Clas Neumann, head of SAP Labs Operations and Fast Growth Markets, and Rui Cheng Li, MD Labs China, talk about the focus of SAP’s research and development (R&D) efforts in China.
Q: What are the major changes you have witnessed since SAP established its first entity in China?
Neumann: There have been so many changes, it is really difficult to know where to start. Besides the obvious changes like the super-fast development of the economy, tech infrastructure and also the political weight of China in international bodies, we have also seen very specific changes in our business.
Initially, the concept of software and paying a licence fee for the use of software was not widely known. Many customers found it counterintuitive to pay for intellectual property when the physical value of the CD was only a few Yuan. This has changed dramatically, thanks to the rising Chinese software industry and the government’s strong modernisation efforts.
In addition, the knowledge base of our customers has changed significantly. Our first 10 customers, after we entered China in 1995, were from a group of large joint ventures between foreign multinationals and Chinese conglomerates. Today, 90 per cent of our customers are Chinese companies from the private sector and state-owned companies.
Finally, IT-related research at universities, and higher education in general, has improved a lot. Initially, it was challenging to find capable software developers or IT specialists in China. Today there is a large supply. Nevertheless, the talent situation in Beijing or Shanghai is still difficult, whereas in Xi’an or Chengdu it is a bit easier for an IT company to find highly skilled engineers.
Q: When did SAP decide to invest in R&D in China?
Neumann: We started our SAP Labs China in 2003, after performing localisation engineering for our products for a few years. Based on the excellent experience we had, we also decided to pursue global R&D work in China. As success breeds success, more business units from SAP were convinced that China is a great place to develop software. Today, China is our third largest R&D hub in the world.
Q: Has SAP’s R&D team developed products that are primarily for China?
Neumann: For many years, the Chinese market was too small to justify such a large R&D set-up. Therefore most of the products were exported and successfully implemented by global SAP clients. Today, the situation has changed a bit. We feel that in many areas, China is either the biggest market (e-commerce, robotics, machine learning) or is also a technology and adoption leader (e-payment systems). So naturally, we have put more research and product development in these areas in China and are slowly transforming our SAP Labs China in that direction. As the SME market in China is also a strong growth engine, we have developed our latest cloud-based product “SAP Anywhere” here in Shanghai and had our global product launch in Beijing last year.
Q: With China’s well documented air pollution deterring some people from locating here, and administrative issues often making it challenging to secure required visas and work permits, what measures has SAP taken to ensure that it is able to attract and retain the talent it requires for its R&D operations?
Neumann: Indeed it isn’t easy to attract foreign talent to large cities in China due to the fact that the living conditions are seen as very difficult. What we do is that we offer more flexible models, where the family can also stay outside of China, or we offer shorter assignments than before. We do not have visa or work permit issues as we usually only bring highly qualified engineers with many years of successful track record to China.
Overall the situation of bringing foreign experts to China is still satisfactory, and we try of course to participate in a small way to make the overall situation better through our technology solutions.
Q: What are some of the other key challenges SAP faces in terms of China’s regulatory environment?
Neumann: In many areas in IT, there are regulations that demand a joint venture, such as in providing cloud services to businesses in China. This brings no additional value-add for our customers – in fact sometimes such regulations slow down the process of being able to offer these kind of services in the first place. We have joined the efforts of the European Chamber with regard to asking for a level playing field and for a reduction of bureaucracy.
Q: What is the significance of the “Made in China 2025” initiative, and how big an impact do you envisage it having on SAP’s future business here?
Neumann: “Made in China 2025” is a very significant step in the digitalization of China’s industries. It represents the first time a 10-year industrial modernisation plan has been released (even arriving shortly before the release of the latest five-year plan). It also addresses the most important areas in transforming the Chinese economy from an investment-driven model to an innovation- and consumption-driven growth model. The success of the initiative will define how successful the overall transformation turns out to be.
Q: Would you agree that before manufacturers in China start to make costly investments in IT, robotics and other forms of automation typically associated with Industry 4.0, they need to go back to basics and upgrade their management practices?
Neumann: I don’t think that one necessarily has anything to do with the other. Also, I am not a specialist on Chinese management practices, as I have never worked in a Chinese company. I believe the number of robots in comparison to people employed in a typical plant in China is still only a fraction of what it is in South Korea, Japan or Germany. So, there is really a lot of growth opportunity here. Also, if you scrutinise the highly-automated countries I mentioned above, their management practices are also vastly different, yet this has not impacted their ability to successfully automate their respective industries. Actually, the opposite is the case – robots don’t care who their manager is and what the management practices are, they do as they are told. Very soon they will also predict, learn and improve.
Q: How does China compare to other fast-growth markets such as India or Russia?
Neumann: One cannot compare those markets at all, as they are driven by completely different factors. I was never a big fan of the BRIC or BRICS concept. I have been visiting all of these markets every year for a long time and there is really not much that China has in common with Brazil or Russia – with the exception of the landmass. The people are different, the culture and history is different, the economy is driven by completely different factors, the politics work differently….and so on. That being said, these markets are of course highly interconnected in terms of global trade and the interdependencies of their economic development cannot be neglected.
This interview was originally published in EURObiz, the Journal of the European Union Chamber of Commerce in China.
Contributing to the multimedia elements of this story: Natalie Hauck and Alexander Januschke, SAP Development University.