Klaus Zimmer, SAP's president and chief executive officer of Northern Asia, took charge of SAP's Chinese operations in 1997, a time when the most powerful executive at many Chinese companies was still the Communist Party secretary.
Today, China's economy is booming. State-owned companies have tossed aside the shackles of a planned economy and a growing number of Chinese companies are looking overseas for new markets and opportunities. Working closely with SAP's Chinese customers and partners, Zimmer watched first hand as this transformation unfolded over the last decade.
Zimmer recently sat down with IDG News Service at SAP's Beijing office to discuss the opportunities and challenges presented by China's fast-moving market. The following is an edited transcript of that conversation.
There has been so much hype about China and the potential of the Chinese software market. Is the hype justified?
Klaus Zimmer: Good question. I'm actually not so bullish as people who watch China from the outside. I see more shadows than I see light and I think that after 2008, when Beijing hosts the Olympics, there will be an adjustment in the economy.
Today, there is huge overproduction in many, many sectors. I travel around the country and I visit many customers and they all show me their new equipment, their new buildings, and then you ask yourself: where is it going to lead? It's going to lead to huge overcapacity in steel, in automotives, in home appliances, and it will have repercussions on the world market. The Chinese are not going to buy all that stuff, so it will be dumped at special prices on the world market.
Nevertheless, for the software market we are on a stable platform. At SAP, we have close to 1,300 customers. That's quite substantial: 1,300 customers and 2,300 installations. The majority, of course, are smaller companies, but more than 400 are big companies.
Have Chinese companies generally embraced IT as a competitive advantage?
Zimmer: One of our retail customers here once noted that the basket of goods that Chinese people carry out of the supermarket is equivalent to one-tenth of the value that American consumers carry out of the market. That's also our observation. The shopping behavior of the Chinese enterprises for software is about one-tenth of what equivalent companies, in the U.S. for example, are buying.
Why is that?
Zimmer: It's a homegrown system here. They are well aware that IT can help, but they do not rely on IT for a competitive edge. They are mainly focused on labor-intensive manufacturing. They are sitting here and they do not see efficiency gains from the ERP [enterprise resource planning] system helping the bottom line.
Once they go outside China and go to the U.S. or European markets, they change their thinking. For example, we had Lenovo running SAP for six years before they acquired IBM's PC division. When they became an international company, they gave us a contract that was 10 times bigger within a year or so of the acquisition.
International exposure clearly tells Chinese companies that they have to change otherwise they cannot compete on the world market. One of the biggest growth engines for our revenue is the internationalization of the Chinese companies.
Has the CIO [chief information officer] emerged as an important position in Chinese companies?
Zimmer: Ten years ago there was no CIO. The classical Chinese company had a general manager; a party secretary, who was the most powerful guy; and a chief engineer. There was no one else. These three guys managed the company. Today, you have the CIO, the CFO [chief financial officer], a guy who is doing the investor relations, and so on. It's becoming more common, especially in the banking business, where the CIO is actually quite powerful.
How have ERP systems helped state-owned Chinese companies transition to the market economy?
Zimmer: When you go back 10 years or so, the assets of the big trans-regional Chinese companies were not owned by the headquarters. They were owned by the province or by a local organization. So, even though these were the assets of the headquarters company, they were not controlled by the headquarters.
You still have a lot of companies who don't have complete control over their regional units. Some state-owned companies use the reporting functions in SAP to get a grip on these independent regional units, just to see what is going on. For example, they can see what the revenue is in Shanghai or in Jiangsu province and so on.
Do you see Chinese software companies rising to become international competitors for SAP?
Zimmer: I don't think so. They are not growing beyond their language barriers. They are not a global competitive force on the world market. They possibly have a role to play in the Chinese communities worldwide, but not beyond this.
What holds them back?
Zimmer: None of them speak English. It's actually a big challenge for Chinese companies to become international. The country was delinked from the world market for 40 or 50 years. It's a gap that you don't have in Korea or Taiwan, but you have in China.
Today, when somebody is using Chinese ERP software like UFIDA, you don't have a multinational version and you don't have multinational support. To build that is extremely difficult. An international Chinese company cannot rely on the domestic players. That's very clear today and it will be true for quite some years to come.
Is it easy to recruit highly skilled programmers and engineers straight out of university in China?
Zimmer: We generally don't get the quality of people we need. The education system is not providing them. What we have to do is train them, and that's an issue.
When I look at our management teams, in all of our lines of business, they are all homegrown. We have built these capabilities over the years. I don't think you can come here, parachute in, and build a viable management system that can carry a huge organization out of nothing. It's not possible. You have to build the culture, you have to build the skills, you have to build the expertise.
The universities here are not teaching the right stuff. The same problem exists in Europe. In Germany, they also are not teaching the right skills. It's not really close to the necessities of the market.
What are the skills they need?
Zimmer: First of all, the whole education system is built on repetition: basically memorizing and repeating stuff. The system is not built on questioning things and having healthy disputes over issues. That's what you need.
Again, our senior managers have all been with the company for five to six years. They have grown through the ranks. We identify them and then we start developing them, training them and building them up. They go on to become the heart, the core of the company, and then they build the execution capabilities around them.