Is Rootcloud a good business when going overseas?

From a policy point of view, the Industrial Internet  is still a hot spot, since January 2023, China 25 provincial government work reports mention the industrial Internet, 22 provincial government work reports on the scale of industrial Internet development in 2023 policy deployment. At the Industrial Internet Conference held on June 15, the Ministry of Industry and Information Technology disclosed that the platform system related to China's industrial Internet has been extended to 45 national economic categories, and the industrial scale has exceeded 120 million yuan, and the development trend continues to be good. According to EqualOcean, key factors driving the growth of the Industrial Internet market include the growing demand for connected supply chains, as well as the declining price and increased availability of sensors and processors that can provide real-time access to information.

Looking at the international market, according to Statistic, the global industrial Internet market will exceed $321 billion in 2022. The market size is expected to continue to grow in the coming years, reaching approximately $1.11 trillion by 2028. EqualOcean's review of the Grand Revive Research database found that manufacturing accounted for more than 18 percent of the industrial Internet's largest global market share in 2022 and is expected to remain in the lead until 2030. With the introduction of Industry 4.0, the Industrial Internet is becoming increasingly popular in discrete and process manufacturing, offering multiple options and possibilities to optimize operations, reduce downtime, increase efficiency and help make data-driven decisions that improve margins and reduce costs. North America dominated the Industrial Internet market in 2022 with a share of approximately 32%, which is attributed to the early adoption and implementation of industrial Internet technologies in the region, which has now developed into an Industrial Internet innovation hotspot.

In this domestic and foreign context, will Rootcloud be a good business overseas? To understand this problem, it is necessary to start from the Rootcloud itself.

Rootcloud has lost RMB 1.3 billion in three years， needs to accelerate the pace of commercialization

As revenues expand, so do losses

EqualOcean learned that Rootcloud is an industrial Internet cloud platform solution provider, covering smart manufacturing, product intelligence and industry chain of manufacturing, research and development, product services, etc. The main product, Root Cloud Platform, provides one-stop IoT end-to-end products and services such as connectivity, computing, innovation and application. According to the Shugen Internet prospectus, it shows that from 2019 to 2021, the operating revenue is RMB 150 million , RMB 280 million , RMB 517 million , the last three years operating revenue compound growth rate of 84.71%. However, while revenue is growing at a high rate, losses are also expanding, with net losses attributable to owners of the parent company amounting to RMB 339 million, RMB 292 million and RMB 709 million from 2019 to 2021, respectively, a three-year net loss of RMB 1.3 billion.

lagging behind in the commercialisation process and no stable customer base

In terms of commercialization, Rootcloud is currently lagging behind its peers in terms of net profit and gross profit margin. The prospectus shows that Rootcloud's sales model is mainly based on direct sales, accounting for more than 95% of revenue, with products based on software and hardware as auxiliary products for IoT access. Sany Group(三一集团) and its enterprises under the same control have become Rootcloud's top customer group for three consecutive years. 2019-2021 sales revenue between Rootcloud and Sany Heavy Industry and affiliated enterprises totaled RMB 111 million, RMB 184 million and RMB 280 million respectively, accounting for 74.24%, 69.02% and 56.82% of operating revenue in each period. In addition to Sany Group and affiliated companies, several other large customers, individual revenue accounted for no more than 3% of Rootcloud's total revenue for the year, and replaced year after year, without forming a stable customer relationship, but also reflects Rootcloud's large customer strategy is not progressing at all. In 2021, Rootcloud accelerated the commercialization process, doubled the marketing costs, reached 180 million yuan, in addition to the experienced construction machinery, manufacturing, and industrial robot industries, but also expanded the auto parts, equipment manufacturing, textiles, home appliances industry chain.

Facing competition from many parties, the business model is inconclusive

Rootcloud faces competition from many companies in the industry, with three core solutions, each of which has a pendant category of companies competing, including companies with industrial backgrounds specialising in industrial equipment and system data access, ICT companies acting as cloud service providers, and internet and software companies focusing on software development. The integrated solution formed by Rootcloud can certainly open up the system and solve the problem in a one-stop manner, but it is easy to be "too many but not precise". At the same time, the industrial internet industry is still in its early stages in China and even globally, and there is no certainty as to whether the future will be dominated by integrated solutions or outsourced separately for each segment.

