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Digitalization Research Center,HUST:Digital Transformation, a New Method for Chinese Manufacturers Going Global

Chinese manufacturers are increasingly seeking to expand globally as they face overcapacity in the domestic market. However, limited overseas experience and a lack of international talent pose significant challenges for these companies. It has become clear that their domestic business models, organizational structures, and operational systems are inadequate for achieving strategic goals abroad. Additionally, many Chinese companies struggle to find individuals with the necessary technical skills, management experience, and language abilities for successful international expansion.

To address these hurdles and ensure competitiveness in efficiency, cost, and service, some Chinese companies are turning to digital transformation. To the experienced business leaders, this approach is viewed as the most cost-effective method for achieving global expansion goals. By remodeling operational systems with digital solutions in the dynamic overseas environment, companies can enhance their ability to compete in international markets.

The Challenges for Manufacturing Companies in Digital Transformation

However, digital transformation is not easy. Research by McKinsey (2018) reveals that the average success rate of digital transformation globally remains below 30%: 20% in 2012, 26% in 2014, and 20% in 2016. [1] Even in digital-savvy industries such as High-tech, communication technology, media and entertainment, the success rate is less than 26%. In traditional industries such as oil and gas, automation, and infrastructure, the success rate of transformation is even further below average, ranging from 4% to 11%.[1] 

Under the influence of Industrial Revolution 2.0, China has established a great number of excellent manufacturing enterprises, and positioned itself as the world’s manufacturing center. However, compared with companies established during Industrial Revolution 3.0 with digital genes, traditional manufacturing enterprises face even greater challenges during their digital transformation journey.

Figure 1:The last three industrial revolutions

  • Lack of digital mindset: Few management or employees of the traditional industries understand the value of digital transformation or recognize its significance in enhancing competitiveness. Moreover, without systematic planning, the majority of sporadic, or short-term digital transformation efforts have yielded limited financial results despite significant investments.
  • Lack of digital talents: Finding excellent Chief Information Officers (CIOs), Chief Digital Officers (CDOs), and other digital professionals is a difficult task for these companies. Attracting and retaining such talents has proven to be challenging as well.
  • Lack of digital execution methods: Traditional manufacturing companies struggle with executing digital transformation effectively. Management and organizational structure needs to be transformed to data-driven business mechanism and decision-making process. Professional digital teams with insights and methods are necessary to guide and implement the digital transformation.
  • Lack of determination and commitment: Digital transformation requires a solid foundation and integration with the manufacturing processes. Traditional production activities are usually based on the physical world and thus require the digitization of control mechanisms, operation processes, and management systems. This process is complex, time-consuming, and the return on investment may not be immediately apparent.

From a positive perspective, the difficulty of digital transformation for manufacturing enterprises means that if one succeeds, it can establish significant competitiveness. McKinsey’s long-term survey on digital transformation found that 16% of enterprises stated that digital transformation can significantly improve performance and maintain its competitive advantages. A few wise business leaders have realized that improving core competitiveness through digital transformation can bring substantial benefits and establish long-term competitive barriers. Compared to other traditional methods to build competitiveness, digital transformation requires far less investment and human resources, and perhaps the biggest investment needed is the determination to execute the digital strategy. Therefore, the digital transformation of manufacturing industry is becoming more attractive and urgent.

Benefits and Key Components of Digital Transformation in Manufacturing Companies

Digital transformation is a gradual process that encompasses all aspects of a business, making it challenging to measure short-term economic gains directly. However, surveys have shown that digital transformation offers three main advantages: streamlined work processes, significantly increased labor productivity, and enhanced user experience. From a global standpoint, successful digital transformation plays a crucial role in supporting Chinese companies’ global expansion strategies. Some specific benefits include:

  • Breaking Geographical Boundaries:

Digital transformation empowers companies by allowing them to transcend geographic boundaries. Highly digitized manufacturing enterprises can efficiently manage dispersed operations and achieve seamless collaboration through their digital platforms.

  • Supply Chain Optimization and Cost Efficiency:
  • Digital transformation optimizes supply chain management processes by integrating and sharing information, refining information management across the entire supply chain, and leveraging data analysis and forecasting capabilities. By breaking down informational barriers in inventory and production management, digital technologies enhance supply chain efficiencies, reduce manufacturing costs, and improve collaboration effectiveness and product quality.
  • Real-time Data Analytics and Market Insights:
  • Digital transformation enables companies to gather actionable insights from vast consumer data, providing a comprehensive understanding of the target market. This data-driven decision-making approach minimizes risks, optimizes resource allocation, and enhances the success rate of international ventures.
  • E-commerce and Digital Marketing Strategies:

Digital transformation offers Chinese companies opportunities to expand their presence in international markets through e-commerce platforms. It empowers businesses to proactively choose sales channels, execute digital marketing campaigns, provide customized services, and efficiently navigate competitive global markets.

By embracing digital transformation, enterprises can unlock their potential in a globalized world, foster successful international ventures and secure their position in global market.

