In the course of a lot of day-to-day exchange, company visits, and research, I often get asked "what is a digital enterprise?" My usual answer is: a digital enterprise is one whose decisions are backed by data.
A superhard-materials firm in Shunde, Guangdong, analyzed its product portfolio a few years ago and found that its polishing-wheel product was the highest-volume seller but had a thin gross margin. The head of the company told the R&D team to concentrate on using technology innovation to raise the quality of the polishing wheel and cut its manufacturing cost by 10%. A 10% cost reduction on a 200-million-yuan product line yielded 20 million yuan of savings in a year. Even though the numbers were computed with a mix of computers and hand calculation, there was a use case and a data logic — and that is a fine example of SME digitalization.
A few years back, a company won a national-level digital enterprise project. It had embedded a lot of sensors in its equipment to monitor production in real time and to use big data to manage capacity and predict equipment failures. The company considered itself digital, and when it filed for an IPO it wanted to list on the STAR Market. But experts pointed out that its financial data did not show any new competitiveness from digitalization, so the "sci-tech innovation attribute" was not present.
I recently visited a smart-manufacturing equipment firm in Foshan that helps downstream food firms with intelligent manufacturing and digitalization — even though much of its own production is done manually. The boss explained that the firm is not large, its equipment is all customized, and while it pursues digitalization, it has trouble reaching standardized, automated production itself. Its competitiveness comes from customization and from offering solutions.
A firm in Guangzhou's Huangpu District makes world-leading medical devices that can detect diabetes and cardiovascular and cerebrovascular disease years in advance. On the shop floor, what I saw was all manual assembly. The boss said they only make a few hundred units a year, so automation and intelligent manufacturing don't apply. But the company is a big-data enterprise: it holds a great deal of user parameters, which will feed its future R&D and operations.
If we told the story in sweeping terms — or in the style of a cinematic pre-battle speech — we could say that in the future there will be only one kind of enterprise: the digital enterprise. But SME digitalization is not a writing assignment on a fixed prompt. It is a journey where, as the saying goes, only the one drinking the water knows whether it is hot or cold.
The grand narratives of SHEIN and Midea are well known, and these firms are held up as models of "chain-wide transformation." But their digitalization logic is not the logic an SME should use. If we do not really understand the logic of enterprise digitalization, digitalization becomes a trap.
Build an enterprise operating logic for digitalization
About fifteen years ago, Hanyu Group in Jiangmen, Guangdong, was a small firm making one small product — drain pumps for washing machines. The terms "digitalization" and "intelligent manufacturing" had not yet arrived, and to become more competitive the firm had to work hard on the price-performance of its product.
Its daily homework was innovation and management. Hanyu set up a rule at the time: when an employee produced an innovation, the employee shared in the resulting profit. Ten years on, the company had built a little innovation ecosystem of its own, with hundreds of technical innovation patents created by its own people. Inviting employees to make constructive suggestions is part of what lean management requires.
With employee participation and lean management baked into the corporate culture, the enterprise runs like a high-speed train, with every car pushing the train forward. Hanyu could enjoy the dividends of fast growth, and it went public. Today Hanyu runs at profit margins around 20% and is the hidden champion of washing-machine drain pumps worldwide, with a market share of 40% to 50%.
I used to visit Hanyu's plant every two or three months. Every visit, I saw changes. Workflows were being improved. Automated equipment was being upgraded. Production lines were being refined. The company was constantly counting small costs and watching returns.
A small firm that improves every day and cuts manufacturing cost by 5% to 15% a year — day after day, year after year — opens a wide gap with its peers. By the time competitors catch on, the firm has scale in a single product and is out of reach. A competitor with too-small orders cannot move to automated or intelligent production, and its cost stays high. If the competitor does move to intelligent manufacturing, its production volume can't absorb the investment.
Hanyu's competitiveness logic is a lean-management logic, but read today, it is also a digitalization logic. Data and profit targets both act as the baton for enterprise innovation. The firm counts heads every day, watches the numbers, measures parameters of equipment, products, and people flows, and proposes improvements. The foundation of its decisions is data.
