Small and Medium Enterprises in China

While many people are aware of China’s growing dominant position in the world economy and the development of incredibly large companies such as Alibaba, much less attention is paid to the small and medium enterprises (SMEs) within China. This sector represents an incredible portion of Chinese economy producing 60% of China’s industrial output and helps to create 80% of jobs within China (uhy.com). Unfortunately more recently these SMEs have experienced difficulties particularly in finding the capital necessary to thrive (economonitor.com). To help combat this the Chinese government has implemented as part of its Five-Year plan to help grow the number of SMEs and help existing SMEs to continue to grow. For foreign investors this means there is the potential opportunity to break into the Chinese SME market, but it is not without its risks. We will now discuss some of the opportunities this presents for foreign investors as well as the issues they must be aware of before attempting to enter the market.

Investment Opportunities

In looking at the landscape of SMEs within China and how many are struggling, it becomes even clearer that a strategic approach to entering this market is necessary. There are particular sectors that as China’s government seeks to revitalize the economy through SMEs will provide great investment opportunities for foreign firms.

  • Machine tools and business services – this centers on the idea that as companies continue to develop and the economy continues to grow more advanced technology will be required along with more knowledge on how to grow a business.
  • Luxury Goods – there is growth within China’s middle class who are demanding these more expensive products and the potential for growth from foreign firms.
  • Energy – It will be incredibly interesting to see where China goes, particularly on the renewable energy front as pollution concerns grow more and more, but this could represent a tremendous investment opportunity for a foreign firm looking to capitalize.       

Risks

Doing business in China, particularly for SMEs is not without its risks. As evidenced by many of the current failing SMEs items such as access to reliable power and access to labor have caused many business to experience tremendous hardships. There are a few other areas that are extremely important to consider as well:

  •         Intellectual Property – One such risk, particularly important for smaller companies is around intellectual property and the enforcement of IP laws. There has been progress made on the enforcement of IP rights within China, however, it is still critically important for smaller companies to be aware of and to take steps to ensure its rights are protected (uschina.org).
  •         Finding the Right Partner – It is still a wise idea to gain access to the market through a local partner. Finding the right one becomes critical as you need to make sure your motives are aligned and that there is good communication between both parties.
  •         Access to Funding – While as a foreign investor you may be the source of the funding it is important to know what current Chinese SMEs are dealing with in terms of finding capital as it may change their motives in doing business with you. Recently, there have been loosened restrictions from the government to encourage banks to provide loans to SMEs in an effort to boost the economy (scmp.com).

Summary

China’s economy represents a tremendous opportunity for a variety of foreign investors and can be very tempting even for small and medium enterprises to try and enter the market. While in theory this may make sense, it is extremely important to understand if you are in the right industry, willing to take on particular legal hurdles, and can find the right partner to help you succeed. Despite these risks, the time appears ripe for the entrance of SMEs as the Chinese government has made a concerted effort to improve this sector of the economy. Success can be found, but do not expect it to be found easily.

Corbett Clarke
MBA candidate 2016