Pei Huang: Please summarize the growth of SAP in China in 2005.

Klaus Zimmer: Our target is developing with double speed of the market. So we have 25~30% growth last year.

Pei: You are also responsible for some other countries in North Asia. What's the difference between these markets?

Klaus: I am responsible for Korea, China, Taiwan Region, and Hong Kong. China is the biggest market. These markets are very different. Even within China, the market is quite different in different regions. For example, the biggest state own companies are located in north China, in Shandong, Northeast and Beijing. A lot of foreign companies are operating in Shanghai area and provinces around. Most private manufacturers are along the coast, in Xiamen, Wenzhou and of course in Guangdong.
There is even bigger difference between China and other countries and regions. From maturity point of view, I think that Hong Kong has very mature business environment, all our customers are service companies. In Korea, the majority of our customers are in manufacturing industry, such as Hyundai, Samsung.
The way of doing business is also very different. For example, in China, we deal direct with end customers, for example Sinopec, Bank of China or whatever, we deal with them directly. They don't usually like anybody in between. But in Korea, those big customers often have their own IT companies to do system integration. We always deal with system integrator, never deal directly with the company. For example, Samsung has the company called SDS (Samsung Data System), so, all the IT affairs of Samsung must deal with SDS. Each country or region has its own pace on how to do business and how to optimize the business transaction.
We started our business in China first to international plants, many based in Shanghai, more than ten years ago, like KODAK, P&G and so on. The first engagement we did is in Shanghai region. Then, very quickly, we have some nice customers in South China. There are more private enterprises there. For example, Robust, a famous CPG producer of China, became our customer in 1997. Then, for the last 4 years, especially after WTO, many big companies are quickly convinced that SAP is a good partner and good tool for them to change the management style. After they were convinced in 2001, our business has moved to north. So, now the majority of our business is in Beijing.
The Korean economy is very versatile. When the economy goes up, like now, we are doing very well. But it can quickly go down. Taiwan depends more and more on Chinese economy today. Many companies actually move their business to China. Hong Kong is more service based. There are a lot of service companies. Companies possibly have manufacturing factories in China, but their design and original headquarter are still in Hong Kong.
So I would say, in mainland China, there are three different markets for SAP. Korea is a different market. Hong Kong and Taiwan are different markets. We have 6 to 7 very clearly definable markets.

Pei: In your view, what are the key factors differentiating SAP from other ERP vendors? How could SAP steadily grow in 35 years?

Klaus: We have great team and great culture. This has been started very early. SAP people are very seriously independent thinkers. They are not people who follow others. Our biggest competitor tries to pass us by buying a lot of companies. But SAP is not thinking as this way. We really think foremost that there is no business without our customers. Only if we take care of our customers, they can take care of our business. This is a very simple rule of SAP and is a kind of our DNA. If you look at our customers, they are definitely prosperous. This is our fundamental difference from many other companies. I hire people from our main competitors, when we bring them in, they are good in sales, but they never think what is behind; they don't really think what is coming up after they sign the contract. They have to understand that their responsibility doesn't end after sell. They must think about what we call "customer engagement lifecycle" over many years, maybe 5 to 10 years, sometimes even 30 years. Many of our customers began from 1972. In China, we have some customers for 10 years. SAP has long term view than only care about the revenue quarter by quarter. When we hire people, the first thing they realize is that SAP really cares about the quality of implementation and helps customers being successful, not only selling software. We are actually surveying our customers every quarter. Independent survey companies call or send email to our customers and then give out the rating. The content of rating includes, for example, are they happy with us, are they going to recommend SAP again, are they thinking to buy something else? So we have clear idea that we will serve the customers very closely, otherwise we will be moved away from our customers. This is a very strong aspect of our business.
Another one aspect is of course we have strong product. But what we are doing is not only the software. Software is only tool we use. What we are actually doing is business engineering. This is something that we have the biggest repository, the biggest knowledge base of the whole world about how companies are run, how they can actually achieve better result, how they can become more profitable, how they can reduce the cost, and so on. We accumulate the knowledge base consistently for many years. When you look at oil business today, about 90% of the oil business in the whole world runs SAP systems. All biggest oil companies are using SAP. Why? Because they invested many years ago, based on SAP's solutions for all oil&gas industry companies, they could build their own customized solutions to meet their very specific needs. Each industry is different, so we have solutions for 25 different industries. In most industries, we are the market leader by far. The biggest one is oil industry, and other one is high-tech. Wherever you go, if you check high-tech companies, they are usually our customers. We have cooperated for so many years with IBM, Intel, HP, Dell, etc, and understand their requirements. It's like that, if you always talk to very smart people, you will be clever, because you get their thinking. If you always talk to very stupid people, you will become low level. So, it is very simple. We attract very early the best companies and listen to them, learn from them, and then our product becomes smart. When you talk with consultants of other ERP, they are moving up to SAP, they never want to go back. Because they think SAP is a real architecture that everything is built to run a company. So, if you ask me why our company is the best, I will say, we are the business process company. We are the first one to document a process, for example, from a lead to a contract, from a contract to cash, and then provide service and maintenance. This is something that nobody else on this scale can go. We have more than 30,000 customers globally and In China, we got more than 1,200 customers. Two years ago, we went into the SME business. This year, we are expecting 300 new customers in SME business. We keep the momentum. At the same time, we also build strongly the existing customer base. The existing customer in China, Korea and Taiwan are mostly from manufacturing area, they very often go in and buy SAP, and buy standard product to do financial management or sales and distribution management. After a year or two, they usually upgrade, they go industry specific. For example, General Motor, they are the first automotive OEM in China who expanded its SAP application from the finance to the logistics part of our automotive solution, which we call APO (Advanced Planner and Optimizer).