The digital economy has two layers. One is the foundation of digital technology itself — cloud computing, big data, the internet of things, AI — and the tools these provide for digital transformation, helping firms innovate their business and optimize management. The other is the digitalization of every industry. Each industry has to complete a digital transformation, making its business processes fully digital, raising efficiency, and cutting cost.
More than a decade ago, Hanyu achieved full digitalization in production through lean management. It already had the lean-management dividend and the management dividend of digital production processes.
Guangdong Dongjian Auto Technology Co., Ltd. is in automotive aftermarket customization. Ma Yongtao, its founder, still remembers the painful three years when the company brought in an ERP system and pushed through IT-based management. Back then, he says, the shop floor was "chaotic, disoriented, at a loss, and hard to look at."
Every deep transformation an enterprise goes through comes with a painful phase. Some firms die in it; some come through and reshape their competitiveness. Dongjian was lucky. Through IT-based transformation it built a "wide variety, small batch, customized" flexible manufacturing operating system, producing 15,000 SKUs a year and 6,000 SKUs a month, with order sizes ranging from a few sets to a few thousand.
Dongjian's chairman Luo Jun says that without information-system support, the company could not have developed the capability and competitiveness of flexible manufacturing. Aftermarket auto products come in great variety, average order sizes vary widely, and vehicle coverage is broad. The ability to flex to varied and personalized demand became Dongjian's unique competitiveness. The company also used its IT backbone to apply the IPD model and to build a large product and parts database as well as tooling, inspection, and fixture design and manufacturing capability.
The purpose of building an IT platform is to keep information flowing cleanly with raw-material suppliers and, at the same time, among logistics providers. Dongjian gained the dividends of digital transformation — it became a trusted partner of many foreign auto-mod brands, orders grew steadily, it became an IT benchmark in the industry, and it was listed.
Guangdong Changxing Semiconductor Technology Co., Ltd. focuses on packaging and testing for semiconductor ICs and offers one-stop integrated chip-packaging solutions.
Its head, Zhang Zhiqiang, sums up the firm's digital practice this way. First, digitalization raises operating efficiency. Through digital management systems like ERP, WMS, CRM, and OA, information is integrated across process steps and flows are automated, cutting manual intervention and error and raising production, logistics, and management efficiency. Second, it optimizes resource allocation: digital tools monitor the use of production resources — equipment, labor, materials — in real time, enabling more rational allocation and lower cost. Third, it improves product quality: wafer test, packaging, and chip test steps can all use digital tech for more precise inspection and analysis, stabilizing quality and cutting defect rates. Fourth, it strengthens decision support: digital systems collect large volumes of data and, through analysis, provide accurate business insight, helping management make smarter decisions, set better strategy, and ultimately raise competitiveness. In semiconductors, firms with a higher level of digitalization can respond to market changes faster and serve customers better — and stand out in tough competition.
SME digitalization has many pain points
From what I have seen, "business datafication" is the first stage of SME digitalization: recording, storing, and managing the business information produced in production and operations, and presenting it through electronic terminals to smooth information flow and communication.
The second stage is "data serving the business." After building out basic IT, the firm focuses on integrating and using its data to break down data silos and let data drive operating decisions. What this looks like: the IT base is gradually built, office-automation systems and ERP and related infrastructure are in place. The firm starts breaking silos, sharing and exchanging data across departments or systems. Decision-making moves from reliance on experience to accurate analysis grounded in data. The goal is to get the data to really be used — to help the firm cut costs, raise efficiency, and strengthen overall competitiveness.
Beyond "data serving the business" comes the intelligent stage of enterprise digitalization — "data plus business." Supported by digital and intelligent tech (big data, AI, cloud, blockchain, IoT, 5G), firms build self-optimizing decision models with capabilities for state awareness, real-time analysis, scientific decision-making, intelligent analysis and management, and precise execution. Using advanced tools, business processes become intelligent — automated decisions, personalized recommendations, intelligent customer service. The firm runs customized, intelligent practice in key business scenarios — digital-intelligent R&D, supply chain, sales and marketing. It builds a customer-centric capability system, designing interaction modes that fit the customer experience, and raises operating efficiency and market competitiveness across the board.