Enabling Global Expansion Strategy with Superior Performance – A Case Study of Huaxin Cement Digital Transformation

For the last couple of decades, the Chinese cement industry has grappled with a market capacity that far exceeds demand. However, Huaxin Cement, the fifth largest cement company in China, has risen above these challenges by embracing overseas expansion as a core strategy since 2012. Established in 1907 and regarded as the “cradle of China’s cement industry”, Huaxin Cement, under the visionary leadership of Mr. Yeqing Li, the residing CEO of Huaxin for the past 25 years, has astounded investors by transforming a local cement factory into a multinational powerhouse in the building materials sector. Its business ventures now span cement, concrete, aggregates, environmental protection, equipment manufacturing, and new building materials.

Figure 2: Huaxin Cement’s astonishing development in the past 20 years

Huaxin Cement has long embraced the integration of cutting-edge technology into its manufacturing operations and business processes. This commitment was solidified with the establishment of the Digital Technology Innovation Center (DTIC) in 2019. Through DTIC, Huaxin Cement has accelerated its digital transformation journey, specifically focusing on bolstering the expansion related to co-processing municipal solid waste as Refuse-Derived Fuel (RDF) in cement kilns, ready-mix solutions, and aggregates. The outcomes of this endeavor have surpassed all expectations, positioning Huaxin Cement as one of China’s most successful examples of digital transformation.

To execute overseas expansion strategy, initially, Huaxin Cement focused on building new cement factories abroad and managed them with Chinese engineers, leveraging its expertise in cement equipment manufacturing and production technology. Achieving remarkable return on investment, the company has recently decided to accelerate its globalization efforts, resulting in significant acquisitions over the past three years in countries such as Tanzania, Zambia, Oman, South Africa, and Mozambique. As Huaxin Cement strives to swiftly integrate these acquisitions, upgrade manufacturing capabilities, enhance cost competitiveness, and expand foreign markets, it has turned to a simpler and more efficient method – its digital transformation capabilities.

One such case is Huaxin Cement’s investment project in Zambia.

In December 2021, Huaxin acquired two factories of Zambia China National Building Material Limited (CBMCL) from Lafarge, marking its first independent listed company acquisition.

                  

Figure 3: Huaxin Cement’s investment project in Zambia

This acquisition presented a significant challenge for the 21 Huaxin manager and engineer team who need to lead the existing 380 local employees and turn around production to establish market competitiveness in an unfamiliar foreign country.

Figure 4: Risks and challenges of overseas operations

In order to quickly streamline the day-to-day business operations, Huaxin’s professional digital team started by implementing Enterprise Resource Planning (ERP). ERP serves as the foundation of business standardization and digital transformation to increase efficiency, accountability and transparency. Huaxin partnered with Kingdee, a leading enterprise management cloud SAAS company in China, to replace the legacy JDE ERP system with a modern ERP system.

Huaxin and Kingdee have a long successful partnership for over 20 years. This time Huaxin once again collaborated with Kingdee to implement Kingdee Cloud Galaxy, a product that supports Huaxin’s complex self-developed business systems, offers high compatibility with various international ERPs, and provides multilingual capabilities. 

After the successful switch to the new ERP system at the Zambia plant, Huaxin’s digital team promptly launched the eMall (an online ordering system) and ADL (an automatic order processing and dispatch system) projects. The integration of ERP, eMall, and ADL effectively ensure the one-to-one matching of orders and vehicles, and safeguard against fraudulent activities. These advanced digital systems serve as the link between the company and its customers, facilitating seamless communication regarding orders, pricing, logistics, and billing.

The implementation of the set of digital solutions has accelerated marketing and sales, positively impacting the company’s sales performance in Zambia.

Figure 5: Sales keeps growing supported by the digital solutions

So far, in addition to Zambia, Huaxin has successfully implemented Kingdee ERP in other 9 overseas plants. The solution perfectly aligns with Huaxin’s global expansion strategy, and the case of Zambia serves as a strong testament. Kingdee ERP can seamlessly integrate with Huaxin’s business systems, such as eMall, ADL, OA (office automation), HIAC (kiln management), HOPE (production management), HERO (equipment management system), etc.

What sets Huaxin apart is its in-house digital capabilities, which not only can master all the technological expertise from software development, equipment automation, AI, cloud computing, but also guide the business and production practices. Their digital team includes technical engineers, cement manufacturing experts and business consultants. They ensure the smooth implementation of these digital solutions to address critical challenges of each plant with the best cost-efficiency.

Accelerated by the digital transformation, Huaxin’s overseas business revenue has grown remarkably, EBITDA increased from 0.6B RMB in 2018 to 2B RMB in 2023. Huaxin Cement’s digital transformation has set an acclaimed benchmark for global manufacturing enterprises, confirming the extraordinary value and significance of digital transformation in improving the corporate competitiveness.

Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No The Money Circles journalist was involved in the writing and production of this article.