Pei: SAP is expanding the business from high end to middle end and low end. The competition of SME market is fierce, because many other vendors may offer very cheap price and solutions. In your view, how could SAP succeed in SME market?

Klaus: it is always very good to move from top to down. Our local competitors drive from mid-size to small size companies, but it is not working, because they can not do a technology well, so they don't have scale, and they don't have business prestige. But for us, it is easier to operate. We have a full set of functionalities; and small or middle-sized companies or businesses have the same needs as their big counterparts, but with fewer resources. When you look at China Telecom, their IT department is huge. They have several hundred people for IT. But in mid-size companies, they maybe have one or two guys doing IT. Their resources are limited, that requires us to change the product.
SAP Business One, our product for small companies, is very easy to implement. Then we have a product which is striped down from our product for large business. Around this, we actually build industry Best Practices. It is very attractive for those Chinese manufacturing companies in many industries. We look at the commonness of the industries and what they all need, for example, how does the chart of account look, and how does its logistic system need to be. We scale down from big systems to something which people can digest. They don't have ten people in IT; they have only one. So this one guy should do it. He doesn't have to be a PHD. It is very simple to make it easy for mid-size company to enjoy the same benefit as big ones.
We started to promote our SME solution about two years ago. And the center of this solution worldwide is our Labs in Shanghai. It is a very big team, which is now commoditizing our big solution for mid size companies to digest and use. So far, at least seven or eight industries are covered, including consumer goods, High-tech, Utility, etc. They are doing pretty well, and we have very good expertise in Beijing office. They could put all the system in a laptop computer, and they could go to customer and use the customer data within a couple of days. They can show to the customers what SAP is doing with the data, and this data could then be used immediately for implementing the real system. This one has been quite astonishing. When companies are growing, very often they do not know whether their management is in best class, where they can improve much better. In this perspective, our software is a big part of documentation of industry. So our partners and even our customers themselves can actually read the process in our software and compare with themselves, and they can know how other companies are doing. Because we build the knowledge base on worldwide bases, it is worldwide best practice information. This is something most other competitors don't have.
So there are two things, one is the product and another one is the people, which make the difference. I believe that we are on the good track to move from there. If you look at the middle size market, everybody wants to be big, and to grow the business. When we went to business school, they always say the most important thing for you to remember is sustainable, profitable growth-SPG. That's the target. You should grow, you should make it sustainable, and you should not lose money. When you can do this one over the years, you could be successful.

Pei: The way of doing business with large enterprises is very different with SME market. As I know, SAP encountered some troubles when you entered SME market. How do you feel now?

Klaus: Of course, we had a lot of issues at first, because we think big. Our people always think big companies as we can get more revenue from big companies. To go into the mid market, we have to do the same affairs and we need to think small. We need to meet different customers, suddenly maybe listen to their bosses, and deal with the things that we have never heard. Sometimes very often, you also need to meet different levels of competence, which possibly is not the same level as us. They can not afford to have a PHD. So, it's a big learning course for us to enter SME market. In the last two years, we learnt a lot of things, we learnt how to behave. Another important difference is that we need to put a wide footprint to cover mid market. We have to go via channel. We have changed, and we are still changing ourselves to become a channel player, because our business today goes directly. Our target is to do 10~15% via channel. And in China, I think now we get 12% via partners. It is very different, because to deal with our partners, to convince them and educate them, control quality is another issue. I can control and change my own people, but how can I do it with partners' people? We can only try to move them. Formerly we have technical partners, but we don't have sales and promotion partners. Accenture and IBM are implementing our system for the clients. But now, we need some people to sale and distribute our software, for example, some PC companies resell our SAP Business One product. So, it's a big learning curve for us. Actually, we have learnt good trick in 2005.

Pei: you are continuously changing the organization architecture of your Chinese team?

