China a land of growth opportunities for SMEs

Foreign firms must adapt to local conditions

At a forum held Monday by the China Europe International Business School in Shanghai, Fiona Woolf, Lord Mayor of the City of London, spoke of the British government's strong desire to see more of the country's small and medium-sized enterprises (SMEs) enter the Chinese market.

As Woolf mentioned, SMEs account for about 99.6 percent of all British enterprises and are key drivers of job creation, social wealth and product innovation. Specifically, statistics show that British SMEs generate nearly 60 percent of British jobs and account for nearly half of the overall turnover of British enterprises.

Woolf's recent remarks hearken back to statements contained in a report released earlier this year by the UK's Department for Business, Innovation & Skills, which described the UK government's ambition to see the value of local exports double to 1 trillion pounds ($1.59 trillion) by 2020. At that time, the department also stressed the important role SMEs would play in realizing this goal.

China is clearly a major target for export-oriented British firms. In fact, a report released by shipping industry giant Federal Express showed that China is now the sixth largest overseas market for British SMEs, accounting for about 15 percent of their exports. Looking ahead, China will only become more important for these businesses, especially considering that annual Chinese retail sales are expected to equal $10 trillion by 2020, giving the country a retail market equal in size to today's eurozone.

Of course, British SMEs aren't the only ones looking at China for future growth opportunities. Despite concerns about the country's decelerating economy and softening demand, there are several compelling reasons why overseas companies are as eager as ever to crack the Chinese market.

First, despite recent downgrades of the country's economic outlook for 2014 and 2015 by the International Monetary Fund and several other institutions, China is still on track to post enviable rates of growth over the coming quarters. Second, a massive population and rapidly rising income levels mean that the full potential of China's consumer market is still far from exhausted. The country's swelling population of middle-class consumers are likely to keep demand alive for imported products for many years to come. Third, the Chinese government has demonstrated a commitment to improving the business environment for overseas enterprises by lowering barriers to foreign investment. One can see this in simplified registration procedures and other policy innovations rolled out in the China (Shanghai) Pilot Free Trade Zone.

Looking toward Europe, about 5,000 German companies, many of them SMEs, have opened branches or established operations in China, according to the German economics journal Wirtschafts Woche. In Asia, half of Japan's SMEs indicated a willingness to invest in China in 2012, a proportion which increased in 2013, a representative of the Japan External Trade Organization told Chinese media in August. In South Korea, officials also announced plans in July to encourage local SMEs to enter the Chinese market with the aid of government funds.

Despite this interest in China, unfortunately many overseas SMEs have struggled to find success in the country. Many foreign businesses lack a comprehensive understanding of the local market. This is particularly true with consumer-oriented companies that are unfamiliar with Chinese tastes and habits. Indeed, even big global firms like Best Buy and Home Depot have failed to penetrate the local market, blunders which observers attributed to their inability to localize their business models. Similarly, foreign firms are frequently stymied by their incomplete knowledge of operational realities in China.

To overcome these and other hurdles, overseas SMEs should first look for Chinese partners who can help them navigate local market terrain. They must also hone their understanding of Chinese business culture and market conditions. Retail businesses and consumer brands should also explore ways to make full use of China's many popular e-commerce platforms.

Opportunities for growth abound in the Chinese market for motivated foreign SMEs. Yet, this promising market holds many challenging and unique features which overseas companies will have to overcome.

While fortune is never guaranteed in China, flexible SMEs that are willing to adapt stand to gain an important leg up over their more rigid peers.