The Report on Digital Transformation of Chinese SMEs 2024 divides SME transformation into five phases. One, single-point attempts — basic IT build-out and passive digital experiments. Two, local build — some business lines begin to explore digitalization. Three, building a digital base — full-company planning and construction of a digital base. Four, full value-chain intelligent operations. Five, driving business innovation with new IT tech and exploring outward empowerment.
Unlike past digitalization, which only covered some use cases, firms today are more focused on an overall plan for developing and using data — to connect information silos and move decision-making from rule-of-person to precise decisions grounded in data.
But because many SMEs are still in an early stage of digitalization, there are plenty of pain points. When Chairman Zhang analyzed Changxing Semiconductor's pain points, he started with data integration and compatibility: different digital systems come from different vendors, data formats and interfaces don't match, and integration is hard. Next is cost-versus-benefit: firms have to assess the ROI of a digitalization project and make sure the investment produces real business returns.
Chen Jirong, head of digital projects at Dongguan Shuzhuan Information Technology Co., Ltd., also mentions that hardware and software costs for digitalization are high. A transformation needs major funding for hardware, software, networking, system integration, and maintenance. At the same time, employees often lack the digital skills and knowledge to adapt to the new digital work environment and processes. Traditional corporate culture and organization can also block digital innovation — the barriers between departments hurt information flow and collaboration.
Shen Ying'er, chairman of Nanjing Dalian Information Technology Co., Ltd., analyzes the problem from the angle of how firms are organized. The functional software firms use today — ERP, MES, APS, WMS, PLM — was developed on the premise of "Management 2.0," a department-centered hierarchical structure. These products were useful in the early IT and digitalization phase, but their biggest flaw is that management and software end up as two separate layers. The software is an appendage of the hierarchy, with walls between departments and silos between different pieces of functional software.
Digitalization and all-factor competition in manufacturing
Chen Jirong argues that in the next phase of SME digitalization, data must drive decisions. He notes that in the past, Excel was used to pull together sales reports — sales data were scattered across different online systems and offline files, data were opaque, report production was slow and complex, and the data could not really support business decisions. Going forward, firms need systems that can deeply analyze customer, sales, and financial data, and auto-generate different visual reports. Looking at the results, sales staff can spot the bottlenecks in the sales process and adjust their strategy, and the firm can see its operating reality clearly and adjust its approach in real time.
Chen believes silos need to be broken further. ERP should be connected so that customer, sales, and financial data flow together; business-end data should link efficiently across end-to-end loops; front- and back-end data should be joined; cross-system data walls should be removed. This is how to build a new kind of digital marketing platform — so data serves the business and overall operating efficiency goes up.
Shen Ying'er argues that what firms need to build is a fully digital factory platform — using delivery-centered chain-flow management to replace hierarchical organization, management-level large models for top-level design, a big system platform to harden execution, and an integrated management-and-software platform. In his reading, project manufacturing, equipment manufacturing, batch manufacturing, parts manufacturing, materials manufacturing, small-commodity manufacturing, and fine-chemical manufacturing can all adopt a full digital factory platform that covers nearly 80% of traditional manufacturing, spanning sales, design, production planning, procurement, warehousing, production, logistics, and after-sales service — the whole product lifecycle. On the management side, people, machines, materials, methods, and environment can all be digitally defined; business, R&D, production, procurement, equipment, finance, HR, and administration merge on a single platform. No silos. Management and software become one. Management is the platform; the platform is management.
Gu Xin, vice president of Siemens China's Digital Industries Group, argues that manufacturing's future will be all-factor competition. Whoever gets IT and data capability first — and first transforms underlying operations and production — will have first-mover advantage.
Gu says firms need to use digitalization and data to connect business processes that were previously isolated. The firm that first uses digital tools to connect R&D to manufacturing to delivery will win the market — and then push business models and the digital commercial ecosystem to the next round of restructuring.
I recently attended the Siemens Industrial Edge ecosystem conference and learned that Siemens is working on a more open digital commerce platform, integrating digital ecosystems and using industrial edge data to drive digital operations.