In general, Rootcloud in the short term is not able to achieve profit, gradually strengthen commercialization, turn losses into profits, determine the appropriate development path, to avoid products "more and not fine", is the primary task at present. For an Internet software company, only by trying to make it bigger and stabilize the customer base can it continuously expand the market to seize opportunities and have confidence in the face of market troubles.

Huge investment in R&D and a long way to go for product diffusion

Product is the core moat, R&D investment is the biggest threshold of the industry

For the industrial Internet industry, product is the first competitive edge and the core moat. High technology threshold and high R&D investment are common phenomena, requiring companies to maintain a high intensity of R&D investment and R&D innovation in order to ensure that they are not overtaken by later competitors. As of December 31, 2022, the RootCloud platform has accessed and activated nearly 900,000 devices, covering dozens of industry segments such as equipment manufacturing, iron and steel metallurgy, automotive vehicles and parts, and electrical. But this "brain" R & D costs astonishing, the prospectus shows that from 2019 to 2021, Shugen Internet's R & D investment were: RMB 80 million, RMB 166 million, RMB 284 million, R & D investment in total revenue accounted for 54%, 59%, 55%. Comparing the R&D expense ratio of Shugen Internet and its peers, Rootcloud is 2-3 times higher than the average. EqualOcean understands that it is mainly because Rootcloud is currently in the stage of technology accumulation and product sedimentation, and continues to make rapid version iterations of its products, with higher R&D investment.

The product is more differentiated and more difficult to build

Rootcloud's products are more fundamental and more difficult to build, mainly front-end products such as product networking and data collection. Although the revenue share of smart manufacturing IIoT solutions is not the highest, it is the first step of the whole industrial internet. That is, networking products and collecting and modelling equipment data and information systems so as to ensure subsequent analysis and calculation of production equipment, production efficiency and other elements based on data. Unlike the consumer Internet, the underlying collection of data in the industrial sector is very difficult and needs to be deeply integrated with industrial mechanisms, and the data types are complex and difficult to apply.

The road to product popularity is difficult, whether cash flow can support until the darkness of the flower

The current industrial digital transformation is far from a common current standard and solution, technical experience can be reused, but industry experience has to be accumulated from scratch, and the commonality between industries needs to be improved. According to Rootcloud's official website, most of the current projects are customised, with adaptations and secondary development on the basic platform, which will bring about large-scale cost investment in the early stages. The more customers there are, the more complex the scenarios are and the more problems there are, and the later applications can only gradually become profitable after a certain scale. In general, Rootcloud's large-scale investment at this time is necessary. In the deep water of the industrial Internet, there is a need for companies to educate and build the bottom regardless of the return, but the realistic question is whether Rootcloud's cash flow can support the large-scale initial investment, and wait until the darkness comes to light.

Products are the core competitiveness of industrial Internet enterprises，also product research and development is the highest investment in the Rootcloud, the industrial digital base, which is the cornerstone of the industrial Internet is also the demand, but it is also the most difficult to chew the bone, the need for a lot of investment, the cash flow of the Rootcloud can support large-scale early investment, this is the current most critical issue, but also the Rootcloud needs to be listed.

The team size is tightened, and it is difficult to find a good price in the capital market

Cash flow is tight and team cohesion is weakened

In 2016, Liang Zaizhong and He Dongdong set up Rootcloud from Sany Group, serving as chairman and CEO respectively. at the beginning of the venture, in addition to the ten or so people from Sany Group, most of the other sixty to seventy people on the team were recruited externally. He Dongdong took as the main structure of the company's development the market-oriented principle and the model of an Internet start-up company to operate independently, with an independent and sound legal structure, an industrial + Internet team, good team incentives, and independent branding and operation. Due to cash flow problems, Rootcloud experienced massive layoffs in 2022, with massive downsizing of the core platform department and, in terms of corporate culture, the existence of pressures, 996, and advocacy of overtime and overtime in marginal departments, which directly linked performance to overtime.

