A Western View of PLM in China: The Eastern Innovation Tiger is Ready to Pounce

How accurate is the image of China and digital product realization? Do they have any competitive advantages beyond inexpensive labor and low manufacturing costs?

“Yes, definitely. It's easy to get caught up in old thinking patterns and I believe that in the Western countries there is a general underestimation of China's position in terms of PLM, ERP and innovation," said Per Johnsson, CEO of the Chinese PLM and IT company JWI.

Per is a Western PLM man in China, based in Shenzhen, right next to the border with Hong Kong. Johnsson, originally from Sweden, has extensive experience in the field thanks to his time at PTC focusing on the PLM/PDM software Windchill. In 2001, PTC moved Per Johnsson to China to take care of all products the company had sold there. The expansion was successful, but also brought challenges: The acquired systems had to be implemented and staff trained to get the Chinese customers up and running.

In 2006 Johnsson started his own company, which today has merged with other players to become JWI, a company with more than 300 employees. JWI works primarily in high tech, with solutions from PTC, Siemens PLM and Dassault Systèmes.

Engineering.com’s Verdi Ogewell recently met with Per Johnsson. Following are Per’s comments on this gigantic industrial market, digitalization, PLM, ERP and the innovation climate that is really starting to take off. This report also features commentary from CIMdata analyst Peter Bilello, who has deep insights into Chinese PLM investments.

The Master Plan is Called "Made in China 2025"

The plan is to make the country an industrial "superpower." As a nation, China has high ambitions that are actively supported by politicians in the communist party, government, local authorities and an emerging class of “hungry” industrial tycoons. 

The Chinese government mandated a plan to transform the country into a world leader in advanced IT, high tech, industrial automation, robotics, electric cars, mobile communications, biotechnology and the like. It’s no longer enough to simply be a “manufacturing superpower” basing its success on low wages and a large population. More Chinese industrialists are asking the question, "Maybe we can do it ourselves?" and often concluding that, "Yes, we absolutely can!"

The Chinese government's "Made in China 2025" plan bears more than a passing resemblance to the German Industry 4.0 initiative. China will not only work in manufacturing and with imported or distributed technology development, but also towards the goal of becoming a "self-sufficient superpower" in technology, innovation and IT development.

Beyond "Made in China 2025" there are other advantages that China has as a competitive nation:

• Education initiatives graduating six to seven million new engineers each year.
• Acquisition of foreign technology-savvy companies such as Chinese automotive manufacturer Geely’s acquisition of Volvo Cars, and the recent effort to become major owners in the German Daimler Group.
• Building-up huge financial resources, based on large surpluses in the trade balance.

"China is a land of fast followers,” says Johnsson. “The Chinese state supports Made in China in 2025, and they spend a lot of money on research institutes, tax cuts and local initiatives, but most of the driving force and investment in my industry (high tech automation) comes from companies that want to compete in the future.”

But the world is more complicated than skilled engineers, technology and good financial resources. There are other equally important major political aspects that affect the entire development “symphony.” Not least of these is following President Donald Trump's actions in the international trade arena.

In recent months, there have been discussions about whether the trade restrictions and security duties put forward by Trump actually help those who want to compete with a hungry, newly awakened advanced industrial nation like China.

A possible negative effect of isolation is that it preserves old industrial structures instead of stimulating technologies that carry the technological power of the future. In the long term, almost every technology has a best-before date and tough competition has generally been the greatest incentive for successful industrial technological development.

“China is Ahead of Other Countries” 

"So, how are these things coming along?" I asked Johnsson.

“Made in China 2025 is, as you note, China's response to Germany's Industry 4.0 or the U.S.'s Industrial Internet. In principle, you want the same thing. To use new technology to offer and manufacture more customer-specific products, while shortening lead time and lowering costs. China is already a leader in manufacturing. For them, it is about continuing to be a leader in manufacturing even in ten years, even with more competition from other countries and with runaway costs for factory workers. With new technologies, goods can be produced cheaper in countries with higher costs, which means that western countries can start competing again.”

At the same time, China's wages are rising steadily, and Johnsson believes that the benefits of cheap labor are disappearing altogether.

“Until recently, many of China's factories were based on cheap labor, with less investment in automation. In view of this, China has a strong driving force to invest in automation to maintain its position. The advantage they have is that the manufacturing is already here. Manufacturing 'know-how', subcontracting, factories and infrastructure are factors that need to be rebuilt in many other countries. With regards to knowledge of manufacturing, and adaptation to new technologies, I would say that China is ahead of other countries.”

