Small and medium-sized enterprises (SMEs) cannot afford to ignore China with its vast market, expanding middle-class consumer base and plentiful suppliers. Julia Güsten, founder of Sharehouse, says that recent reforms, such as lowered investment barriers in certain sectors, have opened up new horizons for smaller investors. Customer demand for extremely short delivery times is making it impossible to be competitive on the Chinese market while operating remotely from Europe, so setting up shop in China is the best solution. Below, Güsten discusses some of the models available.
When even big corporate players struggle on the Chinese market, what chance do SMEs stand? Actually their chances are quite good, provided they choose a suitable model for entering the market.
Once a company decides it wants to enter the Chinese market it will do well to study the experiences of those that have gone before, by attending China seminars and workshops and/or reaching out to service providers. Much thought should be given to the location of the future investment, without automatically reverting to one of the megacities, whose names are familiar to many in Europe. Focus should be on identifying the optimal investment form among such options as representative offices, wholly foreign-owned enterprises (WFOEs) or joint ventures (JVs).
Although there is a wealth of information available on investments in China, few offer insights into models that cater specifically to SMEs entering the Chinese market. Help is at hand though: as the market has matured and more SMEs invest, their needs for assistance are being filled by a wealth of business support models. These range from opportunities to test the waters to setting up a subsidiary under the umbrella of a service provider. Such options are available in many cities around China, and it is possible to graduate from one model to the next as the business grows, with a fully independent company as the final goal.
For companies just starting out, but not wanting to commit capital investment or support a payroll, a virtual office can be a good way to explore the market. Numerous providers in China’s major cities offer prestigious addresses with a receptionist and telephone services to provide a foreign SME with a business identity and point of contact for customers in China.
A more advanced option, providing dedicated staff but no legal registration of an entity and therefore no capital investment, are company pools. Such associations of companies keep costs low by sharing office space and administration. Most company pools will hire qualified professionals on behalf of its member companies. These employees represent member companies in China, enabling them to analyse and engage with customers, distributors and the target market. In effect, they offer all the possibilities afforded by a representative office – providing the company with a presence in China—which is highly valued by customers—and initiating business, while not actually doing direct business.
Once a company has established a customer base for sales in China, it will begin to find these basic models restrictive. The demand for billing in local currency, rapid delivery times and direct sales can only be fulfilled with a registration and business licence in China. When an international company has reached a certain level of success in selling to or trading with China and needs an on-the-ground presence in the country, a trading company can be established in the form of a foreign-invested commercial enterprise (FICE). A FICE is easier to set up than a full manufacturing WFOE, as the capitalisation requirements are lower and no environmental impact study needs to be submitted. It offers more possibilities and is more cost effective than a representative office. But establishing and running a FICE requires administrative local knowledge, due to legal, tax and accounting requirements. In taking this step, the foreign investor is faced with the need to build up a large back office. Paired with the challenge of maintaining control from afar, market entry through their own trading company becomes a step too big for many SMEs.
To meet this challenge, shared service models for sales, warehousing and even production are becoming more common in China. Shared administrative tasks such as finance book keeping, human resources and logistics ensure a lean structure for the foreign investor and enable them to focus on their core competence. A shared foreign management provides investors with an extended arm and eyes on site.
A major advantage of all these models, whether company pools or shared services, lies in the calculable finance planning from the outset. Services are clearly defined and quoted in advance, so that the annual cost of the China investment can be budgeted accurately.
Julia Güsten has worked in China since 1994. She is the founder of Sharehouse, a company launched in 2013 and based on her experience supporting SMEs in their market entry to China. Sharehouse offers its members office and warehouse space combined with services in finance, book-keeping, human resources, logistics and warehouse management. Shared facilities, Sharehouse services and the resulting synergies allow SMEs an easy and cost-effective entry into the Chinese market.