulatory compliance and user training. This is the stage where most vendors (global and local) are today. Fundamental structure has already been established, but this can only attract a limited number of Chinese users who have deep pockets and the courage to adopt ERP. For the vendors, this stage is merely about survival in the market AMR Research, Inc. AMR Research Report September 2005

11 Stage 2: Organic growth This stage has different meanings for the two groups of vendors. At this point, global vendors are trying to achieve functional localization, which is not just addressing language or regulatory issues. ERP software needs to accommodate Chinese business operation structures and the changing needs of functionalities for fast economic growth. It also requires broader local partner networks and better relationships with government. Some local governments are funding companies to adopt ERP, but in many cases, packages must come from Chinese vendors. For local vendors, this stage is about further developing supply chain modules. Most Chinese ERP packages only embraced supply chain functions in recent years (60% of local vendors come from an accounting software background). Establishing supply chain expertise requires significant investment in R&D or collaboration with local and global partners. Of the two, global vendors likely have a better chance to break through because Chinese business operation structures are shifting toward Western styles, with the integration of global supply chains accelerating this process. Chinese regulations are also becoming more compatible with those outside the region and processes are more transparent now. These factors will reduce the pressure on localization for global vendors and encourage wider adoption, but a rough road still lies ahead. Stage 3: Full maturity This stage requires systematic integration of all elements from the vendor side with considerably improved ERP education among users. The most important indication of this stage will be the mastery of SCM among Chinese companies, when they understand and adopt advanced models such as AMR Research s Demand-Driven Supply Network (DDSN). AMR Research Report September AMR Research, Inc. 9

12 Vendors stepping out from the crowd in some verticals No vendor leads the ERP market now, but some are ahead of the others in their niche industry focuses. Table 4 shows vendor performance from the customer base, ecosystem, support, and localization points of view. Table 4: Vendor groupings Criteria Early Entrant Established Player Acknowledged Leader Customer Base Hundreds Thousands / Leading in one vertical Tens of thousands / Dominate verticals Ecosystem Sales partnerships (VAR/Distribution) Sales and service partners Full ecosystem of complementary local providers Support Tier 1 support during local business hours Tier 1 support (24/7) Multitier support 24/7 with local development resources Localization Language and financial reports Functional changes to support core operations Industry-specific supply chain modules Source: AMR Research, 2005 Based on the measurements in Table 4 and other factors, such as number of years, implementation evaluations, and feedback from users, we have following conclusion on global vendors. Most of the vendors remain in the Early Entrant category because of the number of customers and limited investment in tailoring product functionality and implementation services to the market. However, many of the players have established a beachhead in key industries. IFS holds a strong position in Engineering and Utilities industries, Intentia stands on the top of Fashion and Apparel, QAD leads the Automotive industry, and Oracle has a strong position in High-Tech. Outside of local players, SAP is the only truly established vendor, with a strong presence across many key manufacturing segments and deep investment in local development AMR Research, Inc. AMR Research Report September 2005

13 Closing Comments Does any of this look familiar? It should: the characteristics of the Chinese ERP market are similar to the initial ERP implementations in North America and Europe more than a decade and a half ago. Yet there are differences this time around. The cultural difference and the changing requirements of the fast-growing economy are the keys. Vendors and users cannot count on only one party s change; the changes are mutual. But the changes at the user level need to be predicated by some solid knowledge transfer before decisions are taken. Otherwise, one or more of the parties will make fundamental mistakes since many Chinese companies lack the basics of ERP. Here are some recommendations for vendors trying to make it in the Chinese market: Be flexible This applies not only to product, but also to marketing, pricing, and contract negotiations. Simplify Small, easy-to-understand packages are more acceptable and low risk to both sides. Be selective A large number of contracts from Chinese customers is not profitable, so make sure you truly understand customer needs and what you can offer before you start the paperwork. Collaborate Don t collaborate only during implementation. Provide users with easier access to pre-sales learning resources as well as post-sales services. Education should not be just on ERP either; it needs to be applied to the supply chain as well. Invest in R&D Ideally, set up an R&D center. Be closer to Chinese customers, utilize local resources, and carry out joint research with local clients for success. In the months ahead, AMR Research will deliver follow-up Reports on the profile of Chinese companies (including their needs of IT tools) and local vendors operations. AMR Research Report September AMR Research, Inc. 11

14 Appendices Appendix A: Methodology AMR Research conducted a survey designed specifically for the Chinese ERP market, held telephone interviews, and made onsite visits of many manufacturers for insight on the user point of view. In addition, we visited most of the vendors that are included in this Report. Some findings are based on interactions with their Asia-Pacific executives and on their case studies AMR Research, Inc. AMR Research Report September 2005

15 Digital China Epicor IFS Infor Intentia Kingdee Oracle Microsoft Business Solutions QAD SAP SoftBrands SSA Global UFIDA Company List

16 Acronyms and Abbreviations A&D CRM Aerospace and Defense Customer Relationship Management DDSN Demand-Driven Supply Network AMR Research provides world-class research and actionable advice for executives tasked with delivering enhanced business process performance and cost savings with the aid of technology. 5,000 leaders in the Global 1000 put their trust in AMR Research s integrity, depth of industry expertise, and passion for customer service to support their most critical business initiatives, including supply chain transformation, new product introduction, customer profitability, compliance and governance, and IT benefits realization. More information is available at Your comments are welcome. Reprints are available. Send any comments or questions to: AMR Research, Inc. 125 Summer Street Boston, MA Tel: Fax: ERP R&D SCM SOE VAR Enterprise Resource Planning Research and Development Supply Chain Management State-Owned Enterprise Value-Added Reseller 555 Montgomery Street Suite 650 San Francisco, CA Tel: Whittaker House Whittaker Avenue Richmond, Surrey TW9 1EH United Kingdom Tel: +44 (0) Fax: +44 (0) AMR-R-18489