Bloomberg News

SAP’s China Telecom Venture Helps More Than Double Cloud Sales

April 29, 2014

SAP AG (SAP:US), the largest maker of business-management software, said first-quarter sales of cloud services in China more than doubled as a joint venture with the nation’s largest fixed-line carrier helped boost demand.

The joint venture called China Datacom Corp. that was established with a subsidiary of China Telecom Corp. (728) in November is providing human resources support through the cloud for 15,000 of the carrier’s own users, Mark Gibbs, SAP’s president for the greater China region, said in an interview in Beijing today. The venture will start offering cloud services to other customers in the second half, he said.

SAP, based in Walldorf, Germany, has made China its ‘‘second home,’’ a strategy that’s paying off with strong double-digit software sales growth in the world’s most populous nation, co-Chief Executive Officer Bill McDermott said this month. The success contrasts with International Business Machines Corp. (IBM:US)’s 20 percent drop in China sales and has been aided as last year’s revelation of secret surveillance carried out by the U.S. National Security Agency raises scrutiny of American technology.

“The Chinese have concerns about solutions hosted in foreign countries, especially the U.S.,” said Pat Walravens, a San Francisco-based analyst at JMP Securities LLC. “The whole NSA spying scandal is pushing the Chinese IT buyer away from U.S. solutions. The fact that SAP is German helps.”

German Roots

SAP is the world’s third-biggest independent software company, trailing Microsoft Corp. (MSFT:US) and Oracle Corp. (ORCL:US) In the wake of the spying revelations by former NSA contractor Edward Snowden, sales of SAP’s Hana database program have grown at the expense of U.S. database vendors Oracle and IBM, Walravens said.

SAP relies on its technical and business capability to win business in China, rather than any security concerns about its competitors, Gibbs said. Still, he acknowledged SAP faces fewer political headwinds in China than U.S. companies do at present.

“The fact that we are a German, European company has kept us in good stead,” Gibbs said. “Being a proudly German, proudly European company, I think this is resonating well with Chinese companies. The integration of the governments of the two countries is at a very strong point at the moment.”

SAP built trust with the Chinese government and companies by investing in the market for the long term and the 2011 announcement of a projected $2 billion investment in China by 2015 is going according to plan, Gibbs said. SAP has 4,300 staff in China and has relocated its global support headquarters to Beijing, he said.

Bright Spot

The growth in China is a bright spot for SAP, which reported first-quarter sales (SAP:US) and earnings on April 17 that missed analyst estimates, as a sales boost from the company’s shift to online programs was muted by a slowdown for older products. A strong euro is also eroding the repatriated value of overseas sales.

“China was a particular highlight, which obviously is very different than other big companies that have reported,” McDermott said on the April 17 conference call.

Gibbs declined to provide specific sales figures at the China Telecom cloud venture or for total software sales in the Asian nation. Sales of cloud services through the venture with China Telecom represent a “significant opportunity,” Gibbs said without supplying details.

Huawei Partnership

SAP is also boosting sales of the Hana database system in China through a partnership last month with Huawei Technologies Co. As part of the agreement, the two companies jointly market their products with Huawei supplying its FusionCube storage system for SAP’s Hana system.

“We’ve tried to respect and collaborate with Chinese IT and software companies,” Gibbs said. “The climate for SAP in China, because of the investment, because of these co-engineering projects, because of our association with the ecosystem in China, I think slowly, slowly over time this is playing out and we are seen as a trusted international company.”

Gibbs was named president for the China region in October after serving as chief operating officer of SAP’s Asia Pacific region from May 2011. He was previously the company’s president for North Asia.

The appointment of Gibbs put greater focus on SAP’s China business by breaking the region out of the Asia Pacific Japan group, of which it was previously a part.

The change reflects “the importance SAP puts on the market,” said Michael Briest, an analyst at UBS AG. “Even the U.S. is run as part of the Americas, and Germany as part of a greater Central/Eastern Europe region, so this tells you something.”

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Terje Langeland, Suresh Seshadri


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