The prospect of tapping into China’s ever-expanding mass of middle class consumers with money to burn is enough to make any foreign business chomp at the bit.
But at a time when even the biggest corporate players are finding it rough in the world’s second largest economy, what chance do small and medium enterprises have (A souring taste for multinationals in China 29 July, 2014)?
Still, for many SMEs that have already taken the plunge, the vast market, an expanding middle class, and plentiful suppliers are helping to boost revenue and sales growth.
A new survey conducted by HSBC found that 46 per cent of Australian SMEs with existing international operations are planning to expand into new countries or grow their existing international operations in the coming year.
Among the SMEs surveyed, the top two destinations for business activity and expansion are the US (54 per cent) and China (49 per cent).
But whereas the shift in cultural mindset from Australia to the US is manageable for many businesses, venturing into the Chinese market is like a step into the unknown.
One obvious way for these companies to get a handle on the Chinese market is to look at the experiences of those who have gone ahead of them. A new report from Deakin University's Graduate School of Business sheds some light on the pitfalls involved in doing business there.
The Deakin academics spoke with 40 different Australian SMEs from a variety of industries from business services to manufacturing, biotech and film to find out what the biggest challenges businesses face when they expand to China.
Here’s what they identified as the seven biggest lessons Australian SMEs learned from operating in China:
1. Research, research, research
Just because your product or service is considered innovative back at home, doesn’t mean it’s definitely going to work in China.
One of the strong themes academics picked up in their discussions with SME operators was that China isn’t ready for some of the innovations offered by Australian businesses.
“China is not very innovative based – its only fast construction and making money, and therefore the Chinese are not interested in innovation” said one respondent.
The report recommends SMEs undertake thorough market research in order to gauge market appetite before plunging in.
“Innovative products should also be marketed to defined market niches, rather than broad markets, to facilitate addressing resistance to innovation,” the report added.
2. Choose your mode of entry very carefully
Once you’ve done your research and decide you want to enter the Chinese market, the next thing to decide is how exactly to do so.
There are a number of different routes foreign businesses can take from to flying in and out until the business gains a foothold to setting up what’s known as a wholly owned foreign entity (WOFE), licencing, franchising and joint ventures.
The type of market entry depends on what you’re selling. One company sought to minimise costs through focussing solely on exporting whereas others saw more value in setting up a WOFE because it helped them build up a network of contacts.
And while going in half-cocked may reduce the risks involved to your business, it’s more likely to lead to smaller market penetration and slower growth.
3. Get your guanxi right
Every guide to doing business in China comes with an obligatory explanation of the importance of connections or guanxi to doing business there.
The need to be hooked into established networks in China is especially important for SMEs which, due to their size and foreignness, struggle to gain recognition and legitimacy there.
Understanding even a little of China’s language and culture is a plus when trying to manage local talent.
“It is important that foreign managers develop language skills, and have a good understanding of Chinese business culture,” the report notes.
4. Protect your crown jewels
For any SME, your intellectual property is the crown jewel of the business and the risk of having it stolen from underneath you in China is huge.
Whilst the Chinese government has made progress on increasing the level of protection for IP in the legal system, it remains a persistent problem.
One SME featured in the report even said that they had heard of a person going for an interview at another company pretending to be them.
“I even had one person go to a job interview with a company who pretended to be our company. It wasn’t us selling, it was this guy pretending to be us and he went out there and they tied him up to a pole and robbed him.”
The report suggests SMEs should get their heads around the legal protections available to them including the use of copyrights, patents and trademarks.
The report found that in order to protect IP, the best practice is to limit the amount of it that’s brought into the country.
And for the companies where this isn’t a viable option, there are few alternatives. Sometimes in China “infringements of IP must be expected” says the report.
5. Don’t be afraid to ask for help.
SMEs don’t have to go it alone when trying to crack the China market. There are a number of organisations, both government and non-government out there that have experience and resources to give you a helping hand.
Among the organisations the report mentions are the Australia China Council, Austrade and AusAID, the Australia China Business Council, Australian Chambers of Commerce in China as well as state government international offices.
“It is a good idea to attend at least one of the trade missions organized by the federal, state and city governments to learn about the latest business developments in China” the report suggests.
6. If you’re not online, you’re not in business.
China is now the world’s number one digital retail market with shoppers there more willing to buy online than custumers in other markets. Having a digital strategy is now a necessity when selling into the Chinese market.
But a digital strategy for China needs to cater to the needs of the market there. For Australia, with low brand awareness, getting an insight into Chinese consumers’ minds is paramount.
Employing Chinese locals to assist in creating marketing materials is the fastest way to connect with Chinese consumers. Partnering with an established Chinese brand is also a possibility.
“Even though online shopping is a simpler environment, Australian companies should still consider the cultural differences between the two countries to tailor their marketing strategies to be locally effective,” notes the report.
7. Find fitting foot soldiers
Human resources management continues to top the list of business challenges for foreign companies doing business in China. Finding staff who are creative is a particular challenge, according to the Deakin report.
Dealing with high staff turnover can create an onerous cost burden on SMEs as fickle workers move on to other jobs and new staff need to be trained.
“Managers should review compensation and benefits periodically to ensure they stay in step with the rapidly changing employment market in China,” the report says.
“They should also pay attention to employees’ personal needs and develop more flexible policies to create an engaging work environment.”