Fourth Shift Hopes To Thrive On China’s Greener Pastures

Fourth Shift Hopes To Thrive On China's Greener Pastures
P.J. Jakovljevic - February 6, 2001

Event Summary

On January 18, the government of China's Wu Qing Economic and Technology Development Area announced the honor list of outstanding enterprises registered in its area. Fourth Shift Asia, an enterprise applications provider for small to medium manufacturing enterprises with main HQ in Minneapolis, MN, USA, was recognized as one of the top three companies for its large contribution to the health and well being of the Wu Qing District.

"We established our operations in China about 12 years ago," says Dave Gahn, Vice President, Asia. "Receiving this award affirms Fourth Shift Asia's healthy growth and contribution to the economy in China. We remain committed to providing Complete Care products and services to our 300+ customers here to help them become more productive and profitable."

Fourth Shift Corporation (NASDAQ: FSFT) initially entered China to work on the localization of its software system, setting up operations in Tianjin. This effort helped Fourth Shift to become the first American software developer to receive an endorsement for financial software from the Government of the People's Republic of China. The evaluation confirmed that data within the system conformed to the financial rules and accounting standards of China. Today Fourth Shift Asia has offices throughout China, including Beijing, Guangzhou, Shanghai, and Tianjin. Fourth Shift also has several offices in the Asia-Pacific region.

The news comes as a crumb of comfort in light of the company's disappointing performance in 2000. In January, Fourth Shift reported a net loss of $0.08 per share, for the fourth quarter ended December 31, 2000, compared to a profit of $0.04 per share a year ago (See Figure 1). Included in the fourth quarter results was a one-time charge of $0.03 per share for an expense reduction plan implemented during the quarter. Total revenue for the quarter was $14.9 million, a 17.2% drop compared to $18 million a year ago. Total revenue for fiscal 2000 was $61.2 million, which is 11.6% drop compared to $69.2 million for fiscal 1999. The net loss in 2000 was $4.9 million, compared to a net profit of $1.9 million in 1999. Particularly disappointing was the 26.5% drop in annual license revenue to $15 million from $20.4 million in 1999 (See Figure 2).

Figure 1.

Figure 2.

"The year 2000 is a good year to have behind us," said M. M. Stuckey, Chairman and CEO. "The entire enterprise market has been soft all year and has yet to recover. We go into this New Year with a significantly reduced cost structure, a reorganized and revitalized organization, and an excellent browser-based product line. We are conservatively optimistic for a profitable 2001, even if current market conditions remain static."

On January 9, Fourth Shift announced the release of Fourth Shift 7.10, which features "My Fourth Shift Workplace," a web user interface (WebUI) that puts the Fourth Shift ERP system in a browser and lets manufacturers set up portals to view that data together with other resources they need to perform their jobs. My Fourth Shift Workplace also enables users to create configurable views of their Fourth Shift data called portals. A portal can include the Fourth Shift program itself, as well as existing intranet resources, third-party browser-based applications, or even independent internet web sites. Users move between pages by clicking on tabs and hyperlinks.

The FS Explorer displays all of the available WebUI features in an easy to use "tree" view that can be expanded and collapsed. Search capabilities are also available to allow the user to quickly find a WebUI feature. The company cites these features as enabling users to use Fourth Shift with minimal training. My Fourth Shift Workplace works with both SQL Server-based and mdbs TITANIUM configurations for the Fourth Shift ERP Suite.

Market Impact

These are by no means easy times for smaller applications vendors, and Fourth Shift's predicament is a perfect example. The CEO's brief statement reveals that the company is in survival mode. Look for a slew of similar announcements from its peers that are also in the conundrum of how to expand their products offerings, deliver a modern, Web-based product architecture, and defend their turf from each other and from ever more intruding and succeeding bigger brethren, while coping with much scarcer resources. A big shakeout among the mid-market vendors should be expected within the next 6-18 months.

While the last couple of years have seen a growing awareness of the mid-market as fertile ground, one should expect 2001 to witness a real explosion in this space as customers will want to take advantage of the abundance of offerings tailored to suit their needs. Coupled with the anticipated shakeout and downfall of some incumbent players, the result will be a dwindling number of competitors and also contract price reductions (meaning lower margins for cash strapped smaller vendors) to suit the constrained budgets found in the mid-market.

However, while it is disconcerting that the revenue pipeline seems to be all but dried up, Fourth Shift has realized that simply curbing costs will not suffice. The company has to more vigorously exploit its enviable worldwide geographical coverage compared to its peers. Its product has traditionally exhibited strong multi-national capabilities in terms of languages and currencies support. Fourth Shift was the first ERP vendor to be certified by Chinese authorities to sell in China's expanding market, where there is little real competition.

Furthermore, Fourth Shift continues to deliver attractive, innovative products for its target market. We previously expressed our views regarding Fourth Shift's new product strategy called Complete Care (for more information, see Is Fourth Shift Succeeding in Providing 'Complete Customer Care'?). Although the company keeps abreast of the latest developments, it tries not to alienate its more conservative customers with abrupt new technology introductions. A good example is its new thin client called WebUI, which supports Internet connectivity and intuitiveness, and is still overwhelmingly popular with plant-level users. These product initiatives should provide inexpensive benefits to cost-weary smaller manufacturing enterprises.

However, the above moves should be backed up with substantial progress in developing an indirect channel to supplement the company's strong direct sales force. Without it, we believe the company's growth will be insufficient and it will remain marginally profitable. This is particularly true in light of Tier 1 vendors learning the importance of resellers in the lower end of the market (for more information, see SAP Claims Big Gains In The Low-End Battleground, and PeopleSoft Joins The Hunt For SMEs ).

User Recommendations

While it is unclear how many smaller vendors will survive the shrinking and more crowded market intact, avoiding either bankruptcy or assimilation; Fourth Shift may well be one of those that survive the shakeout. The company has long demonstrated a deep understanding of the low-end of the ERP market dynamics and its requirements of inexpensive products, fast and easy implementations and good service. Moreover, the depth, breadth and innovativeness of its offerings to the SME market are attractive at first sight and deserve due attention.

More comprehensive recommendations for both current and potential Fourth Shift users can be found in Fourth Shift Corporation: Working Overtime To Provide Complete Customer Care.

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