|Internationalization towards China after its Accession to the WTO. Are There Opportunities for European SMEs? (Mattias Grillet)|
I. Introduction & Method
In this part we will take a look at how some enterprises in China started their activities. It was difficult to find SMEs, in the proper definition of the term. Many of the smaller enterprises we found operating in China were still too big to be an SME according to the definitions explained above. Only five enterprises truly comply with the definition put forward. The others fall out, either because they are too large, or because they do not comply with the autonomy principle, or both.
Unlike other empirical research concerning internationalization, we do not focus solely on production units; firstly because of practical reasons: there are very few SMEs producing in China yet, secondly because we think that by focusing only on production units, many enterprises who internationalize or tried to internationalize are neglected, especially if the observed enterprises are SMEs.
The sample below is based on interviews we took from managers of European firms operating in Shanghai. The research was done in July 2002. In April 2003, the present author went back to Shanghai for additional research: we checked out how the observed companies were getting along and searched some other companies to broaden the scope and in doing so increase the validity of the research. Still, we acknowledge the scope of interviewed enterprises is too small to allow a fully reliable empirical test of the internationalization theories. But we are sure that the research made it possible to get a good assessment of the present reality in China, a reality that is sometimes impossible to grasp in ciphers or statistics.
In the next chapter we introduce each enterprise observed: their size, activities, product(s) and how they started in China. For companies not present in China yet, it is interesting to see how the companies introduced here started their own internationalization process. Following, we compare them to the internationalization theories treated in the first part of this thesis.
II. The Enterprises Observed
1. Sismo Systems
(based on interviews with Olaf Claessens, July 2002, May 2003)
Firm and product
Sismo Systems is a Belgian company that sells machinery for the production of ‘Sismo Lattice’, a kind of building material. They invented a new way of building based on this ‘Sismo Lattice’. It is said to allow cheaper and more efficient building compared to traditional building. Besides selling the machinery, they can supply after sales-services and provide consulting on the use of their products.
Activities in China
In July 2002, Sismo Systems was doing market research in China. The market that they target is the whole building sector. This market is rather huge in China. The building sector is traditionally very conservative and difficult to enter. It is that way in Western countries and in China it is even worse. Big stated owned enterprises (SOEs) or former SOEs dominate the market in China. These enterprises’ activities include everything from producing the building material, designing, to the actual erecting of the constructions. One enterprise is in fact a conglomerate of smaller enterprises or units. One unit produces the material, an architectural unit designs the plan, transport units are responsible for transportation of the materials and construction units do the actual building. All these units are working for one conglomerate. This is different from the market structure in Europe, where every activity is done by an autonomous company.
For Sismo Systems this market structure could be very advantageous. If they could get in one of these conglomerates, a constant demand could be guaranteed. Because Sismo Systems sells the machinery and also consults on the use of the products, they have to work together with a lot of other companies (producers, designers, etc.) in Europe. But in China, these companies are all working close together in a conglomerate, which would make business easier for Sismo Systems. Besides these conglomerates there are also other independent producers of building material operating on the Chinese market.
Incentives and start-up in China
Sismo Systems believes there is a big market for their product. China still builds in a traditional way. With the innovative product of Sismo Systems, construction costs could be reduced by more than 30%.
As said before, for the time being, Sismo Systems is just doing market research in China. Already in July 2002 they acknowledged it would be difficult to access the market; the Chinese companies were not waiting for their product. They were examining different options: one of the options is to engage in a joint venture or join a conglomerate.
In February 2003, the two expats formerly doing the market research left China. The search for a partner was handed over to an agent. As well as searching for a good partner, this agent will also arrange all the permits necessary for their business in China. As in all countries, being active in the construction sector needs a lot of permits. China is annoying in this respect, because it does not accept the European permits, which Sismo Systems already have.
They found interested parties for a joint venture. Problem was that these enterprises only want to start when Sismo has the required permits. To find these is now the job of this agent; the presence of expats is not required anymore. The agent is supported out of Belgium by telephonic contact several times a week; from time to time the people formerly localized in China go over to China.
(based on interviews with Jennifer Lu, general manager of Stow Shanghai and Nadine Mestdagh in July 2002, updated April 2003)
Firm and product
The main activities of Stow International NV are the design, production and assembly of steel elements. The result is a storage solution; the addition of 'storage solutions' to the company name appropriately points out its main activities. The final products are usually made of standard components but non-standard requirements of customers are also accommodated. (source: www.stow.be)
Stow has two fully automated plants in Belgium with only 23 employees. Stow has experience in Belgium and Europe and is the leader in their field concerning cost reduced production.
Activities in China
In 1993 Stow opened a representative office in Beijing to look around, and find a partner. Finally they did not enter into a joint venture, but instead started a production unit on their own in 1995.
Today they produce and sell on the Chinese market. They have one wholly foreign owned enterprise in Shanghai: a production unit and headquarters for Stow in China. They also have representative offices in Guangzhou and Beijing.
Stow operates on the market of storage systems. It is difficult to define the market, because storage systems of a small size can be produced very easily; in fact anybody can make a construction to store goods. And so it is in China. A lot of the market is not yet supplied by companies specialized in storage systems. Most heard figures about the size of the market are between 200 and 300 million RMB. This refers to the market supplied by the professional constructors of storage systems. Stow thinks to have approximately 15 percent of this market.
The clients of Stow are both Chinese and foreign enterprises. In the beginning the majority (60%) of the clients were foreign companies operating in China; today they only count for 15%.
Incentives and start-up in China
Today there is really a boom going on in the field of logistics in China. Logistics are a poor point in the Chinese economy and are still a protected sector. Foreign enterprise cannot yet freely transport goods around China. The WTO agreements decided that this market will open up in 2005. Therefore, Chinese companies are preparing to get along with the foreign competition and consequently a lot is being invested in logistics. Many companies are professionalizing their storage systems.
Stow is both market seeking and resource seeking: they came to China to exploit the potential of the growing market and when it became difficult, they localized management (i.e. cheap labor resource seeking).
(based on interviews with Lawrence Absalon, in July 2002, April 2003)
Firm and product & Activities in China
MDD is a trading company that handles and exports textiles and supermarket products. The firm is fully localized in Shanghai, China, and does not have any offices in Europe. Still, it is a European enterprise: the majority of shares are European owned, the general manager is Belgian and the main trade partners in textiles are European.
MDD has set up an interesting company structure: On the top there is the joint venture MDD (80% European, 20% Chinese), and below that are several fully Chinese owned enterprises, whose the Chinese owners are from the same family and/or friend circle like these who invested in the joint venture. Each of these Chinese enterprises fulfills different tasks for the parent company: MMP and Feinan own a factory in Qingpu, both enterprises buy products on Chinese market and deal with the packaging of the goods; CCGI has several shops to sell the lingerie imported by the parent company MDD.
This juridical construction allows a lot of flexibility and makes more activities possible than a wholly foreign owned company could. The total number of employees of the group was around 30 in 2000, 80 in 2002 and will grow to 130 in 2003 with the opening of a new factory.