Klaus: Yes. If you look at what we were two years ago, we are not the same as today, because we have learnt and became smart. To do SME business, we need different people. For example, some people in our company are called channel enabler. These people are working with our partners to enable sales via channels.

Pei: Which database does SAP software use?

Klaus: We are one of the biggest resellers of Oracle database worldwide. In China, 70~80% of our customer insist to use Oracle database. We can sell Oracle database. Others are using Microsoft SQL Server, IBM DB2, even Sybase. We actually have our own database called MaxDB. We put this on the Internet as free and open source database. We got a couple of developing functionalities, so customers could use our open database.

Pei: Traditionally, some experts said that in SAP, there are tens of thousands switches. If you put the switches to different sides, you could meet different industries. Do you still use this type of technology or it is totally changed?

Klaus: This has illustrated how SAP software was implemented in the past. Today, we have been more advanced than that. Before, we developed the software for different functions and then integrated them together. For example, the accounting system generates the chart of accounting, then, puts the chart of account in the system to transact and connect the workflow for people actually doing and connect with sales and other departments. Our main ideas it to be integrated, we call the system R, and R stand for Real time. If you put the order into the system, actually you have it real time available for everybody else. This is our main idea. This is where integration comes from. Before that one, nobody realized integration.
At early stages, we used main frame system, which was a multi-million dollars system and there was point-to-point connection to terminate it. With a black & white screen, people did entry and retrieval on the system, actually directly connected to the main frame. Then, in early 90s we began to use client/server architecture, the users usually use the application on the server and put the database in different servers. Now there is a new architecture called SOA (Service Oriented Architecture). The new architecture SAP use has been working for more than two years. We spent several thousands of people working on it. Now we separate the software by thousands of identified and isolated processes. We document and take out five thousands of most important processes and isolate them from the platform, and define our own SOA called ESA (Enterprise Service Architecture). This architecture is actually the basis of our Netweaver product. Based on Netweaver, a company could define what processes they want to implement, and they can choose the processes, engage the processes, and change the processes.
Process innovation is the core of future business. Companies should change the process landscape to be competitive. For example, the Olympic Game is coming, so that some new types of bank cards are needed to pay for Olympic ticket, and to take the subway. To enable this kind of idea coming to the market, the banks have to change the processes, because possibly they are not there yet. Very often, all infrastructures are not supporting, so they have to go back to the IT department. If they cannot change these things, then they can't issue this card. So you have to make the system to support it, then you can sell it and record the transaction. It took a long time before. We believe more and more new business opportunities will come from remodeling business processes rather than inventing new product. The companies really need to keep their competitive advantage by re-changing themselves. This is business model innovation. We use this one to drive this process oriented re-engineering of whole system. This will be finished by end of 2007. The product will based on ESA architecture and on Netweaver.

Pei: Professor Scheer told me you have integrated ARIS as a BPM tool. Could you introduce something about it?

Klaus: We have a system called IDES (Internet Demonstration and Evaluation System). That's the product of IDS Scheer Company. That's part of SAP system. It is kind of process modeling engine, so you can play around this process and you can use it to optimize the process and workflow. We license this software from IDS Scheer Company. That is actually based on ARIS toolset. But ARIS toolset is even bigger and it is a stand alone system. It can be sold without any SAP system.

Pei: There are many ERP vendors in China. They might have different background. Some come from accounting system, some come from MRP II. There are also some specialized international ERP vendors, such as QAD, IFS, SSA, etc. They have a lot of customers in Chinese manufacturing industries. What's your view of Chinese ERP market?

Klaus: Compare to international market, Chinese ERP market is still very small. It is only less than 200 million U.S dollars, which is nothing compare to the market in the Europe and even Japan. Chinese economy is now bigger than Italian. The whole economy is two trillion U.S dollars. But I can bet that in Italy, there is much bigger ERP market than in China. The market size depends on the way how people actually value service and software. When I started 9 years ago, there is no software market. No one bought software. They bought hardware, and got software for free. Now, the view of service and software has been largely changed. SAP is very successful. We introduced ERP to China, and for the last 4 or 5 years, we got huge growth and profit. ERP market is just like a cake, which is nice and sweet, so, the most important thing is that the cake must grow. IT spending, compared to GDP, is very small in China. Now, the majority of IT spending in China still goes to hardware. But in other places, like in the U.S and in Europe, it actually goes to software and services. Software and services are two thirds, and hardware is only one third. But here, the software and services are only one third. Chinese ERP market is a fast growing market, so, even if we don't take the market share from others, we could still grow our business. So the good thing is that everything will grow. When you look at the biggest four or five players, we take 60% of the market. We share this market with four biggest competitors. The others only own 40% of the market.
Customers don't like insecurity. They like their software and service providers to be safe, so that we have the capability to eat some market share from our competitors. In China, it is very clear that we eat a lot of market share from our competitors. When we grow every year double than the market, that means we get a piece from our competitors. But there will be definitely space for many players on Chinese ERP market. There will be also space for local ERP providers. Companies like UFIDA, Kingdee, Langchao, are already substantial companies. They are not going away just because we eat up the market share. But we never encounter them in high end market. We encountered with Oracle, but we don't encounter QAD and local competitors. I think our small and middle sized partners are fighting with them, not us directly.

