April 2012

The Growing Pains of IT in China

By Melissa Tse

The IT industry is only just taking off in China. Lucrative as it is, the impending opportunities to foreign companies also presents major stumbling blocks

As a part of its 12th Five Year Development Plan, China announced its decision to improve computing infrastructure, including the funding of industrial zones to support as many as twenty enormous data centers, also known as “cloud cities.” The investment comes as no surprise to those familiar with the drought of sophisticated information technology practices in China. It’s been widely acknowledged that China ranks well behind the US and Europe in IT; and China is not oblivious to the fact that antiquated infrastructure has severely hindered business processes in the mainland.

Before, Chinese technology was often nothing more than a punch line, comically inhibited by a lack of creativity and design. China previously only invested in state-owned enterprises, which led to a bottleneck in research. But lately, the Party seems adamant in promoting domestic innovation. In the spirit of high-tech entrepreneurship, the CCP is now partnering venture and private capital investors with local firms, universities and start-up centers.

With both multinational and local firms salivating over China’s nascent IT market, many have speculated over trends in three major areas: cloud computing, big data and enterprise resource planning (ERP). According to James Norwood of SVP Product Marketing, such technologies reduce infrastructure costs, which play a significant role in giving manufacturers the edge needed to be successful. Clearly the demand for such services is high, but implementation of the necessary infrastructure has proved laborious.

On Cloud Nine?

While China reorients its IT strategy, cloud computing has received the most commercial and governmental support. According to the Asia Cloud Computing Association, investment in cloud computing projects in China is expected to hit US$154 billion in the next few years. In 2010, five research centers in Beijing, Hangzhou, Shanghai, Shenzhen and Wuxi were assigned to pioneer studies. China Mobile alone allocated US$52 billion over the next three years to its cloud computing products. Even Chinese network vendors like Huawei and ZTE are touting their services abroad in Latin America and Asia-Pacific markets.

So far, the results show promise. In July 2009, IBM designed and launched a cloud platform for state-owned enterprise Sinochem. The company has since applauded their state-of-the-art system for streamlining key processes by pooling and delivering resources online, eliminating the need for 24-hour servers. Peng Jinsong, general manager of the IT department at Sinochem, said that their cloud platform requires only 33 IT technicians in China and less than 80 technicians globally to manage, substantially lowering operational costs.

But for every Sinochem, there are at least a dozen other firms with less than stellar experiences. While efficient at blocking social networking, blog and media sites, the Internet censors in China are less precise with filtering cloud services, such as Google Docs and Dropbox. Cloud services are intermittently blocked without any warning, rendering them completely unreliable. The Chongqing Cloud Zone responded to the problem with unfiltered service, but only for international corporations. Local firms, of course, complained over the preferential treatment.

The infrastructure for cloud computing is also problematic. Many global corporations uphold stringent standards regarding data and cloud services, including Tier 4 designation. Tier 4 is a strict set of specifications required for high-density data; very few centers in China meet these criteria due to lack of biometric- access control methods critical to guaranteeing inscrutable security. But even the centers designed to Tier 4 specifications are rarely operable at that level, upsetting clients who depend on reliable clouds for daily processes.

Big data, bigger problems

Like cloud computing, the addition of big data was included as a part of China’s latest five-year plan. Big data, which refers to data sets too large for traditional software and other tools to capture and process, includes a plethora of online services that include sensor networks, social networks, military surveillance, medical records, and photography and video archives. With an online population nearing 500 million, government measures to expand big data are overdue, especially given the soaring demands for services in e-commerce, online banking and social media.

But if leveraged correctly, the benefits of big data are endless. Only 20% of the retail market in China is organized. The rest is mostly comprised of small, informal vendors. For organized retailers, big data enables them to anatomize traditional and transactional data into information on product inventories, supply chain, marketing and employee performance. These analytics provide invaluable insight for corporations, especially as they carve out narrower niches in their customer base and tailor services to precise consumer needs.

As for handling tiny retailers without digital data or computerized systems, big data promotes better analysis for organized retailers by exposing variability and mitigating error. In China, counterfeit products are a titanic risk since both retailers and consumers often report counterfeits as official products in market studies, skewing results. To complicate matters, the counterfeit market is just as multifaceted as any other market in terms of age, gender, income, and location, causing further confusion for large retailers on how to evaluate their metrics.

