China for SMEs
Even amid riasing political and economic tensions, the China market remains attractive to certain businesses, especially SMEs, because of its massive middle class (about 400 million) and its robust, relatively accessible manufacturing ecosystem. However, the complexities of doing business in China can present significant challenges, and for companies lacking the resources of larger corporations, a well-informed approach is essential.
Whether you’re planning to remain in China, adapt your strategy, or enter for the first time, following best practices and learning from others’ experiences will help you make informed, strategic decisions.
China Best Practices for SMEs
For SMEs that decide to move forward in China, key business practices can help establish a successful and more secure foothold. Below are some essential steps:
1. Conduct Due Diligence
When forming a joint venture, distribution, or manufacturing relationship in China, thorough due diligence on potential partners is paramount. Many Chinese companies can appear well-established but may lack essential capabilities, carry nonperforming assets, or hide significant liabilities. Additionally, the rising focus on ethical business practices, particularly regarding forced labor, is critical. Ignoring these factors can lead to compliance issues, supply chain disruptions, or reputational harm. See United States Sanctions a Slew of Chinese Companies. Make Sure You are NOT Doing Business With Any of These Companies!
2. Adapt to China’s Changing Market
In a country with a government deeply involved in economic decision-making, market conditions can change rapidly. This is especially true in China, where the CCP acts as the “market maker,” favoring or discouraging specific industries and businesses at a moment’s notice. Even companies with strong footholds in the market can find their strategies outdated within a short time, especially if the government redirects its priorities.
Many early entrants into China missed the mark by basing strategies on market snapshots that failed to anticipate economic or regulatory shifts. Avoid this mistake by continually re-evaluating your China strategy, staying informed on policy trends, and preparing for quick pivots to stay competitive.
3. Assess Your Competition
China’s market can quickly become saturated. Companies often find themselves competing against a flood of new local competitors, which could include factories that shift production capabilities overnight.
SMEs, with their typically limited resources, must conduct realistic market assessments to identify potential over-competition and plan for the challenges that arise when the market becomes saturated.
4. Prepare for Market Fluctuations
China’s economy has experienced notable fluctuations, and future turbulence is likely. In the 1990s, Western companies scaled back their China operations when the economy overheated, leaving their local managers with limited resources. A similar dynamic exists today, especially with recent trade conflicts and unpredictable market conditions.
As a smaller business, be ready for potential delays, increased costs, and unexpected regulatory changes. Building resilience into your strategy—such as through diversified supply chains and adaptable budgets—can help mitigate the impact of economic shifts and position your business for long-term success.
China’s SME-Specific Challenges
SMEs face unique challenges in China, as they often lack the resources of larger multinationals. Understanding these issues upfront can help businesses make decisions that account for their limitations while capitalizing on their unique strengths.
1. Protect Your Intellectual Property
IP protection is critical for SMEs, especially those offering niche products based on proprietary technology or long-standing expertise. The process may be simpler than expected, provided it’s done correctly. Proactively registering trademarks, patents, and copyrights in China can protect your assets from local competitors. Additionally, consider implementing protective agreements, such as NNN (Non-Disclosure, Non-Use, Non-Circumvention) Agreements, with Chinese partners to safeguard trade secrets and prevent unauthorized use of your IP. See How Not to Lose Your IP When Developing a Product with Your China Factory and What to do AFTER You Get Your China Trademark.
2. Consider Management Bandwidth
SMEs naturally have leaner management structures than larger companies, and senior leadership must often be directly involved in international expansions. Committing senior personnel to oversee operations in China can carry a high opportunity cost, as other strategic initiatives may suffer. SMEs that invest heavily in China’s market risk overextending management bandwidth, particularly if they aren’t already equipped for international operations.
Thankfully, there are options for entering the market without deploying extensive resources. In some cases, a light footprint, like a representative office or strategic partnership, can provide initial access while limiting costs and management requirements. Consider your company’s priorities and evaluate if a deep China investment aligns with your overall growth goals. See Your Company and China: Should You Divest, Decouple, or Double-Down?
3. Account for International Infrastructure
Without experience in international markets, SMEs can face a steep learning curve when entering China. Additionally, many SMEs rely on third-party organizations to manage various aspects of their operations. However, caution is necessary, as an over-reliance on unqualified intermediaries may lead to suboptimal results. To put it more bluntly, China has way more than its fair share of con artists. See Beware the Online China NNN Agreement.