Pei: Some customers of other ERP vendors changed to SAP. Could you forecast the trend?

Klaus: In national 11th five-year plan, a lot of contents are looking at sustainable profitable growth, and it is the same as our philosophy. The relationship between SAP and customers are more than sales and customers. The system we have could make our customers work properly. Using SAP actually create more trust. There are a lot of companies that want to go to public, and they install SAP because of this reason. Because they think that if they get more trust, they could get more investment. We are already here for ten years, and we have shown the companies are keep growing well with our software. They were very small companies several years ago, but now they are becoming huge ones, like Haier. Look at Lenovo, it was relatively small in 1998 or so, but now it is a global company. We help them to grow and I think this is our main advantage that we can already show, we can reference that these companies to sustain the growth.

Pei: SAP came to China with the international manufacturers, do you also have some big Chinese customers using SAP abroad China？

Klaus: Yes, CNOOC (China National Offshore Oil Company) already implement Indonesia and everywhere. Haier use SAP out of Qingdao and out China.

Pei: This year, Innovation is a hot word. Please give your comments about the effective way of innovation.

Klaus: The best way to innovate is to listen to big ears and open big eyes to the customers. We innovate because we try to look what our customers want now and what they will want in 5 years. It is very important to listen to what the customers want. In Europe, people change a new mobile phone every 5 years, and people only buy it when they lose it. In China, people buy it because it is a fashion, and they buy a new one when it is just released. In the automotive market, companies like General Motor, release 4 or 5 new models every year now. That makes them more adjustable. If a company don't know the customer needs and keep innovating, they will lose market share. For us, we have very good transaction and transmission between customers want and our product, what we think our product should look like, this keeps us ahead of the market. We are not tracing and selling, we are on top of these things. Companies like Oracle, they say ERP is dead, everything is on the Internet; the Internet is computer. In my view, the Internet came, and it is very useful, but Internet is not everything. Companies still need to make profit. You cannot do it on the Internet. You must have your own numbers and you must know how to operate the company.

Pei: Do you agree that ERP is just a supporting system?

Klaus: Yes. Our biggest customer in China for automotive industry is General Motor in Shanghai. They actually have flexible manufacturing system supported by SAP. They can produce a couple of models in one factory. They can have different cars and vans assembled one after another. It is a new style. In some automotive companies, they build new factory for each car; they are not flexible. ERP is only an enabler of business model; it is not really driving the business model. The companies like GM, Ford, have to drive the business model by themselves, and that keeps them growing. ERP is only the toolset for making them successful.

Pei: What's the feature of SAP PLM?

Klaus: Our PLM is developed in our own way. For example, CCTV can use PLM to plan and manage the productions and projects. They could manage an Olympic Game project, they can use our PLM to reconfigure the standard systems, and control it. Because we have very mature ERP basic product, we can use them to create very stable and strong PLM applications. For example, BBC is using our PLM to run, control, and monitors all the productions. The product is fast changing now, for example, mobile phones. Nokia is using SAP PLM. From design to production every often it takes less than a year, so you have to control it.

Pei: This year MES is becoming hot. Some automation providers, ERP providers and even PLM providers entered this market. What is your strategy?

Klaus: We are not doing MES, but we have some interface to do it. For example, a steel company needs a real time date to put into, because later when they have end product, they must know the information of the batch. They should find out some problems happened before. Our work is to decrease this to happen. We do not like Siemens, which offer the solutions to control automation systems, but we are connecting to the automation system to read MES data.

Pei: In your view, what does IT bring to Chinese Manufacturing in the last five years?

Klaus: I think IT brings Chinese manufacturing capability. Lenovo is a good example. Lenovo could not scale up to be the largest PC producer in Asia without IT system. Without IT, the growth of the company is limited and there is a ceiling. Chinese companies are flexible, and are changing very fast. Company like BYD in Shenzhen, which is a battery producer, has changed its strategy and went into automotive industry. We actually enable many companies to allow their strategic changes. Lenovo divided into Legend computer, digital China, etc. Because the business could not be focused, they had to split them, IT systems enabled this split. Last year they bought IBM PC, and it was very easy for them to merge two SAP systems. So, SAP has built a flexible IT system for Chinese manufacturing companies. Today, China is the manufacturing center of the world, scaling up every year with an unbelievable speed. When you look at the toys, cars, or whatever, China is always on the biggest five and ten producers in the world for nearly everything. A part of it is enabled by IT, and by SAP.