Senior managers at Adidas recently divulged that they had issues regarding large gaps between the product volume that had been shipped versus what retailers and consumers reported as purchases. Managers soon realized that the discrepancy between the volume shipped and the alleged volume sold was due to consumers and retailers reporting counterfeit products as authentic. Luckily, Adidas was able to re-assess their metrics according to information compiled by big data resources. For instance, knowing that lower-tier cities further west had higher volumes of consumers reporting counterfeit Adidas merchandise as genuine led to better market studies of their products in those regions in China. Through more sophisticated analytics and algorithms, big data significantly improves how organized retailers determine metrics.

Unfortunately, developing big data in China has several logistical, infrastructural and legal obstacles. Data centers require substantial power and bandwidth, both of which China presently lacks. Without proper infrastructure, it is difficult for China to compete with Hong Kong and Singapore as an international data hub. But the more alarming problem is regulatory. China ranked 18 out of 20 on the Data Center Risk Index due to lack of legal repercussions for data theft and crimes, and tight governmental control over data. For many multinational firms handling highly sensitive information, this is a gigantic security risk. Many security consultants concur, saying there is little recourse for local employees pilfering data or the loss of equipment during “inspections” by the Chinese police.

For instance, if a firm manages any classified materials or products on a Chinese data center, that information is subject to review by Chinese regulatory bodies. Data is no longer privately held by such firms. But by the same token, refusing to participate in Chinese markets is not only unrealistic but also unavoidable. Firms exprerience a Catch-22 in juggling protection of client interests while still complying with extremely demanding regulations.

Slaying the ERP beast

Although cloud computing and big data has its fair share of difficulties, it doesn’t compare to the Hydra-like quandary that is ERP, which seems to breed twice as many setbacks as advances. A necessity in streamlining finance, accounting, sales, human resources and customer relationships across an entire firm, ERP has been the cornerstone software for management in the West. However, in many ways, it has been strongly resisted in China. Consequently, the rate of failure of ERP projects in China is triple that of Western countries. Even global ERP vendors like SAP and Oracle struggle with the Chinese market, holding only 24% of the market in China as opposed to their 70% global share.

With many Chinese corporations branching out to wider markets, managers recognize the need to update operations software. From 1997 to 2002, the ERP market in China soared from USD$78.4 million to USD$243 million. Market intelligence firm TechNavio predicts that the market will grow another 15.9% by 2014.

Unfortunately, according to case studies on ERP, despite having greater expertise and software, global vendors who have set their sights on China still lag behind domestic vendors due to language, price, cost control modules and customer support issues. For instance, many global vendors lack accurate translations of their enterprise systems from English to Chinese. Some user files were entirely in English, baffling local employees.

Price is also a major concern for Chinese clients. The ERP systems of a global vendor, like SAP or Oracle, cost more than RMB5 million, whereas local ERP systems are priced around RMB700,000. Although global vendors provide superior software, local vendors deliver better customer service. SSA, one of the leading foreign ERP vendors in China in the 1990s, is a cautionary example. As their customer base developed, the company failed to keep up with customer support. The ensuing implementation failures pushed clients toward local vendors.

Learning from past mistakes

This rush of investment in to China’s IT market presents opportunities for domestic and foreign retailers. Since most government support in IT is behind joint ventures and local partnerships, collaboration between foreign and global vendors may provide benefits in crossing cultural gaps and practices. However, this approach is still problematic. Like previous strategies of investing exclusively in state-owned enterprises, a dependence on local firms also results in R&D bottlenecks. If the majority of local firms lack proper training, knowledge and equipment for such projects, that bottleneck is only exacerbated.

Global IT firms should meticulously and ruthlessly evaluate every aspect involved with competing in a Chinese market. Recent case studies have reported the prevalence of such problems, implying there still is not enough vigilant foresight in IT development. Herein lies the crux of the matter: without proper preparations, global firms risk dying in a sea of bureaucratic, social and professional conflicts.