SAPinsiders Should Proceed with Cautious Optimism in China

SAP perceives a big opportunity to fill a supply chain management (SCM) gap and consequently has started expanding its local partner base in China. As part of its current cloud strategy, SAP released solutions for customers last year on the Alibaba Cloud — the largest Chinese cloud services provider — and has done an excellent job leveraging local talent, hiring 3,000 developers in China.

SAP has also focused on China at the right time, as the Made in China 2025 plan finally starts to mobilize Chinese manufacturers to move to higher value capabilities and products with smarter manufacturing. While the beginnings of a trade war between the US and China might hurt SAP customers in China, it will also drive a demand for more sophisticated SCM and planning tools to squeeze more value out of suddenly thin margins.

Growth and Risks in China

SAP has increased its investments in China several times. It first opened its Beijing office in 1994, and early this decade, it doubled the number of offices in China to 10 and has since opened an eleventh. By now, SAP understands the culture and how to productively work with its Chinese employees, partners, and customers within the local regulations.

Since its launch in 2009, Alibaba Cloud has grown into the largest cloud-computing service provider in China by far, and, for now at least, SAP must work with Alibaba to deliver its cloud services to Chinese customers. The two companies will undoubtedly develop some unique solutions together in artificial intelligence, Internet of Things (IoT) apps, and Smart Manufacturing for the Chinese market.

Unfortunately, the Chinese market will likely present several challenges going forward:

• Although SAP has made significant progress in China and the opportunity remains enormous, much of the remaining target market has never worked with enterprise resource planning (ERP) software before and lacks the innovative, technology-driven culture of the adopters so far. SAP has overcome such cultural challenges before and should prepare to continue doing so.
• While the trade war with the US has yet to seriously hurt SAP in China, if it gets worse, then SAP could see companies cutting their IT budgets in China rather than using IT to improve efficiency.
• The trade war could also mean that SAP customers move their production capabilities to other parts of Southeast Asia. If a significant number appear ready to make this move, SAP should prepare to support them wherever they go and have partners ready in the destination countries, whether that means India, Indonesia, Bangladesh, or anywhere else.
• While Chinese officials have claimed that forced technology transfers would stop, many foreign firms say they have not only continued but increased. As the Chinese market grows as a portion of SAP’s business, the risk of forced technology transfer could also increase.

What Does This Mean for SAPinsiders?

Based on the trends for SAP in China, SAP customers with operations in China should heed the following takeaways:

• If implementing SAP ERP or SAP S/4HANA in China for the first time, work with an experienced partner. Deploying an ERP system in any new market requires cultural and regulatory considerations. Educate local employees on the business philosophy that goes along with running an ERP system. Stay compliant with China’s Golden Tax System (GTS). Experienced partners know how to do all this.
• Organizations that fully intend to stay in China should piggyback on SAP’s strategy and leverage the SAP tools on Alibaba Cloud. This collaboration between SAP and Alibaba will provide improved tools for planning, forecasting, and working with local suppliers, partners, and customers.
• Do NOT let the trade war negatively affect the IT strategy. While trade wars hurt, technologies hold the potential to ease that hurt. While less available cash may mean organizations have smaller budgets to run proofs of concept for more experimental technologies, it should force companies to spend more on already proven technologies. Identify technologies with proven value and solid business cases and implement those to gain a competitive edge.
• Companies that do plan to move operations should evaluate how that might affect their digital SCM capabilities. These companies should communicate with SAP and their other partners to ensure that support for tools and capabilities will continue. If they have already started to derive value from SAP on Alibaba Cloud, they should make sure they can continue to benefit wherever they go.

Following this strategic guidance should help SAP customers compete in China.

Pierce Owen can be reached at Pierce.Owen@wispubs.com.