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Read SAP: Establishing a Research Centre in China (Case Attached)How can SAP’s Shanghai Research Center be successful in attracting and retaining top local researchers in China?Leaving aside the talent issue, discuss the pros and cons of locating SAP’s Shanghai Research Center in Shanghai.What are your most important concerns?What do you see as the greatest benefits?Use this week’s readings, lectures, and your analysis of the case to write a 2 page (1½ -spaced) analysis that answers these questions. Use 12 point Times Roman font size with one inch margins all around.Do not do any additional research on the company. Confine your analysis to your reading of the case and the articles assigned.
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HKU817
KULDEEP KUMAR
SAP: ESTABLISHING A RESEARCH CENTRE IN
CHINA
SAP Research adds strategic value to the company through seeking out and
championing new ideas, exploring emerging technologies, and experimenting
with fresh ways of deploying existing solutions. Research opens our minds.
– Dr Peter Zencke, Head of SAP Executive Board1
The three major challenges in setting up a research centre in China include
getting good people, setting up a research program, and developing
relationships with the universities and government agents.
– Dr Ming-Chien Shan, Vice President of SAP Research Palo Alto and China2
In the cold January of 2008, Markus Alsleben, vice-president of SAP Labs China, was sitting
at his desk in Shanghai, contemplating the recently established SAP Research Centre, a
division of SAP Labs in Shanghai, China [see Exhibit 1]. SAP Headquarters in Germany was
eager to evaluate the success of the new division and was pressuring its Chinese location for
results. However, up until this point in time, the research centre had been little more than a
concept. So far, it had been able to hire only a few researchers and the research itself had not
yet begun.
As a global leader in enterprise resource planning (“ERP”) systems, SAP already had a
number of research and development (“R&D”) labs located around the world. However, most
R&D labs were focused on software development. SAP, however, had been regularly
organising cutting-edge research activities globally with SAP Research, the technology
research arm of SAP. The research group had developed a track record of significantly
contributing to SAP’s product portfolio by identifying and utilising emerging information
technology (“IT”) trends through applied research and corporate venturing. The SAP
Research division, which employed over 400 people worldwide, had already established
1
SAP (2007) “Research in Dialogue. SAP Research Report 2006”,
http://www.sap.com/about/company/research/pdf/SAP_Research_Report_2006.pdf (accessed 1 February 2008).
2
Company interview on 6 March, 2008.
Maya Kumar and Markus Alsleben prepared this case under the supervision of Kuldeep Kumar for class discussion. This case is
not intended to show effective or ineffective handling of decision or business processes.
© 2009 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the
internet)—without the permission of The University of Hong Kong.
Ref. 09/408C
1
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SAP: Establishing a Research Centre in China
research units in Germany, Canada and the US. Interested in accessing fresh ideas from the
Chinese talent pool, Shanghai was designated to be the next site for an SAP Research unit.
However, Alsleben was not convinced that China had been the right choice to establish a SAP
Research. Having just started hiring researchers, the research group was already having
trouble attracting research talent for its team. Furthermore, the location of the centre in
Shanghai Software Park was not fostering the sort of cross-company collaboration and crossfertilisation that SAP had hoped for. Had this location in China been the right choice for a site
for SAP’s Asian research? What would the developments in China foretell for the success of
SAP Research in China?
The ERP Software Industry in China
Starting as early as 2003, the establishment of an R&D centre in China was considered
attractive due to limited competition in the IT industry, as well as perceived low barriers to
entry into software research in China. However, the limited supply of high-profile researchers
in China required special attention. The ongoing rapid development of China’s economy and
inflow of foreign direct investment was changing the nature of R&D activities in China,
leading to increased competition for top researchers. Moreover, local Chinese competitors
such as Yongyou and Kingdee continued to attract the attention of small- and medium-sized
customers, particularly other Chinese companies [see Exhibit 2], and a considerable share of
local university graduates as employees.
