BETTER ARMED AND READY
ERP takes hold in globalizing China
By Cesar Bacani and Yang Jian

Just last year, Beijing’s SinoSteel was operating like many of China’s thousands of state-owned enterprises (SOEs): as silos of jerry-built computer and other systems, each fiefdom doing things its own way and doling out information as it saw fit. No longer. The 40 bn renminbi (US$3.2 bn) a year importer and exporter of metallurgical and mineral resources has just gone live with the first phase of its Oracle enterprise resource planning (ERP) system. “SOEs like SinoSteel have to fight for survival,” explains Li Hong, head of the company’s information management department. “We need to introduce a flat management structure, improve our ability to manage risks, and respond to market needs.”

When CFO Asia took a look at ERP in China in 2004, the picture was decidedly mixed. While multinationals in the mainland were implementing across-the-board ERP modules, SOEs and private-sector companies were moving far more cautiously. Their focus was on limited implementation of ERP components that enable compliance with Chinese financial regulations, an area where local vendors such as Ufida and Kingdee excel. They regarded the ERP software of global vendors like Oracle, SAP, QAD, and Systems Union as excessively expensive. There was also the unspoken worry that the transparency and efficiency promoted by a full-blown ERP system will result in painful restructuring and across-the-board firings.

But it seems the imperative of survival is trumping the fear of change. Beijing-based IT consultancy Analysys International says ERP sales totaled 2.8 bn renminbi (US$349m) last year, up 24.2% from 2004. “We’re seeing strong momentum for new instalments as companies look to go global or become more competitive in their home market,” says Klaus Zimmer, president and CEO of SAP North Asia. “For example, in the last year, we’ve seen an acceleration in ERP interest in the banking industry, which is opening up to foreign competition.”

For Zimmer, the long-term implications are clear. “When executives in Japan, Korea, and elsewhere ask me how Chinese companies are progressing, I tell them they need to be careful,” he says. “China’s SOEs are growing into and indeed becoming global forces.” The mainland’s nearly 136,000 SOEs had aggregate earnings of 904.7 bn renminbi (US$112 bn) in 2005, up 25% from the year before, indicating sharper competitiveness. What’s more, they are getting more aggressive in buying assets and companies abroad. Chinese SOEs and other large companies paid US$7.9 bn last year for 53 foreign acquisitions, nearly three times the dollar volume in 2004.

In Zimmer’s view, ERP systems will play a key role in Chinese globalization. Case in point: Lenovo, which bought IBM’s PC assets in 2005. SAP started working with the emerging Chinese multinational, then known as Legend Holdings, in 1998. When the dotcom bubble burst, Legend decided to spin off its IT services component and refocus on the hardware business. “Because the company was using SAP’s solutions, it was able to separate what is now Lenovo and Digital China in just six weeks,” says Zimmer. “And when Lenovo bought the computer division of IBM, it found it easy to merge and integrate the division because IBM too was using SAP solutions.”

There is, of course, a yawning gap between purchasing an ERP package and achieving actual efficiency in operations and clarity in strategic planning, not to say making the big leap to the global stage. Albert Tsang, head of enterprise solutions in China for Indian IT services outsourcer Infosys Technologies, has worked with SOEs on ERP implementation for nearly 12 years. It can be a wrenching experience, he says. “As they delve deeper into specifics, they begin to realize the inherent complexity of an SAP or Oracle implementation. They realize that their business processes must be reengineered and realigned, and that they must also go through a high degree of profit systemization and harmonization.”

That is why some SOEs leave their modules half-implemented or focus only on financial compliance software. Wang Rulin, vice-director of the e-business expert commission at the China Association of IT Economics, estimates that only half of local companies that bought ERP have successfully implemented the software. “The baggage of the planned economy and relationships formed over the years are still enormous,” he says. “The process optimization and transparency brought by ERP creates a big shockwave to old structures and embedded interests.”

Still, China’s state-owned enterprises clearly feel they have no choice but to bite the bullet. Indeed, says Aldous Wong, general manager for applications at Oracle Greater China: “We are seeing a lot of actual projects and opportunities initiated by SOE executives themselves.” Demand has grown so robust that the implementation pipeline is beginning to bulge. “The market is starting to grow too fast,” says Norman Sze, managing partner at Deloitte Consulting China. “We are actually short of people.” Deloitte’s revenues from ERP consulting almost doubled in 2005.

Not all SOEs are getting it right, but given the rising number of implementations, the instances of success are growing in number. And powerful impulses can be unleashed when the ERP stars are properly aligned. “We can now establish a world-class management flow and model, which will help us lay the foundation to become one of the world’s top 500 enterprises,” says Lenovo CEO Yang Yuanqing. Adds Qiang Wei, CIO of Beijing-based Capital Steel: “We are still behind the world leaders [in steel], but the information platform now available to us gives us a good opportunity to narrow the gap.”

The Chinese are indeed coming.