China's role as a global manufacturing powerhouse not only drives the domestic economy, but also offers golden opportunities to global enterprises.

QAD is one of those beneficiaries.

"We have been in China for about 10 years, working with various manufacturers, both large and small," James Hatcher, marketing director of QAD Asia-Pacific, said last week.

"What happened in the last several years, with all the major investment and focus on China, is more companies experienced growth, and pressure to be world class, in terms of efficiency and quality.

"Now, manufacturers are reaching the size where they not only can afford to purchase enterprise resource planning (ERP), but they need ERP to be successful."

Hatcher has worked in China for several years. Given his experience, he realizes a firm can always add people to increase production.

"But adding more people does not guarantee the quality or efficiency that companies need in today's market."

Hatcher said overseas investors and the big brand names are very demanding.

An increasing number of companies in recent years have adopted technologies to make their businesses more efficient, more profitable and more competitive, he said.

"That trend will continue in the next several years. That is where I see our growth and our opportunities," Hatcher said.

For instance, much more fierce competition in China's automotive industry will reshape and consolidate the sector, and market players will have to rack their brains to remain competitive.

Under that scenario, businesses will have to adopt the latest technologies and ERP solutions to trim costs and boost volumes, Hatcher said.

Maxwell Miao, QAD's manager for China, said: "It's a process the auto industry must go through to weed out weaker players."

QAD's Chief Financial Officer, Daniel Lender, was last week said QAD expects its sales in China to leap 50 percent in fiscal 2004.

He predicted the company's sales would grow by more than one-fifth annually throughout the decade.

Those sales, he added, will be powered by an auto sector that is growing quickly into a global export base.

Car plants sprouting up across the country, as multinationals race to match vehicle demand, will boost QAD's revenues, Lender said.

General Motors Corp, Volkswagen AG and Toyota Motor Corp are among the global carmakers that have pumped billions of dollars into China's car manufacturing sector.

Those investments, however, have led to fears of a glut that could hit profit margins.

QAD's executives also expect China to become a vehicle production base for exports, especially after red-hot car demand -- the product of years of sustained 7-percent-plus economic growth -- begins to wane.

"We do not foresee an immediate overcapacity danger within China's auto market. Even if it occurs some day, the sector can still develop by exporting auto parts to foreign markets," Hatcher said.

"In fact, some joint ventures have already initiated their campaigns.

Tony Yip, QAD's managing director for Asia, said: "Once the domestic market slows down and you have excess capacity, then they'll start to export. "We're very much focused on it as the fastest-growing industry in China."

About 16 percent of QAD's estimated global revenues of US$225 million to US$229 million for the fiscal year ending January 31, 2004, will have come from the Asia-Pacific region, Lender said.

About one-third of that, or US$11.88 million to US$12.1 million, will come from China. Global revenues hit US$195 million in the previous fiscal year.

Miao said QAD performed well during in the 2003 fiscal year.

"We will add 50 customers to our name roll in the 2003 fiscal year. If we compare this year's fiscal revenues with last year's, in terms of license sales, we will see a decent, 30-percent increase," Miao said

License sales, or software sales, are actually a benchmark for measuring ERP firms' business progress, Miao added.

While QAD has enjoyed positive results in terms of license sales, most of its competitors, including SAP and Oracle, have experienced negative license sales, Hatcher said.

"That was the trend until two years ago, when many ERP deals occurred and software providers claimed to fix all the problems in one shot.

"But that is almost impossible, and the market has come to realize that."

The market is getting smarter, especially since the IT bubble burst, Miao said. Firms nowadays are paying more attention to results.

It is important to show customers how functional and cost effective ERP can be, Hatcher said.

Otherwise, he added, no one will spend money on ERP products.

Although QAD tends to focus more on the manufacturing side, there is little risk in putting all the eggs into one basket, Hatcher said.

"Manufacturing will not die out, since there is always a need for manufacturing. The only change is location, from time to time," Hatcher said.

"China, right now, is the center of global manufacturing, and QAD will adjust its strategy to meet this trend. That is why we were here in the market about 10 years ago."

Assuming China's vaunted manufacturing machine continues to climb the technology ladder, the country should enlarge its global production, which currently is about 10-15 percent, Lender said.

"We believe that in five to 10 years, about 30-50 percent of global manufacturing will be done in China," said Lender, who used to oversee QAD's Latin American operations.

"In order to have a long term, sustainable competitive advantage, low labor costs are not going to do it ... You used to have to throw bodies at manufacturing. Now, you have to use software.

"We want to grow at least as fast as manufacturing in China ... We see operations growing at least 20 percent per year over the next decade."

When asked if advanced ERP solutions and technologies will be unnecessary in China's market, which has a massive inexpensive labor force, Hatcher said: "During manufacturing, 70 per cent of the costs involve materials, while the cost of labor accounts for a small proportion.

"We are sparing no effort in helping customers reduce the costs of parts and materials."

China's desire to grow from a manufacturing base into a higher level of economic development, such as research and development (R&D), will not hamper QAD's business opportunities in the country, both Hatcher and Miao said.

"We have been confronted with the same question many times. We believe R&D will not be achieved unless a firm is already good at manufacturing, since the latter is necessary for capital accumulation and technology digestion," Miao added.

Blue-chip clients

QAD, which supplies software to help companies run their factories, counts Philips Electronics NV, auto parts maker Visteon Corp and Ford Motor Co among its customers in China.

It also has a strategic alliance with the information technology arm of Shanghai Automotive Industry Corp, and QAD supplies most of their joint ventures in China, including plants with General Motors and Volkswagen.

The company's NASDAQ-listed shares have risen four-fold during the past year.

The company has a market capitalization of US$444 million. It posted a net profit of US$180,000 in the three months to October 31 last year.

QAD's main competitors are Germany's SAP and Oracle Corp.