Could Oracle be about to pounce on Kingdee, the Chinese enterprise
software vendor? An Oracle spokesperson told IDG News that the rumour
was “just speculation”.

However,
given the spate of acquisitions by Oracle, the world's second largest
enterprise software vendor, and the western software industry's growing
interest in China, it would make a lot of sense.

Last week,
Chinese internet portal Sohu.com reported Oracle was in talks to
acquire Kingdee for $150m. The deal, including a cash element of $80m
as well as stock, would likely be finalised later this year, the report
said, without disclosing its sources.

Now, deal rumours are
rarely that detailed. So, is it simple kite-flying or has one of the
“sherpas” working on the deal spilled the beans? Another possible
explanation is loose talk from Chinese government officials who have
already been approached about their likely response to a foreign
company's attempt to buy into China's software sector.

As explained earlier in this EngagingChina
post, the government has recently turned cool on foreign bids,
particularly those that involve “strategic” sectors of the Chinese
economy.

The definition of strategic appears quite wide, as
Carlyle Group, the US venture capital firm has found. Almost a year
after agreeing to buy state-controlled Xugong Construction Machinery,
the deal is still awaiting approval.

If the government
apparently has difficult deciding on the strategic value of
earth-moving equipment, then I forecast huge problems trying to get its
head around enterprise resource planning software.

Of course,
ERP vendors have long argued that their products play a vital role in
making modern business run smoothly and efficiently. But it is a very
western-centric view, as the main ERP vendors are all in the west, and
so too are most of their customers.

It is worth noting that
China's economic miracle has so far taken place largely without the
help of modern ERP software, sales of which are still disappointing
small compared to China's obvious potential. Kingdee, one of the best
known domestic vendors, had sales of just 529m yuan in 2005.

Chinese
manufacturers have historically had a hotch-potch of old IT systems,
each designed to do a specific job. For example, Changan Automotive,
China's biggest producer of mini-trucks, was running 38 different IT
applications before deciding in 2003 to standardise on Oracle ERP
software — see this Oracle-supplied case study (pdf).

Is
Chinese industry finally waking up to the potential of modern ERP
technology to coordinate business processes and improve operations?

Manufacturing Insights, a specialist consultancy owned by the IDC research firm, believes so.

According to its annual Low Cost Manufacturing in China survey,
ERP software is ranked as the most effective IT tool by 70% of
manufacturers with operations in China. Bob Ferrari, program director
for supply chain strategies at Manufacturing Insights, says:

The
increased use and effectiveness of IT and applications is a positive
sign for the region. This, coupled with data showing some improvement
in lead times, indicates that all in all, operations are progressing.”

According
to IDC, Kingdee is one of the top software companies in China, although
its product line is less complete than that of the western vendors SAP
and Oracle.

Kingdee likes to think it could grow to be a big rival
to these western vendors. It takes comfort from the recent comments of
SAP's co-founder Hasso Plattner who reportedly said SAP's nearest
competitor in China was Kingdee and that it could, in the long run,
grow to be a more serious threat to the German giant than current rival
Oracle.

Kingdee is particularly strong among China's SMEs, so it
makes a tempting target for either of the two western giants, which
have long struggled to develop the right products and channel
strategies for SMEs.

A company that is already strong in China's
SME market would make an attractive target for any big western software
house but particularly Oracle. Compared with the formidable challenges
of integrating PeopleSoft and Siebel — Oracle's two big recent
acquisitions — the acquisition of Kingdee would create only minor
indigestion.

SAP is also taking a keen interest in China and recently announced it would triple staff in its Shanghai R&D centre. Of the 6,000 people SAP currently employs in Asia, more than 1,000 are in China.

Another possible western buyer is Infor, which has grown rapidly through acquisitions and recently swallowed up SSA Global, which has traditionally focused on manufacturing companies.

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