More mature digital application solutions, open technology architectures, an industrial AI that is being integrated in, the mining of maximum value from data, and an open, pluralist industrial edge ecosystem — these are what are leading China's thousand industries through digital transformation.
In May of this year I also visited Siemens' Chengdu plant — one of the first nine "lighthouse factories" recognized by the World Economic Forum. The plant produces more than 80,000 units a day across more than 2,300 product types. Worth noting: supported by digital technology, and through continuous optimization and improvement, manufacturing cost has fallen by double digits and quality has reached a defect rate of 6 per million. With its digital capability lifted, staff and management are freed up to spend their capability and time on creating new value; with decision-making pushed down on a digital backbone, operating efficiency has improved across the board.
Against a backdrop in which the concepts, technology, and edge ecosystem of enterprise digitalization are all maturing, I believe digital transformation will produce new competitiveness for manufacturers, drive vertical integration of industries, and trigger industrial change.
Guangdong's SHEIN and Zhibu Hulian are examples of digitalization going vertical — using orders to attract and trigger SME digital transformation, becoming the supply side of industrial-chain digital transformation, and driving industrial change.
Firms inside an industrial cluster can also build collaboration platforms through digitalization. Shantou's Gaodesi Precision Technology Co., Ltd. has built a digital, standardized, intelligent collaborative manufacturing platform that supports information sharing, design collaboration, and shared production across the upstream and downstream. If Gaodesi can turn this into an open brick-toy creativity-design-production platform and empower more brick-toy IP firms, it has a real shot at becoming a unicorn in the brick-toy industry.
The Siemens Chengdu plant is a model of scale manufacturing meeting flexibility. The plant has a wide product range and 18 SMT lines — the most typical front-end process in electronics manufacturing. Just writing a scheduling program lifted production efficiency by 1%. The digital-twin logistics-simulation system cost more than 200 million yuan across its first three phases, and the fourth phase alone cost more than another 200 million yuan. The combination of digitalization and scale gave the plant a competitive niche of its own.
From Hanyu's small drain pump to Dongjian's mass-customized flexibility, scale manufacturing has long been China's strength. As companies build digital capability, they further strengthen China's scale-manufacturing advantage and a new layer of competitiveness. As digitalization and AI advance, industry boundaries blur, and cross-industry competition becomes possible.
Unlike the commerce sector's digitalization, which focuses on customer experience, speed of market response, channel expansion, and brand, manufacturing's digitalization focuses on production efficiency, product quality, cost control, and innovation. It is more complex and more difficult, because it touches production processes, supply chains, and quality control across many stages.
Scale manufacturing is a very complex system. In a digital setting, simulation tools can surface its bottlenecks, bright spots, and upside, and help firms keep improving system performance. The real value digitalization generates is in the quality of decisions. People still make the decisions, but they need enough data behind them. As the value of data rises, decision-making goes lower in the organization and the value of digitalization grows with it. Reshaping manufacturing through digitalization is a chance, and a window, to produce new scale economics.
Liu Hui, CEO of Guangdong Shinglin Elevator, says his firm's pain point is a shortage of technicians who know both elevators and code.
Firms like Siemens and Midea have software systems that were spun off from manufacturing — those systems are rich in industrial knowledge and strong in systems capability. As the edge-technology ecosystem matures, massive industrial edge knowledge and tools are integrated into the systems, which can greatly shorten the time an engineer needs to get up to speed.
China's manufacturing digitalization today has many successful models, technologies, paths, ecosystems, and solutions. No matter how mature the solutions and technologies are, each firm's digitalization practice has to go through a non-trivial upgrade trial of its own.
For now, manufacturing is still an all-factor-competition industry. Enterprise digitalization is the overall combination of every operating detail — it is both an industrial-engineering project that runs the full production chain and, at the same time, an economic project.
Originally published: Economic Observer · Microscope · 2024-09-02 · Read original →
Originally published in the "Economic Observer · The Walker’s View" column. The author is Executive President of the Guangdong SME Development Promotion Association. For reprints or citations, please contact the author or the Association Secretariat.