The Chinese government had a major influence over the domestic market for ERP systems. A
large number of big firms, especially those large enough to be potential customers for SAP,
were either directly owned by the Chinese government or were joint ventures or partnerships
with state-owned enterprises (“SOEs”). The subsidiaries of large foreign companies often set
up partnerships with retired state officials and party cadres or with SOEs in an attempt to
make their transition into China easier. Even after retiring from the government, former state
officials and party cadres in China continued to maintain close relationships with their
colleagues in the government or party. This allowed the government and managers of SOEs to
influence the decisions of executives of Chinese enterprises with regard to their selection of
ERP software.3
However, ERP software systems had not yet been widely adopted in China. Even in early
2008, over 55% of enterprises in China had not adopted ERP systems from the largest ERP
software companies. 4 Instead, they contracted with other software companies, created
software in-house or chose not to use any software. For the companies that did adopt ERP
systems, local players Ufida and Kingdee dominated the small- and medium-sized enterprise
(“SME”) markets, serving 40% and 29% of these markets, respectively. SAP, on the other
hand, was a leader in the large enterprise segment in China.5
Considerations for Conducting Research in China
In the early 2000s, many Western software executives believed China had several advantages
over other Asian countries for conducting research. This resulted in big IT companies such as
Hewlett-Packard (“HP”), SAP and Microsoft choosing to enter the Chinese market early on.6
In part, the advantage they perceived was that research labs in China could be used for
multiple purposes in addition to research, including business development and management
3
Company interview on 6 March 2008.
SAP (2006) “Addressable Market Software License Market for China in 2006”, Internal Company Presentations.
5
Ibid.
6
Company interview on 6 March 2008.
4
2
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SAP: Establishing a Research Centre in China
of client relationships.7 Other considerations included cost of R&D, potential for growth of
innovation in China, challenges associated with intellectual property (“IP”) protection,
government infrastructure and incentives for attracting innovation to China, and Chinaspecific business culture and practices.
Cost of Research
In the past, companies had come to China because labour in China was considered relatively
inexpensive. Companies often moved work abroad or outsourced manufacturing and other
business functions (such as marketing, finance and accounting) to lower-cost countries,
leaving the prospect of conducting research abroad to be the next frontier for offshoring work.
Moving research to countries such as China was supposed to provide large savings for
research-intensive companies, particularly as research costs continued to rise.8 Furthermore,
having their R&D units close to their already offshored manufacturing bases in China meant
easier communication between companies’ business divisions.
Additional costs, termed “transaction costs”, were usually incurred in distributing R&D work
to globally distributed locations. These included the costs of setup and maintenance of
infrastructure for IT communications, co-ordination costs, costs of travel, and costs of
controlling and monitoring R&D at locations distant from the home site. Furthermore,
exploding pay rises, especially in China and India, further complicated the cost equation and
made cost-savings lower than expected.9
While many multinational corporations (“MNCs”) claimed that they came to China for talent,
cost still remained a major factor in their decision-making.10 Key researchers were offered a
“global standard salary”, independent of location. However, local research fellows and
assistants had significantly lower salaries than in the West. Expecting this, foreign
headquarters often allocated much tighter budgets to their Asian research centres than to
North American or European centres, while at the same time expecting standard, world-class
returns. Moreover, most MNCs operating in China, while still benefiting from low-cost labour,
often limited their development of knowledge-intensive activities to more economically
developed locations in Asia such as Singapore.11
Growth of Innovation in China
Chinese were often seen by MNCs as industrious and hard-working, but not innovative or
inventive. Considering that many era-changing inventions and innovations originated in
ancient China (eg, paper, gunpowder and movable-type printing), and that a large number of
top US researchers and employees in innovative US companies were of ethnic Chinese origin,
China’s perceived shortage in innovativeness was likely related to its educational system.
This system focused on Confucian values, rewarding consensus and obedience to superiors,
and condoning out-of-the-box thinking required for innovation.
Within China, the business landscape included both MNCs and a range of government-owned,
government-associated and privately run businesses. Instead of providing customer value
through technological innovation, many domestic firms chose to compete on price.12 With the
government’s constantly changing market regulations and with many companies being
7
Ibid.
Ibid.
Du Pre Gauntt, J. (May 2004) “Harnessing Innovation: R&D in a Global Growth Economy”, Economist Intelligence Unit,
http://graphics.eiu.com/files/ad_pdfs/agilent1.pdf (accessed 5 February 2008).
10
Company interview on 6 March 2008.