Incentives and start-up in China
The main incentive for Mr. Absalon, the present general manager and European investor of MDD, was to start up a business. It just so happened that this business was started up in China and not in Europe. Lawrence Absalon came to China in the year 2000. Initially it was just to travel, but afterwards he studied two months at a university in Shanghai. During this period, he got in touch with the present Chinese investors of his joint venture for the first time. In the beginning of 1998, they made their first deal by selling Chinese products to a Greek wholesaler. Later they set up a joint venture, and started to develop their business. Belgian relatives of Mr. Absalon supported the business by influencing Belgian companies to purchase fromMDD instead of purchasing from Honk Kong suppliers. Due to business trips that promoted the products world-wide, trade with Belgium now only represents 10% of total turn-over for the company.
(based on interview with Pascal Coppens, July 2002)
Firm and product
Eonic was a small enterprise located in Aarschot, near Leuven, Belgium. One and a half year ago it was bought by and integrated into Windriver. Windriver is a large American firm with its headquarters in California, U.S.A. They sell operating systems for electronic devices – from minidisc devices to radar equipment - and call themselves the Microsoft outside the PC market. Although Eonic does not exist as an independent entity today, it was once an SME some years ago and is thus relevant to this study.
Eonic was not a real spin-off enterprise of the Catholic University of Leuven (KULeuven): KULeuven did not invest in Eonic, but since most of the people working at Eonic came from IMEC, the firm had many characteristics of a spin-off. IMEC (Interuniversity MicroElectronics Center) is a research center related to the KULeuven. It specializes in the fields of microelectronics, nanotechnology, enabling design methods and technologies for ICT systems.
Activities in China
Eonic, which is now –as mentioned above- incorporated in Windriver, is selling its software on the Chinese market. Activities were started up by Pascal Coppens. He came to China with a Junior Management Scholarship, through his sponsor firm Eonic. During his stay in China, he wanted to prove that there was a market for Eonic’s products. At the end of the program he got a job at the firm and one to two Chinese employees as support. Today all salesmen are local people; this is the policy of the MNE concerned.
Incentives and start-up in China
For the product Eonic sold, Belgium was too small. Consequently they went quite quickly to the European market and wanted to go even farther. The problem with the American market was that their product can be used to make military related application and in this sensitive industry the Americans have a strong intention to buy only domestically produced software. For this reason it was very difficult to break into in the American market. Consequently, this gave them more incentive to go to Asia.
Still, they only entered into the Chinese market after a Junior Management Program scholar proved there was really a market in China.
5. Automatic Systems
(based on interview with Stefan Schodts, July 2002, updated 2002)
Firm and product
Automatic Systems is a Belgian firm with headquarters in Wallonia, Belgium. It specializes in the design and manufacturing of access control and security equipment for pedestrian and vehicle access control.
In 2002 Automatic Systems was bought by IER, a French firm operating in a related branch of the market where Automatic Systems operates. As well as the cooperation in China, the companies have started to work together in other markets (e.g. airports security) and also in functional areas (marketing, R&D).
Automatic Systems is just slightly too big to be an SME: There are three hundred people working for Automatic Systems worldwide (250 is the limit for being an SME). Two hundred are working in Belgium. The hundred people working outside Belgium are mostly salesmen.
Activities in China
It is in Shanghai that for the first time Automatic Systems and its share holder IER have really worked together, mainly in sharing costs. IER already had a representative office in Shanghai and Automatic Systems joined their offices with two people, one expat and one Chinese salesman. The representative office supports sales in China.
The market for their product in China is growing; China is investing a lot in upgrading its infrastructure. Some of these infrastructures need the products produced by Automatic Systems. An example are toll-roads, a market where they assess to have five to ten percent.
Clients are global and Chinese players. For building and perimeter access control for tollways, they work with Chinese distributors and integrators. For subway systems, they work with global clients who offer a total ticketing solution to the Chinese players.
You could say the market they are playing in is a niche market.
Incentives and start-up in China
Automatic Systems came to China because there is a big potential in the market. They did not come because there are low labor costs. But in the future this could be a reason to source more in China.
In the past eight or so years, they have exported from Belgium to China. There were some Chinese distributors who directly bought Automatic Systems products in Belgium. Automatic Systems also had an agent in China who worked purely on commission. The sales through this agent were sometimes nil, sometimes a little.
At the beginning of 2002, Automatic Systems looked to their positions in other markets, and envisaged what was happening in the economies of the different markets where they were present. During this time, China was assessed as a priority market for Automatic Systems to expand its activities. A salesman for Automatic Systems was employed and stationed in Shanghai.
Activities in 2003
Activities are left to a Chinese salesman, stationed at the representative office in Shanghai. He reports to the director of Automatic Systems International, based in Belgium. The IER chief representative of Automatic Systems’ parent company, IER, checks the expenses of the salesman.
(based on website www.barco.com and information received from Frank Christiaens)
Firm and product
Barco is a high-technology firm with a world-wide turnover of 751 million euro a year and 4000 employees world-wide (data from 2000). According to the definition for SME we use, it is thus certainly not an SME. Still, the company considers itself as a SME, because they tend to have the operational mode and structure of an SME. In fact, they can be considered as a group of SMEs, every business unit being an SME and every business unit focused on one market/product.
The company has a broad scope of products, which are marketed in different markets. Each of these products has to be profitable; so just like an SME, each unit has to make profit to survive. A lot of stress is put on lowering costs in international activities. This is briefly the strategy of the firm and the reason it prefers to be called an SME.
Activities in China
In 1995, Barco opened a representative office in China. Before that, they had only had indirect sales to China. This means they had sold their application to system integrators (companies who make systems) or resellers. In the following years they slowly started to sell more and more; at the beginning of 2003 the CEO defined China, together with USA, as one of the key markets of the company.
In August 2002, a Belgian manager formerly working in Singapore, came to guide an acquisition by Barco in China (Beijing Leyard Electronics Technology Co. Ltd.) and to restructure the activities in China. The plan is to localize management as soon as possible. Barco strives to work as much as possible with local management and personnel.
Today in China Barco has five representative offices, one wholly foreign-owned and one joint venture. The joint venture, Barco Leyard (80% Barco, 20% Beijing company Leyard) has five representative offices and a factory. As said, this will be restructured in the future.
In China, Barco sells 12 to 15 kinds of specialized high technology solutions in as many niche markets. Geographically they distinguish a central region around Shanghai and a northern region around Beijing. Sales are over the whole of China though.
Incentives and start-up in China
The incentive for Barco to internationalize is purely market driven. They want to be the biggest in each market they are playing in. The key markets for the coming years are the different niche markets in the USA and China. Resource seeking is not an incentive to internationalize. There is no plan whatsoever to manufacture in China. Global positioning is the incentive to internationalize. The goal of internationalization is to obtain a satisfying market share of each of the niche markets they are operating in with their different specialized products.
They came to China because there was demand for their product. They started to invest in China when the sales needed support. The investments in China were financed by the returns on the sales. Activities are profit driven.
(based website and interviews with Olivier Ceccecaldi, July 2002, April 2003)
Firm and product
IER, a subsidiary of the Groupe Bolloré, is a supplier of terminals and intelligent printing and controlling systems. It is a French company; the headquarters for Asia-Pacific are in Singapore.
They have several products:
- Ticketing systems for large air, rail and sea transportation networks used by airlines, airports, railways and travel agencies
- Bar code and radio frequency Auto ID systems and mobile solutions
- Self-service interactive kiosks and leisure ticketing systems
To summarize, they sell technical products for airports and other transportation hubs. A representative example of what they sell is specialized printers to print tickets and other import paperwork in the transportation and travel sector. They are not a SME.