4. Understand Proportional Financial Risks
A failed investment in China will almost certainly have more severe financial implications for an SME than for a large corporation. Larger firms can better absorb the impact of underperforming operations, while an SME’s smaller revenue base amplifies the effect of financial missteps.
Many years ago, a Fortune 500 retailer consulted with our law firm about expanding into a particular city in a developing country. We recommended they build goodwill with the mayor of the country’s largest city by helping to fund a new hospital. The company rejected our advice, and their expansion was delayed for over a year, costing millions. For large companies, these delays are frustrating but manageable; for an SME, such a misstep could be disastrous.
If you’re an SME considering China, thoroughly assess whether your business can weather potential setbacks. For many SMEs, a strategic diversification approach—or a China+1 strategy—can provide access to the benefits of China’s market while reducing the risk of relying on one geographic location. By expanding some operations to nearby countries like Vietnam or Thailand, SMEs may be able to capture similar cost benefits while hedging against economic or political disruptions within China.
Despite SMEs’ special challenges, they have some distinct advantages as well. Most importantly, they are usually able to pivot faster than big companies, a trait that can be of great importance in ever-changing China. The family style management of many SMEs often fits well with local Chinese management, making it easier to work together in a partnership.
Why China?
Despite the complexities of the China market, there are still strong incentives for SMEs to enter or remain in China. However, these must be carefully evaluated alongside the risks.
1. Attractive Market Potential
China’s consumer base, particularly its middle class, offers a compelling market for SMEs with well-positioned products. Carefully examine your target customer’s needs and determine if China provides a viable growth opportunity. Direct customer inquiries can help clarify local demands and inform a localization strategy.
2. Customer Relationships
For many SMEs, moving into China is essential to maintain or strengthen existing customer relationships. Understanding your customer’s expectations for localized products or services can provide a distinct advantage in the market. Consider the nuances of China’s e-commerce landscape, which often differs significantly from Western platforms and customer expectations.
3. Addressing Competitive Threats
China’s companies are rapidly expanding their reach, even into Western markets. Companies that see a growing competitive threat from Chinese players may need a local presence to stay competitive. The growing competitive threat from China, primarily from local Chinese players that have become adept at penetrating existing customer bases (also a significant factor due to the rise in e-commerce), can often be addressed in country. A well-executed strategy in China can enable your SME to proactively counter competitive pressures both domestically and internationally.See Protecting YOUR Intellectual Property From Alibaba and Other Chinese E-Commerce Sites.
4. Cost Savings and Operating Efficiency
While cost savings are increasingly harder to capture in China due to rising wages and regulatory costs, there are still opportunities to benefit from lower operational costs.
5. Stakeholder Interest
Stakeholders, including investors and partners, often encourage businesses to pursue opportunities in China due to its size and potential for profit. While stakeholder pressure alone shouldn’t dictate market entry, it can be a signal to evaluate China seriously. Ensure any expansion strategy addresses potential benefits, risks, and operational demands in China to align with stakeholder expectations.
Define Your China Strategy
The drivers to go to China will usually be a mix of the above factors, and management must clearly understand their own company’s drivers and the urgency to address them, along with the consequences if they do not. Though examining these motivations may seem straightforward, companies often perform only a cursory evaluation during this crucial phase of the planning process. Without the insight that comes from examining the motivations for going to China, management cannot accurately weigh the financial investment, IP exposure, opportunity cost, and other risks of going to China. Now is not the time to be complacent about your China strategy.
For any company, entering or maintaining a presence in China requires clear goals, a risk-aware mindset, and a tailored approach. SMEs face particular challenges in navigating the China market, but with thorough planning and informed decision-making, they can capitalize on the opportunities it presents while mitigating risks.
Assess the primary drivers behind your China strategy—whether market opportunity, customer retention, or competitive positioning—and thoroughly evaluate the costs, risks, and potential benefits. Today’s China strategy requires agility, adaptability, and a willingness to pivot when necessary. Now is the time for SMEs to go beyond basic plans and implement a robust, clear-eyed China strategy that aligns with their unique strengths and business objectives.