However, the JWI leader sees strong development in more than just the product development sector. “That's certainly the case. Consumers using internet technology for daily use as payment is well ahead of any other western country I have been in. Industrial companies are also very willing to adapt to new ways of working, but the maturation of technology and software solutions is the biggest problem,” Johnsson said.

HUAWEI and The Advantage of Starting with "Carte Blanche" 

Most manufacturers in developed countries have issues related to complex legacy PLM and IT systems. In China, that is not always the case. Instead, you start from a kind of "carte blanche,” said Johnsson:

“Telecom company Huawei might be the first to have PLM thinking, having the advantage of not being locked up in old mainframe systems. Instead, they could face problems and systems without being forced into time consuming translation and operating system issues. On many levels, this was a positive factor that contributed to the rapid development we have seen the company undergo. Huawei is also advanced when it comes to the digital thread, i.e. the development of a common system that merges the entire product life cycle from the first stages of development and product definition to the products in the field in the hands of the end-user.”

A Contrast to the Old Telco Dinosaurs

Johnsson does not state it outright, but I suspect he sets the Huawei example as a contrast to the Western countries' "old dinosaurs," such as Motorola and Ericsson, and their problems facing and undergoing the deep process change required to transform from a hardware-oriented focus to a more service, electronics and software-oriented and service-based profile.

“The systems you buy and implement are in many cases the first more advanced ones that have been relevant. Nobody has claimed that this is trouble free and easy. Far from it. Everything takes time, but the systems have been running for many years in many places, and many of the creases have been ironed out during the trip. Not everything is ready, but today, the needs are more often about optimization of PLM systems, and development is clearly set to digitize the entire product chain. How can we use the systems more efficiently is the real issue here,” Johnsson said.

“There is also rapid development in terms of innovation,” Johnsson added. “Certainly, we’re in the early stages but it is coming, and I think you would be wise to realize that the Chinese business market will develop rapidly in this regard. China is starting to catch up when it comes to innovation, not least of which are companies such as Huawei and Lenovo, who are good examples of this.”

Already Passed the First Steps of the Innovation Journey

China has long since taken the first steps in the innovation journey and developed what is often an important foundation, closely linked to innovation potential: a strong and advanced manufacturing culture. From there, the step towards innovative thinking isn’t far. Also worth consideration is the huge number of engineers who graduate each year.

Let's say that, in the standard curve of a graduate engineers, 10 percent find themselves top-rated engineers. 10 percent of 6 to 7 million graduates equals 600,000 to 700,000 top students coming into the workforce. Compare these numbers to how many engineers we graduate in the west, and what that 10 percent ratio would be in relation to this.

Whether this will be important for the manufacturing industry’s competitive position in the long term remains to be seen. But the thought is enough to cause discomfort, and it is easy to realize that we should in no way underestimate the power these numbers hold. Another consequence is to look closer to how we can improve our ability to compete.

There may be cultural features in the Chinese social and business climate that inhibit this—not least of which being that the country is a dictatorship, which may conflict with the opportunities to act freely and think that are a basic requirement for the development of innovative thinking. This is a disadvantage, but the great development progress in the country over time gives indications toward greater openness.

Money for PLM Investments? “Not a Big Problem”

Key to anyone who wants to forge ahead on the IT front is obtaining the necessary financial resources. There are several ways in China today to get these resources. "The money is there," says Johnsson. But there are other things that can be more problematic

"An example I see with our customers in high tech, for example, is that you need several senior engineers who can quickly get the junior, newly graduated engineers into operation. However, a ‘new’ engineer may cost over a thousand dollars a month. Not even in China is it possible to let them go unproductive for the time to learn what is needed in terms of knowledge and practice in the local company.”

PTCs Windchill Close to Standard in High Tech

For Johnsson’s JWI, high tech is by far the best industry. Development, sales, implementation, training and consultation on PLM solutions are being worked out. This includes software for manufacturing systems from different suppliers, although Johnsson claims that PTC's Windchill is almost the standard in high tech.

"Siemens and PTC are strong with their manufacturing-related capabilities and focus, while Dassault Systèmes is more frequent when we talk about R&D processes with CAD (CATIA) and ENOVIA (product data base in the 3DEXPERIENCE platform),” Johnsson said.

He adds that SAP is big on the ERP side, which is less surprising, but not within PLM. But what about PLM players such as Aras, ARENA and Oracle? Yes, they exist, "but are not very big."