Activities in China
IER exports its products to China. The products are made in France. All sales go through Singapore, where the main headquarters of IER in Asia are located. They have a representative office in Shanghai to support sales, contact clients, market products and provide after-sales services. The representative office was opened in 1997. There are four employees working there.
Their clients are all Chinese companies. They mostly target transportation sectors, like airports. Many airports are being built or modernized in China, and roads and other infrastructures are developing. Consequently there is a big potential for all products related to these infrastructures.
It is a niche market. Today they have approximately 80% of the Chinese market for each of their specialized products.
Incentives and start-up in China
They came to China, because there was a big potential market. To sell in China, they needed local support, an office with which their Chinese clients could get in touch. To sell from Europe was impossible, because the distance between Europe and China is too big. Many of their clients do not speak English. A local office was needed.
If they had not opened the representative office, they would not have had the part of the market they have now.
(based on interview with Kristien Loontjes, August 2002, updated April 2003)
Firm and product
Ensysta Shanghai is a subsidiary of the Belgian company Ensysta N.V., which is a part of the Aveve Group (Boerenbond). In Belgium there are 300 people working for Ensysta: 100 engineers and 200 laborers. They have a turnover of around 27,5 million EUR worldwide; so, although it could be seen as a SME, it is not, because it does not comply with the autonomy criterion.
Ensysta is an engineering and installing company. Ensysta Shanghai branch is mainly active in the pharmaceutical and fine chemical industry.
Activities in China
Their business in Shanghai is project based. Because the Chinese government does not allow foreign companies to do only engineering and installing business, they are registered as a production company. They do some prefab production in their workshop, but most of the production is done on site.
They have a wholly foreign owned enterprise. Aveve once had a bad experience with a joint venture in Africa, and since then it is the group’s policy not to engage in joint ventures anymore.
The pharmaceutical market in China is booming. Also the fine chemical industry is growing. More and more foreign companies are entering into the Chinese markets. These foreign companies are the main clients of Ensysta Shanghai today. But at a certain point this will end and they will have to find Chinese clients. Their initial plan was, as well as to follow some European companies, to try to find Chinese clients, but until now they have only had foreign or joint venture clients.
It is difficult to find Chinese clients because Ensysta does not really deliver a product. Chinese expect you to offer engineering for free, and for installation they are not willing to pay a lot. Chinese have enough money, but they want to spend it on expensive machines. The way everything is installed is less important. They do not see what use it can have, and they do not really want to pay for the quality of the installation of the (expensive) machines.
The competition from foreign companies is growing. The local competitors are also improving their quality. So, although there is a certain demand for their product, business is not easy.
Incentives and start-up in China
Before they came to China, they already did projects for clients in China. But because these projects were expensive and inconvenient, they decided to come to China. Expats are still less expensive than sending people over for a short time (as long as a project lasts, which could go from several months to a year). The client was not willing anymore to pay all these costs (hotel, expat premium etc.). The process of ordering and receiving spare parts was difficult, as they had to be transported from Belgium, which costed precious time. So, after-sale services were difficult. For clients in China it was also difficult to pay in foreign currency to Belgium. The main reason for Ensysta to invest in China was to work together with Chinese employees under the supervision of an expat.
9. Bekaert Textiles Trading (BTT)
(Based on interviews with Stefaan Waeyenberge and Hilde Aerssens, July 2002, April 2003)
Firm and product
Bekaert Textiles makes a range of high-end interior textiles, the major one being mattress ticking, which is the fabric cover for mattresses. They produce in Belgium to export around the world.
Activities in China
Bekaert Textiles Trading is a subsidiary of Bekaert Textiles, the former being a trading company set up to sell Bekaert Textiles’ products on the Chinese market. They are situated in the free trade zone of Waigaoqiao, Shanghai, because outside this kind of zones, foreign trading companies are not allowed. In 2003, Bekaert Textiles is planning to start up a production unit in the greater Shanghai region.
Incentives and start-up in China
They came to China to facilitate the export business towards China and grasp the potential of the market.
They started to do market research in 1996. Sponsored by Prins Albert Fund and Bekaert Textiles Stefaan Waeyenberge went to China to do research on the mattress ticking market. In 1998, Bekaert Textiles signed a contract with the consultancy firm Interchina. This firm did research to find a good location and good entry mode to enter the Chinese market. Meanwhile Interchina acted as an agent for Bekaert Textiles and gradually started up their import business.
In May 1997, Stefaan Waeyenberge became an employee of Bekaert Textiles; In May 2000, he was sent to China to set up a subsidiary enterprise: Bekaert Textiles Trading (Shanghai) Co., Ltd.. In August of the same year, two expats (Stefaan Waeyenberge and his wife Hilde Aerssens) flew into China to expand the business of the newly-formed company.
Other enterprises which we contacted are:
- Microvert, a trading company just like Bekaert Textiles Trading situated in the free trade zone of Waigaoqiao because that is the only zone, where foreign companies are allowed to trade independently. Similarly to MDD, Microvert is an (European) trading company with its headquarters in Shanghai. They are not a subsidiary of another European company.
- LBC, a global player in the field of logistic of chemicals. It is not an SME.
- Reynaers, a producer of aluminum frames, which was doing a prospectus in April 2003. They are at the service center of Export Vlaanderen. Reynaers is not a SME.
- Picanol, an enterprise with approximately 1500 employees world-wide. They have two main activities concerning China: firstly, the production of former generation weaving machines in China for the Chinese market; secondly, the export business of weaving machines from the last generation from Belgium to China.
III. Patterns Observed: A Test of the Internationalization Theories
1. Main Types of Foreign Production
Firstly, we noticed that many of the observed enterprises had not (yet) engaged in foreign production (See table Appendix C). Most are only in China to support sales or to do market research. The ones who actually produce in China are Stow, MDD, Ensysta and Picanol. Of these four, Picanol and Ensysta are not SMEs. Ensysta sells an engineering and installing product; this involves minor production activities. MDD is an SME, but as said before, it is not a subsidiary of an European company. Stow is in fact the only real SME (treated in this thesis) with important production facilities in China.
When categorized by incentive to internationalize, all observed enterprises fall into the first two categories of foreign production, i.e. resource seeking –but mostly cheap labor seeking- and market seeking. Market seeking is the biggest motivation for SMEs to engage in international ventures. All four sub-categories of these market seeking incentives –following customers, adapting, lowering costs and global positioning- were applicable for the observed enterprises.
As expected, not one of the observed enterprises could be categorized as efficiency seekers, strategic asset or capability seekers. This seems normal, because there needs to be a substantial amount of assets before it becomes necessary to think about strategic management or efficient management of these assets.
2. The Eclectic Paradigm Applied
(The eclectic paradigm of foreign production is explained in part one of this thesis.)
A. Ownership advantages.
Firstly, our empirical findings strongly confirm that a firm has to have one or another kind of ownership advantage to be successful –in this case- in China. For SMEs, this ‘rule number one’ often translates as being the number one in their market. This almost always implies they have to be active in a niche market. A small enterprise needs a small market to be successful. Many of the observed enterprises were operating in a niche market.