11
Farhoomand, A.F. (2005) “National Innovation Systems of China and the Asian Newly Industrialized Economies: A
Comparative Analysis”, Asia Case Research Centre, University of Hong Kong.
12
Ibid.
8
9
3
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SAP: Establishing a Research Centre in China
government-run, investment in long-term, innovative technology R&D was often near
impossible. This led firms to diversify into non-technological sectors to survive. 13
Furthermore, while China did have local R&D institutes, they often lacked targeted goals for
stimulating innovation, and issues in knowledge-sharing between researchers existed through
a lack of trust and through corruption.14
The opening-up of China stimulated several government initiatives for the country to become
more innovative however, and in the 1990s, R&D quickly became a growing focus for
companies operating in China.15 China aspired to be the second-largest investor in R&D in the
world, second only to the US. China had a growing number of well-trained Chinese scientists
and engineers, earning their first degrees in China, moving abroad, and more recently
returning home after graduate level studies abroad in the West. It was hoped that these
returnees would bring back some of the innovative capabilities of the West and thus spark
R&D innovation in China.16 From the early 1990s onward, computer hardware and software
companies and companies in the advanced materials and biotechnology sectors were
beginning to be established in China. 17 The pharmaceuticals industry jumped on the
bandwagon much later, stimulated not only by cost, but also by the idea that companies would
be able to develop products faster, more cost-effectively and with fewer restrictive clinical
trials.18
Challenges in Protecting IP
Well into 2008, China had one of the worst reputations for a marked lack of respect for IP
rights at the local level. Local factories continued to produce a number of copycat products,
from DVDs and women’s handbags to high-end electronics and software, and there was
concern that this disregard for IP rights could cross over into trade secrets being stolen from
research labs. Furthermore, there were concerns about the quality of research, as well as
worry over plagiarism and academic fraud.19
This phenomenon was not unique to China however. Other developing countries had gone
through similar IP development phases, with almost 70% of software installed on PCs in
central and eastern Europe and in Latin America obtained illegally in 2006—over 10% higher
than in Asia as a whole.20 However, China’s marked lack of respect towards IP rights had
become well known globally. Government efforts to curb this trend resulted in piracy rates
dropping 10% from 2003 to 2006.21
Despite China’s reputation for poor IP protection, China’s acceptance into the World Trade
Organization in 2001 was a reflection of the national government’s desire for, and ultimately
its adoption of, international standards on legislative and jurisdictional levels. Nevertheless,
there were challenges in the local enforcement of IP laws and corruption of employees. For
example, even if one factory making bootleg products was shut down by local authorities, the
owner might open two other factories at other locations to compensate for lost business.
Furthermore, only a limited number of IP infringement cases were brought to the attention of
13
Ibid.
Ibid.
Du Pre Gauntt, J. (May 2004) “Harnessing Innovation: R&D in a Global Growth Economy”, Economist Intelligence Unit,
http://graphics.eiu.com/files/ad_pdfs/agilent1.pdf (accessed 5 February 2008).
16
Dyer, G. (5 January 2007) “The Dragon’s Lab—How China is Rising through the Innovation Ranks”, Financial Times.
17
Goldstein, H. (September 2002) “They Might Be Giants”, IEEE Spectrum, http://www.spectrum.ieee.org/archive/5754
(accessed 2 January 2008).
18
Bloch, M., Dhankhar, A. and Narayana, S. (2006) “Pharma Leaps Offshore”, McKinsey and Company,
http://www.mckinsey.com/clientservice/bto/pointofview/pdf/MoIT8_Pharma_F.pdf (accessed 12 January 2008).
19
Dyer, G. (5 January 2007) “The Dragon’s Lab—How China is Rising through the Innovation Ranks”, Financial Times.
20
Business Software Alliance (2007) “Fourth Annual BSA and IDC Global Software Piracy Study”,
http://w3.bsa.org/globalstudy/ (accessed 2 August 2008).
21
Ibid.
14
15
4
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SAP: Establishing a Research Centre in China
Chinese judges at the supreme-court level. Similar to scenarios in the West, most cases of
copyright infringement were settled out-of-court. Without being brought to the attention of
judges, out-of-court settlements made it more difficult to further develop legal practices in IP
and created a lack of examples and lessons about the negative consequences of IP
infringement that could be communicated to companies. 22 Furthermore, monetary penalties, if
imposed, were often very low.
