Small companies entering China are in some ways at an advantage, expert says

The bigger-is-better mentality that has dominated China's business and hindered development for smaller enterprises is starting to lose its sway, say foreign experts and entrepreneurs working in the world's second-largest economy, but newcomers keen on making the most of the opportunity need to be aware that reform has not entirely caught up with rhetoric.

Despite this waning fixation with big business, the romance is not entirely over, and red tape that can put time- and capital-strapped SMEs at a distinct disadvantage is still a factor in the mainland market.

So says Stephen Phillips, chief executive of the China-Britain Business Council, the leading organization for the promotion of trade and investment between the UK and China. About 80 percent of the companies the council works with and advises are British SMEs looking for commercial opportunities in China.

Phillips says China's attitude toward "the little guys" of the business world is gradually changing for the good. But many still face a lingering bias against small business.

"One big challenge companies face, I think, is a consequence of China's hitherto love affair with large companies," Phillips says.

"The courting of the biggest multinationals, the endless focus on Fortune 500 companies, means SMEs find it quite difficult to get access into China's biggest companies, into the state-owned enterprises in particular, because they tend to like to deal with the bigger boys, even when SMEs might have better technology.

"It's become the sort of mantra when you go around China: provinces and cities want to attract the big boys, and they have so far not focused on attracting the small boys. And that's reflected in the corporate sector, too.

"It's beginning to change. There is a real shift of thinking in China, but there is a legacy of that that does make it harder for SMEs in China."

Dai Kewei, the vice-director of the Wuxi Commission of Economy and Information's Small and Medium Enterprise Bureau, is a product of that changing mentality.

The government of his southeastern city believes SMEs will be the transformational economic force in China this century, he says, and has introduced a raft of incentives to encourage micro to medium-sized businesses to grow.

"Helping large companies can bring your city a good reputation, but it doesn't help much with employment and innovation," he says. "SMEs do."

British-born Graham Curren, 50, is the CEO of semiconductor firm Sondrel. His company, which came to China in 2008, has gone from having 40 employees to 150 worldwide. About 100 of its engineers are located in China, and the company says it has grown an average of 25 percent a year over the past 12 years.

Curren agrees that the attitude toward smaller companies is gradually changing for the better in China, but there is still a lot of red tape to be cut before that positive sentiment translates to a better business environment.

"One of the issues in China is that there isn't really anybody in the government you can go to for the rules. It's really difficult to find things out, even if you speak Chinese. Even for local people it's difficult to find out what the rules are, and then you discover the rules are varied at a local level, or your local contact interprets the rules differently."

Local tax variations and residency rules for employees are two issues that Curren hopes will be reformed.

"If you move from one city to the next, you've got to relearn everything. You've got to make contact with the local tax people who make the rules. It's very localized and it makes business quite restrictive. There are always lots of hidden rules. For example, we tried to get some interns a little while ago, only to discover that interns have to be immediate graduates. None of this stuff is easy to find out. You find it all out by trial and error."

Chris Cheung, director of the EU SME Center in Beijing, says a lack of intellectual property rights protection also "remains an ongoing concern" for foreign SMEs.

Phillips, who says any further reduction in red tape in China would be good for smaller businesses, points out that both local and foreign companies are subject to the same kinds of rules.

"It's no different than it is for a Chinese company, but for a small (foreign) company with more limited resources these (navigating bureaucracy) are bigger hurdles than if you've got an in-house legal team and compliance team."

But while SMEs the world over face challenges securing finance and making resources stretch further, when it comes to setting up shop in China, Curren believes foreign SMEs often have a slight advantage over big foreign firms and multinationals.

"In a big company, the CEO doesn't necessarily spend a lot of time here (in China)," he says. "So the people who can really change the way the company operates to suit the local environment, or change the corporate rules to suit the local environment, don't really have the local exposure. That might be an issue for China, because people's perception of China outside China is totally different from the reality, in my view. It's restrictive for the company, and they miss out on the opportunities. SMEs don't have that problem because the CEO is generally here and they are able to make firsthand judgments."

Both Curren and Phillips agree that more foreign SMEs in China are a good thing for everyone.

"Typically what the companies we work with have is a product or service that is in some form innovative," Phillips says. "They've got something that doesn't exist in China. So what this does is help Chinese partners, or through competitive pressures Chinese companies, move up the value curve."

Curren says lower overhead and access to Chinese talent helped his company grow, and eventually meant he could hire more engineers back in Britain.

Foreign SMEs can do very well in China, he says, but he recommends hiring a local to help get through the red tape.

Foreigners should not expect overnight success, Phillips says.

"We would advise companies they need to be in for the long haul and that it might not fall into place immediately. The advice is always to use common sense advice, do your homework, do your due diligence and understand the environment."

josephcatanzaro@chinadaily.com.cn

Visitors check out a device produced by Sen-Bio, a medical products manufacturer in Wuxi, at an exhibition. Photos Provided to China Daily

(China Daily European Weekly 11/14/2014 page8)