Secondly, the ownership advantages of SMEs seem to be mainly asset related. The second kind of ownership advantages, transactional advantages, are only applicable to bigger enterprises. SMEs have not the big internal structures to get advantages through transactions. The lack of possibility of transactional ownership advantages stresses the importance of asset ownership advantages.
Appendix D demonstrates whether the observed enterprises considered themselves as playing in a niche market, specialized market or neither. Most of them were playing in niche markets and were the leader or a very important player in their specific market; thus, they had substantial ownership advantages.
B. Internalization advantages
As seen in part one, Dunning argues that firms have to have internalization advantages: they have to be able to produce or sell a product or service internationally at a lower cost than the cost of the same product or service on the international markets.
Again, we find this especially true for SMEs. Because an SME runs more risks in international ventures, the choice of internalizing and thus internationalizing or only engaging in trade will be critical in the survival of the SME itself.
Confronting the interviewed managers with questions inquiring into how and why they did internationalize, we judge the following internalization advantages (see Appendix A) as the most important for the enterprises observed:
1) Buyer uncertainty (about the nature and the value of the inputs (e.g. technology) being sold): Chinese customers in many sectors only seem to make deals when they have (a good) personal contact with the firm selling goods; selling directly from Europe or through agents seems to be less successful.
2) Need of seller to protect quality of intermediate or final products; To control supplies and conditions of sale of inputs (including technology): agents are perceived as not trustworthy in this respect.
3) To avoid costs of enforcing property rights: fighting against counterfeit is perceived as very difficult in China; enterprises try to keep their technology inside and thus internalize.
C. Locational advantages: why have they chosen China?
All observed enterprises chose China to internationalize to, because the Chinese market is perceived as having a big potential. This was in all cases the main incentive to internationalize towards China. We will go deeper into the locational advantages and disadvantages of China in Part Four.
3. The Establishment Chain of the Uppsala Model
(The establishment chain theory is put forward by the Uppsala school, treated in part one of this thesis)
The enterprises observed follow more or less the different steps of the establishment chain described on page 23. Still, some difference are noted, that may be typical for internationalization towards China.
3.1 Limited agent system
Firstly, relatively few enterprises made use of a sales agent and most of the four who did (Picanol, Barco, Automatic Systems, …), said that sales quantities sold through an agent were comparable with “occasional exports”. This conforms with research by Van Den Bulcke, Zhang and Esteves publicized in 2002, where they found that few companies used a local agent before launching into production activities in China. They argued that this may be due to the underdevelopment of the agency system in China. (Van Den Bulcke & Zhang & Esteves 2002, p.93)
3.2 Representative offices
Secondly, there is the phenomenon of representative offices. Earlier, representative offices were the only form of enterprise, besides joint-ventures, which were allowed in almost all sectors of the Chinese economy. Many enterprises engaged in this kind of enterprise, just to be present in China. Later sales subsidiaries in the form of wholly owned enterprises were allowed in more and more sectors in China, but since all sales were already supported through the representative offices, many enterprises either did not set up a wholly foreign owned sales subsidiary, or delayed the start-up.
The establishment chain model does not explicitly mention the step of opening a representative office in a foreign county, a step that can be situated between the sales agent and sales subsidiary. We think it is not wrong to implicate the representative office into the establishment chain, because –as I the case with China- it is an important step in the learning process of the firm, and the authors of the Uppsala model encourage a further development of their work. Below, we will make a distinction between representative office, were the only goal of being present in China and doing market research on the one hand, and representative offices, which also support sales. The latter kind of representative office is put in a category together with the sales subsidiary in the analysis below.
3.3 Present in China without agent, representative office, or sales subsidiary
Lastly, some enterprises were present in China without having neither a sales agent, sales subsidiary, or independent representative office. Still, these enterprises were in China for several months to more than a year. The goal of their stay in China was market research. Since this can be considered as a fundamental step in the learning process, it can be included in the establishment chain. We have put this category between the representative office for market research and the sales subsidiary/representative office that supports sales.
3.4 A closer look
In appendix E we put the result of our research in a table and graph. Most enterprises follow the different steps put forward by the Uppsala model, but there are certain exceptions:
Ensysta made a big leap from occasional projects to a wholly foreign owned production enterprise. The reason for this can be seen in Ensysta’s product, namely an engineering and installing service. This is in line with one of the criticisms of the Uppsala model, which argues that the model is not valid for service industries.
Four of the six enterprises mentioned did not have occasional contact with China before setting up an enterprise in the country. For this leap-frogging behavior, each enterprise had its own motivations.
- Stow offers storage solutions and works –just like Ensysta- which are mostly project based. To manage a project in China out of Europe seemed very difficult, which was one of the reasons why the company set up a representative office in China.
- Sismo Systems and Reynaers both are active in conservative markets, which made it impossible for either business to enter the market without being physically present in China.
- Eonic was a young high-technology firm whose first contact was spearheaded by the will of one of the company’s employees, who insisted to join the Junior Management Program which was focused on China. Eonic is a typically new economy firm. This company internationalized relatively quickly after it was set up. After it had successful internationalized in China, Eonic was bought by an MNE. So, it cannot be known how successful Eonic would have been if they continued their internationalization path independently.
The trading companies MDD and Microvert are difficult to include into an establishment chain, since these enterprises were set up in China, and therefore do not explicitly internationalize from a European enterprise.
If some more steps are included in the learning process put forward in the establishment chain, it can be concluded that most observed companies follow the ‘establishment process’. This conclusion is confirmed by the research of Van Den Bulcke, Zhang and Esteves concerning European direct investment in China. (Van Den Bulcke & Zhang & Esteves 2002, p.94)
Still, some enterprises skipped the first two stages of the establishment chain – occasional export and sales agent. Surprisingly, these are the only real SMEs observed in this thesis (Stow, Sismo Systems and Eonic). Generally, their explanation is that they could not enter the Chinese market to sell products, without being present in China itself. The reason for this could be that Chinese customers are less likely to buy a product that is not of a popular brand name or produced by a famous company. In this regard, SMEs –more likely than MNEs- may be urged to bypass occasional exports and sales agents, and go directly to China to convince potential clients their product is worth buying. To convince potential clients without being present in China is difficult for SMEs.
I. Why Internationalize towards China?
Because SMEs have restricted financial resources, they should focus on strategic regions, instead of being everywhere with restricted capacities. (Wieselhuber 2002)
So, why would SMEs internationalize towards China? We think the answer to this question is the same for SMEs as it is for larger companies. There is no evidence found proving China has a friendlier climate for SME business activities compared to other countries.
In the first part of the thesis we looked at the internationalization theory of Dunning. His answer to the question toward which country enterprises internationalize was that the observed country had “location-specific advantages” over other countries (see Appendix A). In this respect, location-specific advantages of China are:
- The investment incentives of the government are high;
- Good commercial, transport and communications infrastructure;
- Cheaper input prices than in Western countries (labor and others);
- Politically relatively stable compared to other developing countries;
- Proved economically stable during the Asia crisis; stable currency exchange rates (because strongly controlled by government);
- Reasonable education level of work-force;
- Flexibility and commitment of work-force is high;
Especially the last two advantages seem to become more and more a relevant pull factor of FDI in the process of globalization. (Nunnenkamp 2002, p.35)
The main reason –if not the only- for enterprises to internationalize towards China is to exploit the potential of the market. All enterprises interviewed said this was one of the main reasons to internationalize to China. Other researchers came to similar conclusions. We quote Nunnenkamp:
“Traditional market-related determinants are still dominant factors shaping the distribution of FDI. If at all, the bias of foreign direct investors in favor of large host countries has become stronger, rather than weaker.