Lack of independence of the company, listing twists and turns

EqualOcean has learned that the company updated its financial information on April 11 and the Shanghai Stock Exchange resumed its listing review. Throughout the road to the listing of Rootcloud, since the submission of the prospectus on June 2, 2022, various problems have surfaced, and the listing process has been repeatedly interrupted.The core reason is the lack of independence of the company. The current controller of Rootcloud is Liang Zaizhong, whose father is the current controller of Sany Group, Liang Steadman, and due to this blood relationship between Liang Steadman and Liang Zaizhong, Liang Zaizhong will most likely be the successor of Sany Group. In addition, it will be difficult to sell Rootcloud products to Sany Group's competitors, such as Zoomlion, and the commercialisation process will be hindered to some extent.

The blood relationship between Rootcloud and Sany Group is a double-edged sword, on the one hand, most of the revenue depends on Sany Group, on the other hand, it hinders the pace of listing and affects the subsequent commercial development, and at the same time, the company needs funds to re-expand the team and improve the team incentive mechanism.

All things considered, this is not a good time to go to overseas

Combined with the above analysis of Rootcloud, EqualOcean considers the development environment and overseas market factors, and believes that Rootcloud is not suitable for going to sea at this stage.

Favourable policies and industrial clusters, laying the foundation for development

Policy support has always been the bottom line of the industrial Internet, which is entering a golden period of rapid development under the incentive of national policies. 2017 to 2019, the government carried out demonstration projects to declare for subsidies, and some industrial Internet enterprises made a living from this; after 2019, industrial Internet platforms provide more personalized solutions and services for large industrial enterprises. Industrial clusters are a feature of our industry, but there is a lack of industrial infrastructure available to SMEs. The Industrial Internet Task Force Work Plan 2022 proposes that large enterprises should be encouraged to create digital platforms that meet the characteristics of SMEs, carry out digital services and promote the digital transformation of SMEs. With the encouragement of the policy and market environment, Rootcloud's development speed and business environment in China are better than those in the international market.

The situation in overseas markets is not optimistic

In 2018, GE's performance took a sharp turn for the worse, the industrial internet business was never profitable, and Predix was split into three independent companies in 2021. The digital transformation of overseas factories is difficult and the platforms are not very versatile. Unlike China, where the industry is clustered, the overseas manufacturing industry has an inadequate industrial base and the digital transformation is far more difficult than at home, with industry standards varying from country to country, in addition to considering the safety standards of different countries.

At the same time, competition in the international market is becoming increasingly fierce.  Industrial Internet platforms worldwide include ABB, ARM Holdings, Atmel, Cisco Systems, General Electric (GE), International Business Machines Corporation (IBM), Intel Corporation, Rockwell Automation, Siemens, Microsoft Corporation and others.International industrial internet platforms have started earlier and formed a stable customer base, so it is difficult for Shugen Internet to gain an advantage in the competition in the short term if it wants to enter the international market. Thanks to Sany Group, Rootcloud can use Putzmeister as a starting point to learn industry standards and be able to apply its technology to industries outside the manufacturing sector before considering overseas markets.

Cash flow is under pressure and many issues need to be resolved

Rootcloud is currently facing many unresolved problems of its own, such as lagging behind in commercialisation, not being independent enough, investing heavily in R&D, facing competition from many sides, continuing losses and high cash flow pressure, etc. Its own products need to be perfected and its commercialisation level needs to be improved. At this stage, considering going abroad will inevitably increase the investment in research and development costs, because we need to make customised solutions according to overseas markets, while marketing costs will also increase significantly, adding to the already tight cash flow burden. At this stage, Rootcloud should focus on strengthening its independence, strengthening its commercialisation capabilities after a successful IPO, and further developing on a certain scale, and then consider globalisation after achieving scale advantages.