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Investing China: China 101 For Smes

Many small and medium sized enterprises in western countries are caught between the proverbial “rock and a hard place”. Economic pressures at home are forcing them to consider setting up in or at least sourcing from China, yet the Chinese market gets tougher and tougher to crack every year, in part because so many of their competitors are already there. Following are some strategies for squeezing your SME through.

Partner up with a Chinese company (or companies): Chinese companies willing to form partnerships or joint ventures with western companies are plentiful, and the (Chinese) woods are thick with local investment consultants who are both fully bilingual and hip to local conditions. However, although a reputable China investment consultant might be able to find you a trustworthy Chinese partner, the fun is only just beginning. Differences in management philosophy, financial resources, and understanding of local conditions often combine with communications difficulties (not all of them linguistic) to make these kinds of arrangements a frustrating experience for all concerned. There have been successes, of course, but in general the popularity among foreign investors of partnering with Chinese companies has waned significantly in recent years.

Strength in Numbers: Since there are a lot of other SMEs in the same situation as you, it would not be wise to simply write them off as competitors. Taking advantage of an existing trade association (or forming your own) to share resources, labor, and market intelligence can help your SME in several ways. First, negotiating as a group gives you bargaining power to secure concessions that would otherwise be unavailable. Second, your trade association could pool funds to set up a representative office in China that would act as a sourcing center that would provide its members with a list of pre-qualified local suppliers with whom discounted pricing has already been negotiated. It could also perform market research and negotiate distribution networks for the benefit of its members who hope to sell their products in China. Finally, your trade association could partner with a Chinese industrial park to set up shared facilities available to all of its members, including management and infrastructure. Although you would need to formally establish a Chinese company in order to perform income-generating activities on Chinese soil, there is no particular reason why a group of SME couldn’t jointly invest and establish a wholly foreign-owned enterprise in China that would bypass the need for local suppliers by producing its own products with local labor.

The foregoing is just a taste of the various possibilities available for taking advantage of China’s low labor costs and its large domestic market. Think creatively and you may be writing the sequel to this article yourself.

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