Non-traditional determinants such as cost factors, complementary factors of production and openness to trade, (…) have typically not become more important with proceeding globalization.” (Nunnenkamp, 2002, p.35)
Many of the interviewed managers of SMEs operating in China agreed on the point that cost factors are less important and some would say even more: SMEs should not go to China if the reason is to take advantage of cheaper labor costs. A European SME cannot compete anyway with the big manufacturers when it comes to reducing costs. If cost-reducing is the goal of the international activity, sub-contracting is seen as a much more successful way.
China’s accession to the WTO makes tariffs decrease substantially for most goods. For this reason it is not relevant to produce in China to avoid high import taxes. “The tariff jumping motive for FDI had lost much of its relevance well before globalization became a hotly debated issue.” (Nunnenkamp 2002, p.36)
A disadvantage that China has compared to other possible destinations of FDI like Eastern Europe or Latin America is the larger psychic distance to Western Europe. Also the physical distance is large. A subsidiary in for instance Poland is much nearer to Western Europe, which allows more intensive interaction and coordination between the headquarters and the subsidiary. Personnel in subsidiaries in China cannot fly back to Europe every time a problem emerges. The costs to bridge this distance are relatively bigger for SMEs than for larger enterprises.
If SMEs choose to internationalize towards China, it should be because there are opportunities in the specific market in China in which the SME would like to operate. This specific market will be limited geographically, in sector scope and in potential customers.
II. The Chinese Market: Some Specifications for SMEs
In this chapter we take a look at some prejudices towards the Chinese market, to see whether they are true or not and in which way they are relevant for SMEs operating in China.
1. The Boom of the Chinese Economy
As stated in the introduction of this thesis we would suggest to be very careful with data publicized by the Chinese government. Even if the impressive growth rate of seven percent or more is true, investors should know that this growth rate is mainly sustained firstly by the construction sector -a sector which is driven by government investments- and secondly, by foreign direct investment. In other words foreign companies –of which most are Hong Kong and Taiwan enterprises- are increasingly enlarging their part of the growth rate of the Chinese GDP.
The GDP per capita, and so the purchasing power, in the richer regions is on average around 5000 RMB. This is still well below that of developed countries. On the other hand, it cannot be denied that the GDP per capita in cities like Shanghai and Beijing is growing.
2. Cultural Differences between China and Europe
Cultural differences can jeopardize communication between the different actors in the business process. In a foreign subsidiary these different actors are the European manager, the Chinese personnel, the headquarters in Europe and the (Chinese) clients of the company.
2.1 Chinese Personnel
During our research we verified the statement that Chinese employees lack initiative, and indeed many managers agreed on this point. Because of some educational and historical reasons, the (mainland) Chinese seem to be afraid of being blamed, and so might have difficulties in taking responsibility and making decisions the way it is done in European enterprises. The reason for this lies mainly in the education system, which does not encourage innovative actions. Changes in the education system are expected to be very slow.
Sometimes it is said that this lack of initiative is culturally determined. We want to dispute this thesis. Until now, it has been difficult to find local managers with some ten years of experience, ready to take on the responsibility and have the initiative to manage a European subsidiary successfully, because after all, the People’s Republic of China opened up only some ten years ago, thus China did not have the time to form managers with qualifications comparable to what European managers on average have.
Europeans do not like to be blamed for mistakes either. The “lack of initiative problem” is more a matter of attitude and business culture: if employees are given the freedom to learn and eventually make mistakes without the consequences being too harsh, the problem can be solved. This will take time of course but the Chinese are eager to learn, and an important learning schools for Chinese employees are the foreign companies active in China. The number of local managers with experience in foreign subsidiaries is limited but increasing. Meanwhile, European enterprises may have to train their personnel themselves.
2.2 Communication with the European headquarters
Many subsidiaries in China say they have certain communication problems with the headquarters back in Europe, in the way that they have to put in a lot of time to explain that business in China is done in a different way than it is done in Europe. A certain understanding from the headquarters is needed. The subsidiaries that do not complain about “explaining the Chinese message” are generally given a lot of freedom in operation.
2.3 Bargaining and giving face
Bargaining is the process of asking for a higher price first to be able to give a discount later in the price negotiations. It is a game that has to be played; many Western enterprises are said to inflate their price lists, just to make this process easier.
Bargaining is important to give face to the other party: the person negotiating the price has to be able to go back to his (Chinese) boss with the news that he got something off the original price; this proves he did a good job for his company and so consolidates his position or even his job in the firm. If he is not able to get something off the price, this will be interpreted as a failure. Since there are usually a lot of people working at Chinese firms, another person can be sent easily to continue the price negotiations. Because there are a lot of people on the Chinese job market, the competition is very fierce. Consequently, the Chinese are very good negotiators.
Bargaining can be found at every level of business transactions. Still, there seems to be some kind of change going on. Supermarkets -where bargaining is not done- are emerging and Chinese enterprises who have had a lot of contact with Western firms are getting used to the fact that Western firms do not like to bargain so fiercely as is traditionally done in China.
Among the observed enterprises some fully acknowledge the importance of the bargaining process and did play the ‘game’; others prefer to stick to the discount rates put forward by the headquarters. It is difficult to determine which strategy is the best.
“Personal contact and social interaction play an important part in the development of international markets – especially where more complex industrial products are concerned. Networks between buyers and sellers which form the basis of effective communications must be established. Network establishment can be a demanding and time consuming process where the gap between buyer and sellers is large due to an initial lack of knowledge of each other and is accentuated by physical distance and cultural distance barriers.” (Welch & Luostarinen 1988, p.52)
Over the last decades, more and more Western scholars focused on the importance of networking for successful business. It is important to know that the Chinese had already put stress on the importance of social relationships for centuries. Consequently, the Chinese society and the whole business structure is much more based on relationships than it is in the West. The results of this are more complicated business relations, which Westerners often interpret as unnecessarily complicated. Networking is more important in a society with a complex bureaucracy and a weak legal framework. Since this is the case in China for centuries, it can be expected that Chinese have much more experience when it comes to managing social networks.
Networking is thus not restricted to corporate life in larger MNE. For enterprises in China, also SMEs, it is a part of daily life. Briefly, for SMEs networking means attracting the right people with right relations. This is more easily said than done, but when the market is not so big (niche markets), the number of good salespeople is limited. In this case, a good starting point to find good salespeople is to check the other players in the market. Buying away good sales personnel is a daily business, and if costs are not enormous, it is perceived as a successful strategy.
2.5 Chinese Clients
To sell a product is one thing, to get paid for it is another. Sometimes this can be a problem in China. To minimize risk, companies just entering the market can protect themselves by not selling on credit. Letters of credit is another and very advisable method to minimize risks.
2.6 Different business culture perceived by European managers in China
All of the interviewed managers acknowledged that the business culture is different. In western countries a good relationship with the clients of the company is important; in China personal relationships are indispensable in doing business. A statement with which many managers can agree is that in the West, companies are doing business with companies; but in China, people with people. Going to eat together with clients is perceived as more important in China; still only fifty percent of interviewed managers say they go eating together more often with clients in China than in Europe.