"The reasons are several, but it is significant that the ’big three’ have longer pedigrees when it comes to CAD and PLM in the Chinese market. At the same time, the market is relatively saturated in regard to the ’new’ PLM, which displaces efforts such as optimization and the Bill of Process (BOP), which in turn may affect Aras, which seems to be generally in a growth boom,” Johnsson said.

CIMdata’s View of PLM in China: Siemens is the Overall cPDm Leader

As a high-tech man, Per Johnsson knows a lot about demands and software usage in this segment. But what about PLM in general, and other industry segments such as automotive and aerospace? What is the size of Chinese investments here?

Analyst firm CIMdata studies these matters and has almost 15 years of experience in the Chinese market. CIMdata’s president, Peter Bilello, generally agrees with Johnsson on how things are developing.

“We’re definitely seeing a progression in overall understanding and appreciation of what PLM means and what it can do for those companies,” Billelo said, continuing, “For example, when looking at the cPDm (collaborative Product Definition management) growth, which includes software and service solutions such as Siemens Teamcenter, Dassault Systèmes’ ENOVIA and PTC’s Windchill, we’re seeing that the Chinese market is approaching $600 million. Japan is still the largest in the region with $1.4 billion, but Chinese investments are growing at a faster rate. Back in 2013, China was under $500 million, so it’s grown by about 100 million in the last five years. Japan has grown a little bit less than that, so China has a bigger percentage growth on a smaller basis, which isn’t that surprising.”

Looking at the geographic distribution in cPDm investments during 2017, the Asian-Pacific region represented around 20 percent of the global spending, while the Americas stood at 39 percent and EMEA (mainly Europe) at 41 percent.

Among the regional countries, China finished second last year with just under 19 percent of the market share, compared to Japan’s 47.8 percent.

The total cPDm investments in Asia-Pacific landed at around $3 billion in 2017.

If we look at the big three vendors—Siemens PLM, Dassault and PTC—in terms of 2016 market share in cPDm, overall in China it looked like this:

1. Siemens PLM Software, 21.6 percent
2. Dassault Systèmes, 17.6 percent
3. PTC, 14.6 percent

“We are not yet ready with the numbers for 2017, but I expect that things didn’t change dramatically during last year,” says Peter Bilello.

What about the important aerospace and automotive segments then? The latest numbers are from 2016:

Aerospace

     1.  Dassault Systèmes and Siemens PLM with 15.9 percent market share each

Automotive

1. Siemens, 24.5 percent
2. Dassault Systèmes, 23.8 percent
3. PTC, 8.5 percent

“The automotive industry has definitely been an early adopter of these technologies in the Chinese market,” Billelo commented, explaining that, “This has a lot to do with the fact that many Western companies like Volkswagen, GM and others have implemented production in China. Also, some companies have close relationships to China, for instance Volvo, as the owner is Chinese Geely.” 

High Tech and Electronics

As Per Johnsson says above, this area has been a strong segment for PTC.

I asked the company’s pre-sales director, Leo Qin, about it and he agrees—but also states that, “With over two decades of development in the Chinese market, PTC has made remarkable achievements in various other PLM subsectors like automotive parts and components, military defense and retail.”

Furthermore, Qin points toward IoT as a very promising arena that has the potential to boost PTC’s PLM platform, Windchill. IoT technology has enriched the abilities of PLM, and Qin claims that PLM based on IoT can better help Chinese customers to proceed with their digital transformation for products and enterprises.

“With the development of intelligent and interconnected products, the new PLM platform features the capability of PTC’s leading IoT platform, enabling users to connect the real-time data generated by intelligent products back to PLM to constitute a real product life cycle data closed loop. The new platform provides clients access to the real-time insight of the product in the physical world and helps developers to better understand how the product works, and to improve and iterate the product. At the same time, it can also help service personnel to obtain real-time alarms, fault codes, service manuals and maintenance spare parts in the PLM platform, to enable the servitization transformation for clients.”

Growing Interest in Factory Automation and Smart Manufacturing

Bilello added that the other thing he has noted within the last five years is the better recognition of automation—that is, factory automation both from an MES perspective, and also in terms of robots.

“Last December, I was in Nanjing at a conference about smart manufacturing, and there were around 5,000 people in attendance. They’ve been talking about concepts like Industry 4.0 for a number of years, and now they’re creating the applications to support it,” Billelo said.

