Recently there was a business headline that ran in the news that read: “US$1.3 billion investment from a Chinese real estate company into Texas oil fields”. People living in Chicago may have heard of another investment from China’s Wanda Group in the city’s waterfront residential project last year (2014). On the other side of the coin: multi-national corporations (MNCs) operating in China see less and less of the conveniences that they used to enjoy in various fields, including tax incentives, subsidies, or leniencies on inappropriate business conducts. Due to this several MNCs have left China and chosen to go back onshore. Underlying these facts is a belief that golden age of foreign companies in China is coming to an end.
In order to understand whether this is a valid judgment, we shall take a look at the economic development stage China has gone through. China started to open-up and reform their business practices in early 1980’s, when China’s industrial infrastructure was extremely backward and had to rely heavily on foreign technology, brands, and management to help build its industry. Through this process, and by mid-1990’s, the country had built expansive manufacturing capabilities. Thanks to the low cost of labor and resources, in the following decade China not only provided foreign MNCs high production efficiency, but its huge domestic market as well. This was a period when Chinese saw quick income increases, and the emergence of a middle class. Such development has led China into what some people called “the middle income trap”. Many people have suspected China has started losing its competitive edge in the exportation of manufactured goods while also being unable to keep up with economically more developed economies in the high-value-added market.
Does this mean an end of China opportunity? How will China evolve and implications to US SMEs?
Since the new administration took office in 2012, China has made efforts to upgrade its manufacturing industry from the current cost-driven mode to more value-added model. Such transformation is supported by the efforts led by the State Council which has initiated a series of policies to encourage creativity and innovation. This trend can also be seen with consumers seeking more and more customized services/products driven by the internet and mobile internet. Although this poses challenges to large MNCs which are traditionally used to serve the mass market with large volume of standard products/services, it provides a new opportunity to small and medium enterprises (SMEs) which have special advantages in a niche market and are usually more flexible when dealing with customized demands. Such opportunities span across the entire value chain of a company, from supply, operation, even to marketing.
Foreign SMEs can now increase their competitiveness in the market by incorporating China-centric element into their strategies. For instance, with the improved product quality of Chinese suppliers, foreign SMEs are now able to source more reliable product materials from China. In the meantime, foreign SMEs with specialized technologies/products will find more clients and consumers seeking niche market products and services in China. One of the most recent requests I received was from a Chinese electric vehicle maker seeking US technology partners to help improve the design and performance of their vehicle. The market will soon begin to see more and more collaborations of this nature across the two countries.
However, China also poses a variety of challenges to any prospective foreign entrant. These challenges include, for instance, language barriers, culture difference, varied business practices, etc. All these challenges will lead to certain risks for the new entrant to navigate and overcome.
China Market Consulting of TE+A took this risk with our Shanghai office back in 2006. We will now start delivering this service in Chicago this year by getting closer to our clients. TE+A plans to run an offline monthly event every second Tuesday, and people interested in the event can register through: www.meetup.com/ccclub, which is our official event webpage named “Chicago China Club”.
Our mission is to facilitate business transactions between US SMEs and their Chinese counterparts through active engagement with both parties throughout the entire process of transaction. Bridging the cultural gap between China and the US is only the first step. There are many more to take and with the help of a firm like TE+A that process can be that much more effective and simple.
Chief Operating Officer