Generally speaking, the European managers working in China are not very surprised by the encountered cultural differences. These findings confirm those of Danish researchers who found that entrant firms, in general, experience the shock effect in relation to entry of adjacent, rather than distant, countries. This is the so-called “psychic distance paradox”: firms do not expect problems in neighboring countries, hence underestimate the cultural differences; but firms are mostly better prepared to internationalize to more alien countries. (Pedersen & Petersen)
2.7 Conclusions and strategies
Concluding, we can say that China is a market that is culturally very different from ours. Consequently, large commitments and investments in personnel are needed. The enterprises observed were aware of this and prepared for it as much as is possible. Still, they encountered problems due to the different business culture everyday. A businessman argued cultural differences are not a problem, but a challenge and a substantial part of the job.
There are two extreme strategies to cope with these problems and one way in between: The first is to learn and adopt “the Chinese way of doing things”; The second is to rule your enterprise like a colonial; the third is to try and get along with the Chinese without losing your own principles and business policies.
3. The Different Chinese Regions
3.1 The myth of the “one billion market”
China is a big country built out of several regions, each with different local cultures, habits and even spoken languages. To see China as one big market of 1.2 billion people is a rather simplified vision, probably put forward by people who want to promote the country or their story.
3.2 The different regions
It is not possible to describe each Chinese province in this thesis, but we can distinguish some major regions: The North, with the capital city of China, Beijing, the East with the country’s business center Shanghai, the South, with most important cities Guangzhou and Shenzhen, and the Western regions. The most relevant differences between these four regions for this thesis are the differences in business culture. Some managers interviewed claimed Shanghai was the most business orientated; Beijing is judged to be more bureaucratic, and the province of Guangdong seems to have a more southern culture towards business, a culture that northern Europeans sometimes have difficulties with. The West (Chongqing, Wuhan, Xi’an, Chengdu) is generally perceived as having a less mature business climate than the coastal regions.
It is important to acknowledge the differences between the four regions. Just like in Europe, where it is advisable to approach Sweden different than Portugal, so is it advisable to be aware of the differences between Guangzhou and Beijing.
3.3 The Great Western Development Strategy
In January 2000, the Chinese government launched the “Great Western Development Strategy” to respond to the growing economical differences between the poorer West and the richer coastal regions of China.
The present author studied in the period 1999-2000 in Chongqing, one of the key cities in the Great Western Development Strategy. The transport and office infrastructure seems to indeed be improving. Chongqing has a history of trade and the mentality is more business orientated than the sister city of Chengdu, on the other side of the Sichuan Basin. The latter city has always been a provincial capital and therefore has a more bureaucratic mentality. We would like to compare Chengdu with Beijing and Chongqing with Shanghai. Still, the business climate in Chongqing is far from mature if compared to Shanghai firstly, and secondly, only recently has Chongqing come into the limelight of policy makers in Beijing; before Chengdu got all the attention and money. Chongqing is still a relatively poor city.
Actually, this can be said all of the western regions. The purchasing power of consumers and enterprises is lower than in the coast regions. For this reason, and because the business climate is not as mature yet as in Shanghai for instance, the West of China is generally less attractive for SMEs. Following statements of Ögütçü and Taube are interesting in this respect:
“The “Go West” campaign should greatly improve the region’s infrastructure over the medium term, but not so the institutional and regulatory setup.” (Ögütçü & Taube 2002)
“While the central government has greatly improved the environment for regional development, local governments have some work to do. There still seem to be substantial room for improvement in the design of local micro-level environments for foreign investment.” (Ögütçü & Taube, 2002)
“Incentives like tax breaks and exemptions can leave local governments short of funds to invest in infrastructure and the fight against crime and corruption – precisely the elements needed to attract investment.” (Ögütçü & Taube, 2002)
3.4 The different regions as perceived by European managers in China
The most companies interviewed say they do business all over China. Mostly they focus on the big cities in the east of the country. Many have representative offices in Beijing, Shanghai and the South (Guangzhou or Shenzhen). Some enterprises occasionally do business with the inland regions, others regularly, others hardly ever, but all do this only on business trips. No company interviewed had thought about setting up an office in the inland regions.
To conclude, we can say that although most enterprises perceived differences in the different regions of China, most also said that they do actually focus on the whole Chinese market. At this point, we have to remark that on the one hand, most of the observed enterprises were not so small and thus had the resources to realize this objective over time. On the other hand, the observed enterprises were mostly playing in niche markets; niche markets can naturally have a broader geographical scope.
Lastly, because of the cultural differences in regions, it is advisable to hire indigenous personnel from the region (sales) activities are done. A Chinese from the south might not be so successful in Beijing.
4. The Chinese Bureaucracy and Legal System
4.1 Improving situation in bureaucracy
A popular belief about China is that the huge bureaucracy issues permits for every single action of an enterprise. This was probably true some years ago, but today the situation has improved significantly, at least in Shanghai. An important policy of the Chinese government is to attract foreign investment. Consequently, they do not want to make it impossible for Western enterprises to set up a company in China. The administrations of most investment zones have central offices which often play the role of intermediary between the foreign enterprises and the authorities.
4.2 Legal system
Under pressure of the WTO, the legal system is improving month by month. This has been perceived by some of the interview managers. Transparency seems to be improving too. Still, problems remain.
4.3 Remaining problems
What can be a problem with the bureaucracy is that there are no unified rules. Each region has its own rules; it is impossible to define a China-wide rule of which procedures have to be followed in setting up and running a business. Social security costs, taxes etc. also differ from region to region. How much lower depends from region to region, and from business to business. Generally, costs are higher in regions with a more mature approach to business.
Local governments and investment zones compete to attract investments. In this struggle they often represent the business facilities in their investment zone better than they actually are.
A drawback for SMEs is that governments and investment zones might only be interested in big investors and less in the smaller pieces.
If clients do not pay the bills, they can be sued, and in most cases the trial will be professional and fair. When the client is found guilty, he will be convicted. The problem remains the punishment in situations like this. Even if the foreign enterprise wins the trial, it will be difficult to get the bill paid for which the trial was started.
4.4 Concluding remarks
Firstly, looking at the Chinese situation of the not-so-transparent bureaucracy, we cannot forget that SMEs have a lot to complain about in Europe too when it comes to paperwork caused by bureaucracy. (OECD Observer, 2002) The interviewed managers in China who had experience in Europe complained less than the ones with less experience in Western countries.
Still, it cannot be denied that the statement “in China not a lot is allowed, but everything is possible” has some elements of truth in it. The problem is that European enterprises cannot afford to try to circumvent the rules. Chinese enterprises can distinguish the line between legal and illegal much more easily and thus can work more freely, which gives them a competitive advantage over foreign companies.