“I also got the chance to visit a number of interesting companies,” he continued. “One of them makes transit doors, i.e. doors for subway cars and trolleys. There was a process that they automated which used to have two people crimp the front of the door and the back of the door together. There were two problems with this: it took two people ten minutes, and there was inconsistent quality. They’ve replaced that now with automation solutions and robots. The result is that they’re not only doing it a lot faster, but it’s also done consistently.”

This story is an interesting illustration of what is happening in many Chinese industries: that it’s important to be able to produce not just for the Chinese market, but for the global market.

“Yes, and I think that’s another indication of the enhancement of PLM capabilities,” says Bilello. “There’s a desire not just to produce in China, but to reach the next level of capabilities of production and be able to sell more advanced products on the global market.

“Other examples are in the aerospace industry, where you have to reach a whole new level of quality to be able to sell outside of China, and we’re seeing that they’re definitely on their way to do that. And that means more simulation capabilities, more design tool capabilities and data management, and all those things have to come along to have the right level of support.”

Billelo also points to the topic of Systems Engineering.

“They have an understanding of the need of a systems-level knowledge as the products are increasing in complexity and moving up the value chain. That is definitely an indication of a market that’s starting to mature.”

Finally, there are a couple of tangential reasons besides technological needs that are contributing to the PLM investment growth. One of these is changes in the licensing business in China, which used to be a problem related to software piracy.

“But now, it seems that the companies that we talk to don’t do that anymore. They’re much more likely to buy licenses and appreciate the underlying capabilities of their data management technologies. They’re trying to use more innovation and CAD technologies, and we see that type of application and a recognition in the market of the importance of these things, both among vendors and industrial companies,” claims Bilello.

A Quest for the "Model-Based Company"

All of this means that China is well on the way to maturity in terms of PLM and innovation capabilities. At the same time, JWI’s Per Johnsson says that the market is becoming somewhat saturated with “new” PLM.

“The concept of the ‘model-based company’ becomes attractive in this development mode,” said Johnsoon.  “Many Chinese companies want to create situations where no one in the chain can even make mistakes. In this environment, ‘models’ become an educational tool that helps the users. CAD and PLM, as I said earlier, are relatively mature. Therefore, the focus is on platforms that are placed ‘on top of’ the old ones. For example, PTC's IoT platform, ThingWorx, Siemens MindSphere, and the solutions available on Dassault's 3DEXPERIENCE platform.”

The model-based enterprise (MBE) concept includes everything, such as the digitized company, IoT, Industrial IoT, digital twins, threads and others. Together, these trends and development threads form a complicated puzzle that in the end must be able to work together as a whole.

"This implies increased interoperability, democratization of data availability and competent platforms for collaboration," said CIMdata analyst Peter Bilello. “Data must be reusable over system lifecycles in business networks, which requires a broad definition of MBE. This concept is by nature interdisciplinary and not only extends across the organization internally, but also across the entire network. Additionally, MBE applies to many industries such as aerospace, defense, automobile, workshop and construction.”

The "Carte Blanche" Decreases in Importance with Time

Clearly, at least in the Chinese top-tier companies, there is an endeavor to build skills and integration with what is beyond PLM, such as IoT and IIoT. However, the consequence is that the above-mentioned legacy convention has also come to a point where systems are to be linked together when the new system is added to the old systems. At this point, having ’carte blanche’ decreases in importance.

"Certainly, I dare say that most of us today do this. You put all the new layers, IoT, et cetera, on their old systems. Of course, this requires integration work and adaptations. In short, this will be a key to success, and JWI can help with good solutions,” said Johnsson, adding: "We are in a very interesting phase, partly because we are the first software company in the area that has solutions which helps customers with this."

As stated earlier in the article, Johnsson concludes that the greatest customer benefit JWI can deliver today is primarily about optimizing the design and manufacturing processes, such as integration, design for manufacturing and digitization for manufacturing control.

My Conclusion

Is China a threat to Western industries? Their growth is steady in terms of PLM, manufacturing automation and innovation capabilities. The big step from a rural low-tech economy to a modern industrial nation has already been taken.

China is established as a strong global industry player; a position that probably will become even stronger. And as this nation matures, going from manufacturing, build and print to real innovative design work, I think that this fact is going to become more evident. When that happens, maybe we’ll see a tipping point where the growth will accelerate significantly faster than competition in the U.S., Europe and their own Asian-Pacific region.

We’re not there yet. Highly industrialized regions like North America and Western Europe still have an advantage—but for how long?

Those who can manufacture sophisticated products are not only interested in being "a reflection of other people's knowledge" over time. China wants to develop, and the seeds are already sown for ideas about how to improve its large contract manufacturing industry.