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SMEs in China: Much Opportunity But Little Room For Error

Strategy

Dan Harris and Simon Malinowski from the acclaimed China Law Blog share some insight into the common pitfalls SMEs face when doing business in China.

SMEs going into China simply cannot afford big mistakes. Generally, they have to get things right the first time.

It is with that in mind that Technomic Asia's Business Podcast has just started a new series of podcasts on Small- and Medium-sized Enterprises ("SMEs") in China. Their first podcast (Kent Kedl interviewing Steve Crandall), entitled, "Small- and Mid-sized Challenges in China: An interview with Steve Crandall," focuses primarily on market opportunities available to SMEs in China and how not to get burned.

• China is a unique opportunity for SMEs. Crandall notes that growth for SMEs in the first 6-18 months of their existence is usually slow in already well developed Western countries. On the other hand, China’s rapid development and growth leaves a lot of open market space foreign SMEs to maneuver and grow.

If you’re going to do China, know China

China is not an entire market onto itself. For example, the social, cultural, and linguistic differences between, say, Guangzhou and Beijing could not be more apparent. Consequently, viewing China as an entire market is a mistake; it is more appropriate to look at it as a number of unique markets under a larger umbrella. The regional diversity, coupled with a good degree of autonomy between the provinces necessitates knowing your target markets.

Though China's regional diversity complicates entry, it also magnifies the market gaps that allow for growth.

If you’re going to do China, do it right.

Included in all of that regional diversity is the somewhat autonomous functioning of the regional government entities. In order to smoothly enter one of these markets, developing knowledge of and strong ties with the regional government is almost a necessity.

Successful entry into China requires serious due diligence and a comprehensive game plan. The risks are serious and significant for SMEs, and a failure to adequately prepare for them can be disastrous. Kedl and Crandall both point to IP protection and employment as potential minefields.

Multinationals have a wealth of resources available to the, including the ability to withstand failed experiments. SMEs do not have this luxury and Crandall notes “they have to get it right the first time.

Common mistakes

I have seen too many SMEs lose big due to one mistake not to vehemently agree with this podcast. The most common "lights out" mistakes I have seen have been the following:

  • Purchasing product from China without a finely tailored OEM Agreement. The American company gets a massive shipment of bad product from its Chinese supplier and it has no real recourse against the Chinese company and insufficient resources to both secure new product and pay off its disgruntled customers.
  • Failing to properly register key trademarks in China. If you do not register "your" trademarks in China, someone else will. And then right when your largest shipment is a bout to leave China, you will get a call from the company that registered "your" trademark. They will be calling to let you know that unless you pay them a massive licensing fee, your shipment will never leave China.
  • Thinking that because you have gotten away with functioning illegally in China for years (or because you know someone else who has) that you will never get caught. Absolutely not true. My firm has been contacted by a firm that was in China for twelve years before it was unceremoniously shut down for not being properly registered. We were also contacted by a company who was allowed by the local government to operate a business for nine years against all zoning regulations, but then shut down one month after a new administration took over.
  • Failing to have a written (Chinese language) employment agreement with all employees and failing to have an employee manual (again, in Chinese) explicitly setting out the grounds for termination. Though I have yet to see a company have to close down for these mistakes, I have seen many instances where companies subjected themselves to expensive and protracted (and always losing) litigation for these mistakes.

I could go on and on.

This article first appeared on China Law Blog.

China Law Blog is published by Harris & Moure, is an international law firm with offices in China and "have been involved in China long before China became the hot topic".