Lastly, our findings are based on the situation in Shanghai. Since the different regions in China each have a different attitude towards bureaucracy and legal reform, our conclusions can only be judged as valid for the Shanghai region. It is very likely that bureaucracy and legal systems in less developed regions is less business friendly. In any case, rather than relying on legal safeguards, European companies need to ensure that their Chinese counterparts in any contract have their own motivation for fulfilling, or performing according to, the contract. (Gallant 2003)
5. Mass Products – Industrial Products – Services – Trade: Where Are the Opportunities for SMEs?
5.1 Mass product markets
Mass product markets are markets of goods that are produced in big quantities and at low costs and are mainly for private consumers. Mass product markets in China have a lot of producers and competition is consequently very hard. Margins are low; many Chinese state-owned competitors may be losing money, but by obtaining loans from state-owned banks, they can continue activities. (Lauwers 2002)
For SMEs it is very difficult to succeed in mass product markets. None of the interview enterprises was active in mass product markets whatsoever.
The chances that this happens are small, but if SMEs are active in a mass product market, China can be good in terms of finding a sub-contractor, which can produce at substantially lower costs than would be possible in Europe. We do not think that SMEs have high chances of success in marketing a mass product focused on private consumers. Competing with Chinese companies on price is not possible; the other option, to compete on quality and brand-name, often implies huge marketing costs that are only bearable by larger enterprises.
5.2 Industrial products
All of the interviewed enterprises produced and/or traded in industrial products. It seems this kind of market has the biggest opportunities for SMEs. Especially products with technology imbedded are in great demand in China.
An example is ICT products. Miller puts it this way:
“China is the world’s fastest growing ICT spending nation, growing more than 15% from 2000 to 2001. Perhaps more significantly, China’s ICT market has experienced a 27% compound annual growth rate since 1993, the highest of any country.
On top of these tremendous growth rates, China is a leading spending country in several ICT categories: Sixth in overall ICT spending, behind the US, Japan, Germany, the UK, and France; Fifth globally in telecommunications spending, over $44 Billion in 2001; Fifth in hardware spending with a 29% compound annual growth rate in the category; Second, behind the United States, in number of education-related Internet users; and First in percentage of IT spending on ebusiness (32% in 2001).
With the Olympics headed to Beijing in 2008, analysts anticipate significant IT investments of several billion dollars will be made in preparation.” (Miller 2002)
In our research Barco and Eonic/Windriver are good representative examples in this matter. Both enterprises sell highly technological products and are successful in China.
In our research we bumped into two enterprises whose main activity was supplying an industrial service. The first, LBC, offers a service in the field of logistics of chemicals; they specialize in handling chemical liquids in harbors.
In China the concept of one company offering this service to many companies is new. Before, every company had his own production unit, transportation unit, and so on. Each company tried to be as self-sufficient as possible, so they tried to do every little thing of the supply chain by themselves. They did not have the economic concept of one company serving different companies in one chemical production zone.
This is changing and Shanghai is a pioneer in that point. A firm in the same business as LBC was allowed to build a jetty and a storage center in a certain developing zone and all chemical firms that come to that developing zone will be encouraged to use this jetty and the service of secure transport of chemicals delivered by this specialized company.
The second firm, Ensysta, provides engineering services to the fine chemical and pharmaceutical industry. They acknowledge it is difficult to find Chinese clients, because the Chinese enterprises expect engineering to be offered for free; They are also not willing to pay a lot of money for installation.
These two examples demonstrate that in many industries, Chinese enterprises are not yet ready to pay for certain kinds of specialized services. Besides, many of the service sectors still have restrictions for foreign companies. China’s entry into the WTO will mean that new regulations in service sectors like banking, insurance and telecom will be implemented. Still, it remains to be seen if other service sectors, especially those dominated by smaller enterprises, will see the same kind of opening up.
Lastly, non-specific service orientated foreign enterprises are trying to upgrade their products by delivering a good after-sales service. Picanol is a good example in this respect. Still, services like this are a new concept in China and time is needed to convince clients that these services are worth the price.
We define trade here as the activity of buying and selling goods, that are not produced by the (parent) company. Two companies interviewed can be categorized as trading companies: MDD and Microvert. Bekaert Textiles Trading is here treated as subsidiary selling Bekaert Textiles products.
The trading companies MMD and Microvert were two of the few real SMEs we met during our research. Different from the other observed firms, they are not backed by a European firm. Both have headquarters in Shanghai and work independently, without strong links to Europe.
Microvert is located in the free trade zone of Waigaoqiao, because this was until now the only place in Shanghai where foreign enterprises were allowed to import goods without Chinese intermediary and to bill their clients directly in RMB. MDD chose a joint venture construction with Chinese subsidiaries; this gives them more flexibility on the one hand, but also more administrative paperwork every month on the other hand. It is unclear which of these two strategies is advisable, though we do know that one condition of being successful in a joint venture is that the partner is trustworthy.
Three years after China’s accession to the WTO, at the end of 2004, “enterprises will have the right to import and export all goods and trade them throughout the customs territory with limited exceptions”. (www.WTO.org) Thus, opportunities for foreign trading SMEs may increase. Of course, a lot depends on which goods are being traded.
It is remarkable that the observed enterprises chose to be based in China and not in Europe.
It is difficult to operate with limited financial resources in any kind of market, but SMEs have good chances of success when they have a leading position in a specialized market of industrial products that are difficult to reproduce. Niche markets of highly technological products offer the highest changes of success.
6. Localization of Personnel
Expats are personnel from the homeland that are expatriated -in this case- to China. Most companies pay their expats air tickets, insurance, housing, expat premium etc. The costs of sending out expats are substantial and most SMEs cannot afford to send personnel to China. The alternative is localization of personnel.
6.1 ‘Local foreigners’
In most foreign subsidiaries in China, foreigners hold key positions to manage and take the initiative. Besides, Western staff can be important for sales activities in the way that they can be the image of the company. This can be important when companies want to sell higher quality goods. Chinese often link foreign with high quality.
There are two kinds of foreign staff. The first kind are expats. The second kind of foreign staff are the local foreigners. A lot of foreigners, who are not expats, live in cities like Shanghai; these people need to make a living. For SMEs, it is substantially cheaper to hire these people than to send out expats.
6.2 Localization of sales personnel
All European managers interviewed agree that Chinese employees are indispensable for doing business in China. The sales personnel especially need to be local Chinese. Local means that they are from the region and speak the local dialect. It is useless to hire a salesperson, who was born and grown up in the south to sell products in the north.
At best, salesmen should already have a good network before they are hired. By hiring a salesman, an access point is hired to a network of potential clients. This is probably true in the whole world, but it is certainly in China. Dismissing a senior employee in an enterprise in China can sometimes have disastrous consequences for sales of the enterprise: although the performances of this employee were at first sight near zero, by dismissing him, the access to the network of clients he had dealt with may be lost. Business networks are an important aspect of doing business in China.
6.3 Localization of management
Local management may be better positioned than foreign managers in finding good sales personnel at reasonable costs, not only because local management can be expected to know better where to look, but also because they can be much better in negotiating when it comes to salaries. Lü points out the advantages of local management:
“Chinese managers contribute to better subsidiary performance by providing local knowledge about government regulations and about market conditions that are very often critical in this context. In addition, Chinese managers in foreign subsidiaries help build networks to circumvent the barriers which are often impenetrable to expatriate managers.” (Lü 2000, p.69)
The problem for SMEs that arises here is to find good and trustworthy local managers. As said before, this kind of managers is still thin on the ground in China; the people most suitable for the job of manager of a foreign SME subsidiary are those Chinese managers who have worked before at a foreign company.