Government: Infrastructure and Tax Benefits
Since the opening-up of China in 1978, the government of China had made efforts to
gradually become more integrated in the world economy. Well into 2006, the Communist
Party’s 17th National Congress agenda still had the goal to “enhance China’s capacity for
independent innovation and make China an innovative country”.23
To stimulate greater levels of innovation and indigenous research capabilities, the Chinese
government established new policies, including promotion of long-term investments in
technology and providing incentives to foreign companies to bring both knowledge-intensive
activities and manufacturing activities to China.24
Attracting Foreign Innovation
The Chinese government aimed to promote innovation through the return of Chinese
scientists and engineers who had worked abroad. Not only did this contribute to the local
economy, but it also improved China’s foothold in the global research market.
The Chinese government often encouraged MNCs to set up research centres in exchange for
permission to enter China and gain access to China’s resources and markets. The government
believed that R&D activities could be used to identify and develop new technologies,
products and services for future sales to customers and thus were vital for companies’ longterm success and survival. This was especially important in the fast-changing context of
software development, in which there was continuous pressure to innovate. Decisions about
scope, size and staffing of an R&D centre had considerable impact on research results and
marketability of research, thus requiring careful analysis.
Regulations
The differences between the established legal environment in China and often unclear
implementations and applications of these regulations at local and company levels made
research initiatives appear difficult and risky to foreign-funded companies. Moreover, because
many large companies were state-owned, they were often averse to taking on major risks.
With research by its very nature carrying large amounts of uncertainty and risk, braving the
Chinese regulatory environment was not high on the list of priorities for these firms.25
Tax Benefits
Local tax authorities sometimes allowed for specific tax holidays or breaks on business taxes,
value-added tax or personal income taxes. For example, employees with university degrees at
software companies in Beijing were offered personal tax breaks.26 These sorts of incentives
22
Lynton, N. (15 December 2006) “China’s Innovation Barriers”, Business Week Online,
http://www.businessweek.com/globalbiz/content/dec2006/gb20061215_816544.htm?chan=search (accessed 1 February 2007).
Hu, J. (25 October 2007) “Report at the 17th National Party Congress”, China Daily,
http://www.chinadaily.com.cn/china/2007-10/25/content_6204667_5.htm (accessed 1 January 2008).
24
Farhoomand, A.F. (2005) “National Innovation Systems of China and the Asian Newly Industrialized Economies: A
Comparative Analysis”, Asia Case Research Centre, University of Hong Kong.
25
Dyer, G. (5 January 2007) “The Dragon’s Lab—How China is Rising through the Innovation Ranks”, Financial Times.
26
Company interview on 6 March 2008.
23
5
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SAP: Establishing a Research Centre in China
enticed foreign companies to establish themselves in China rather than in countries with
higher taxes.
Software Parks in China
Software development and related research activities were relatively new to China and had
only started in the early 1980s on a small scale. It was not until the turn of the millennium that
the Chinese software industry reached approximately US$6.8 billion in revenue—roughly
one-tenth the US software industry’s revenue in the same year (US$63.8 billion).
To accelerate the development of the Chinese software industry, in 2000, the State Council
published “Policies on Encouraging the Development of Software and Integrated Circuit
Industries”. This document provided a framework for government support of the Chinese
software industry, including the creation of regional clusters of firms that were often in the
same industry.
These clusters usually focused on science and technology and functioned as export-processing
zones. In particular, local governments wanted to attract MNCs to set up both manufacturing
and R&D centres. In attracting these MNCs, the Chinese government wanted to stimulate
foreign multinational investment in China in the hope that this investment would promote
local innovation and contribute to the local job market.27
Typically, local governments in China were interested in attracting “knowledge companies”
to their industrial and software parks. The governments offered incentives and preferential
treatment to companies that located in these parks. Such incentives often included
inexpensive land leases or sales, or ready-made buildings with minimal or zero rent for the
first few years of occupancy.
To gain a competitive edge in attracting talented employees, software parks built close
connections with local universi …
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