DiligenceChina

The good news for Small and Medium Enterprises is that Mainland China - the greatest commercial opportunity of our generation - is still firing on all cylinders. The bad news is that China has a well earned reputation for crushing the dreams and hopes of entrepreneurs and opportunity seekers – both home-grown and overseas. What’s different about the China story these days is that the market and regulatory landscape have evolved to the point where smaller firms with limited resources are able to do serious business – and their prospects are bright.

Changing environment for SMEs entering the China market
There was a time when selling into China was only for big global corporations that could buy access to key decision-makers and connected party officials. Now the tide has turned, and China has set up a fairly transparent system of rules and regulations that level the playing field to a large extent. Those cultural barriers and trade restrictions that the MNC giants broke through in years past are now down for everyone – including SMEs. New regulations, company formation procedures, systematic laws, sophisticated new infrastructure and a growing middle-class are creating a perfect storm of opportunity. As China changes and develops, new niches and market opportunities are opening up faster than incumbents can satisfy them.

International giants are bullish about the little guys
Citibank — no minor player in Mainland finance — is throwing its weight firmly behind the trend of SME growth in China. In April, the bank the launch of the Fudan-Citi Small and Medium Enterprise (SME) Senior Management Training Program, underwritten by a grant of RMB 1,155,000 and managed by Fudan University’s management school. More recently, a senior staffer at the bank projected that its SME-based business will grow by triple-digits for the next few years. Big state-owned behemoths grab the headlines in China, but it is the no-name SMEs that really drive the economy. By many estimates, smaller firms are responsible for over 50% of China’s output – and 75% of new job creation.

Room for Everyone?
New entrants often find that the Chinese market is already crowded, though many traditional industries are full of inefficient operators that have neither the resources nor the management skills to develop into serious contenders. In the future, SMEs of all types will fight it out for their piece of China’s market. Pure western plays compete side by side with international JVs, returning Chinese and a new breed of smarter, tougher local start-ups. Many entrepreneurs are gravitating towards the service industries, where home-grown Chinese firms have trouble competing. Design, management consulting, HR and training, and marketing are key areas for international start-ups – though the finance industry is expected to be a tremendous source of growth as the sector develops.

Focus turns inward towards the Chinese Consumer and B2B markets
To be successful in China, SME’s will require heads-up decision-making and intense preparation. China is no longer just a source of cheap raw materials or a base for low value-added production. True, there are still opportunities in the manufacturing sector, but the really exciting news is for business owners who plan on accessing the China market. Managers entering the market are best off choosing between building vs. selling. Motorola and GM may be able to book big revenues simultaneously manufacturing and marketing, but this is generally a disastrous strategy for most SMEs. The brightest future undoubtedly belongs to those who can effectively sell into the China marketplace.

Opportunities are constantly developing
Do smaller newcomers really stand a chance when competing with the big, established players, both local and international? For many small companies, China represents the ideal competitive environment. Some SMEs are being pulled into China as they follow their existing clients into the new market, while others are finding that the burgeoning B2B and consumer markets offer them new opportunities for growth and expansion. SMEs have certain competitive advantages versus their giant global counterparts. Small, nimble service providers have the flexibility to serve niche markets and react to– or even lead – market trends to a degree that the global giants can only dream of. HR is a key challenge for managers in China, but one that suits the micro-organization hiring small numbers of local graduates and managing them closely. That model has been known to work well in China, while the giant MNCs have been plagued by high turnover, rising payrolls and skyrocketing training costs.

Caveats and pitfalls also abound
But just because accessing the China market is possible, doesn’t mean it is safe or easy. There wouldn’t be opportunity without risk, and China’s got plenty of both. First and foremost, be on the lookout for competition. Chinese SMEs are known for their speed and flexibility – and will seize upon successful models with mind-boggling speed.
The regulatory environment is more transparent than it was a few years ago – but by no means a minor consideration. The consumer and B2B markets have developed rapidly, but that doesn’t mean that customers are beating a path to your door. Chinese consumers still prefer saving to splurging, and purchasing managers are renowned for beating down prices.