The Chinese supply-chain software producer has had a good couple of days since we first mentioned it (or didn’t, as we made it into a rather silly guessing game), helped by the rebound in Chinese shares, no doubt. We will increase our coverage over time, as we think it really is a ground-floor opportunity.

I’ll start with a list of it’s products:

• e-Future ONE Visual-DRP, a Web-based product designed to meet the distribution and network management needs of manufacturers;
• e-Future ONE DMS, a mini-enterprise resource planning application utilized by wholesalers and distributors in the consumer goods industry;
• e-Future ONE POS-ERP, a software solution designed to meet the demands of retailers for goods flow, order flow, information flow, and cash flow management;
• and e-Future ONE LRP, an application for distributors or logistics companies to improve warehouse management, transportation management, and logistics management.
• It also offers e-Future ONE SCM, an application designed to promote collaborative business between retailers and their suppliers;
• e-Future ONE CPFR/VMI, a program that provides customers with collaborative planning, forecasting, and replenishment features;
• e-Future ONE CRM, a system tool mining and analyzing customer data for retailing operations;
• e-Future ONE BI, a program designed for intelligent distribution;
• and e-Future ONE eWalkman, an all-in-one portable payment system, which can place information at both the operator and customer locations.
• In addition, e-Future provides consulting services, including systems implementation, systems planning and design, customer-specific configuration of application modules, and on-site implementation or conversion from existing systems, as well as post-implementation consulting services.

The Chinese market for these kind of software products is rather fragmented, as things are in the early stages of development. This is one reason why EFUT is on a pretty aggressive take-over path.

It’s funny, keen observers of this site will not have escaped the fact that we have stated before that we’re not fans of take-overs (which is based on the rather sobering economic literature on the subject), only to make an exemption for the take-over under discussion.

We have to use the same argument here, because of the fragmented nature of the Chinese market. Lot’s of small, regional players. It’s not without disadvantages though. Companies EFUT acquire might have similar software products, which brings a little bit of a dilemma.

Either, you discontinue that product, risking upsetting it’s users or you have several offerings addressing the same kind of processes. One has to be familiar with some basic background in the economics of software to be able to appreciate this a little better.

Software has:

• High development cost which are fixed, low variable cost because marginal cost are almost zero. Once you have the code in place, making a second copy costs almost nothing, although with business software like the stuff EFUT is engaged in, this is a little less so, as it requires service personnel to install and maintain it. Also, costs are ongoing because improvements in the products need to be made (the service personnel is ideally placed to suggest improvements in functionality as they are in constant contact with the customers, we would like organizational structures in place where the service personnel is in constant contact with the whizzkids writing the code).
• What you really want for your software is to become standard. In that case, it doesn’t even have to be very good (we’re sure you can name at least one example here!). If you are the standard, then unseating you will become very hard, as switching cost will be high
• Switching cost involve the learning to run new software (and unlearning the old). In the business world, it might very well involve having to change business processes, the way the organization operates. This is very hard.
• It’s useful in supply-chains to have a single standard software, because it basically involves coordination between different companies. However, there are means of getting around that (common standards is one, ad-hoc software tying different systems together is another).

So, take-overs do come with some disadvantages. Upset the users of the software the company acquires, or make becoming a standard more difficult and having to manage different products with similar functionality.

Having said that, we see little alternative in the fragmented Chinese markets, and we like the way the company is very conservative using the capital markets to finance its take-overs. We will continue our coverage of this promising company.