Stow International is a good example of how localization of management can be successfully implemented. At the end of the nineties all foreign competitors of Stow had left the Chinese market because of the difficult economic situation. By employing a Chinese manager who had formerly worked for Alcatel, costs were reduced substantially and Stow could stay in China. Over the years Stow kept on decreasing the number of expensive expats it employs.
III. China and the WTO
1. China’s Accession to the WTO
China has been negotiating to enter the WTO since 1985, i.e. the beginning of the “opening up” of China to the rest of the world. Negotiations reached the final stage at the end of the nineties and the 11th of December 2001 China became a member of the WTO.
There are different agreements for different sectors of the economy. For SMEs the most important changes are the decrease in import/export tariffs. In 2000 these tariffs were on average 17%; in 2005 they will be on average 10%. (Interchina, 2002)
The decrease in tariffs is in two stages. One was in the beginning of 2003; the second one will be in 2005. It is impossible to discuss here which changes China’s accession will have in each sector of the economy and which opportunities this can give for each SME. Still, some remarks can be made about the influence of China’s accession into the WTO on SMEs.
(Appendix E: Press release of China’s Accession to the WTO)
2. Remarks concerning China’s Accession to the WTO
2.1 Negotiation power
The negotiation power of smaller enterprises or countries is smaller in the case of a dispute. In the same way the costs of suing will relatively be much higher for smaller enterprises or countries backing them.
2.2 Local governments
The fact that the national government takes a serious engagement does not necessarily mean that the local governments will follow. (Thiers 2002) Leaders like the former Prime Minister, Zhu Rongji, were determined to use foreign competition as a weapon in reforming the inefficient state-owned enterprises. (Ögütçü & Taube 2002) But it is much less certain that local leaders will follow the same policy and it is unclear how far the new less reform- oriented leadership will try to form a counterbalance against local protectionism. The chances of successful implementation are bigger in Shanghai and other more developed regions than in the less developed regions.
2.3 Possibility of delays
The other side of the coin is less relevant for European SMEs in the short term, but good to know as background for the long term. Many observers found China gave in a lot on for instance the agricultural sector. If the regulations really are implemented in this and other sectors, Chinese enterprises might not be able to cope with foreign competition, which could lead to massive dismissals. The millions of unemployed persons created could be a threat to the social stability of the country. When China’s social stability is in danger, the Chinese government could have a ground to delay or dismiss certain implementations.
2.4 National Treatment
The Chinese government has promised national treatment to all WTO members. This means that all foreign enterprises investing in China will be treated the same way Chinese enterprises are treated; this embraces the treatment before the court and towards tax officers.
The problem that arises here is that foreign enterprises used to get a lot tax exemptions from the government if they invested in China. In theory, this will not be possible anymore, because the WTO agreements implicitly stipulate that foreign enterprises have to be treated the same as Chinese enterprises, therefore they have to pay as much tax as Chinese do.
3. Changes Perceived by European Managers in China
The general feeling by European businessmen in Shanghai about China’s entry into the WTO was that this entry is just a step in a long changing process that already started long before December 2001. Generally speaking, they do not expect that any change will come over night. This was the main conclusion of our research from July 2002.
In April 2003 the general feeling, especially among the traders, was that the WTO makes things much more complicated. On the one hand, gradually more and more is allowed, but on the other hand, they are more and more products, which need a certificate if imported.
Most managers do not believe that the national treatment will quickly put an end to tax exemptions and other preferential treatment foreign enterprises enjoy, as long as these enterprises continue to bring in technology or knowledge that China needs.
4. Conclusions - WTO and Opportunities for SMEs
It is difficult to predict in how far China’s accession to the WTO will bring advantages for SMEs on the short term: on the one hand, the question remains in how far the WTO rules will be implemented all over China; on the other hand, it is unclear how many more regulations will be issued to control trade in a way conforming to the WTO agreements and how far this will complicate business for SMEs. Besides, not all sectors open up to the same extent. Each enterprise should check this out carefully for the sector in which it is active. In the long term, China’s accession to the WTO will be good for the business environment in general.
More foreign enterprises will enter the market. Foreign companies generally are more demanding on the point of quality, which gives opportunities and competitive advantages for European SMEs offering this quality.
IV. Support during the Internationalization Process
1. Trade Promoting Offices
Most governments of European countries for which exports are an important part of the economy have created departments to promote these exports. These institutions or departments focus mainly on SMEs.
The export promoting institutions of Belgium are regionalized: Export Vlaanderen for Flanders, Brussels Export for Brussels and Agence Wallone à l’Exportation (AWEX) for Wallonia. Each of these offices has good services for SMEs: going from advice to financial support for prospectus business trips or participation at trade shows.
At least three of the interviewed enterprises made use of and were satisfied with the services of the service center of the Export Vlaanderen in Shanghai. It is very useful for enterprises starting up or doing market research in China. LBC, Sismo Systems and Reynaers all agreed that one good point about the export center is that Chinese staff can be hired through the administration of the service center. The only other way to hire Chinese staff is by setting up your own enterprise or representative office, which is more expensive than renting an office in the service center.
A bad point of the service center for Sismo Systems was that they miss out on the 50 000 EUR subsidy that they could have got from Export Vlaanderen because they are initial investors in China. That subsidy cannot be combined with the service of the offices offered by the service center.
2. Administrations of Investment Zones in China
The Chinese government wants to attract investments. Some local government and investment zones do their utmost best to welcome companies investing in China. These zones are mainly focused on bigger investments like production units. Often, each zone has one contact office, which helps companies to set up an enterprise in that certain investment zone in China. There are hundreds of investment zones all over China, with different facilities focused on different kind of companies.
The difficulty is often to find the most suitable zone for one or another SME. In Shanghai, an example of such a zone is the Waigaoqiao Free Trade Zone, the only zone in Shanghai, which allows foreign trade companies to settle. Of the companies interviewed Bekaert Textiles Trading and Microvert are based there. Both companies chose that zone because it was the only place in Shanghai were it was allowed to do their kind of activities (trade of textiles and trade of animal feed respectively) and bill their clients in RMB without a Chinese trading company as intermediary. After 2005 –last stage of WTO implementation- these activities may also become possible in other regions.
A drawback of the Waigaoqiao trade zone is that the rental prices of offices are relatively high, sometimes leveling or exceeding average European rental prices, as perceived by the interviewed managers.
3. Consultancy Firms
There are two kinds of consultancy firms active in the Chinese market. Both are not cheap and it is questionable if SMEs can afford them. The first kind is the internationally known consultancy firms like Price Water House Coopers and others. For these MNEs China is also relatively new; when they have to carry out a market research in a very specific market sector, they still might need input from the demanding company. Secondly, there are smaller enterprises that specialized in the Chinese market. Some of them also can act as an agent. InterChina is a good example in this respect.
The latter consultancy firm prefers to work together with firms with more than 300 employees, since it judges the Chinese market not mature enough yet for real SMEs.
Banks can be useful for SMEs in the sense that they can introduce SMEs to certain business networks present in China. Most major European banks are present in China and traditionally play an active role in business associations. Belgian banks present in China are Fortisbank, KBC and ING. Although many of these banks cannot (yet) give very specific advice for SMEs, it is useful for an SME, who wants to internationalize, to contact its bank and ask what kind of support these banks can deliver.
5. Business Associations
Business Associations in the home country and in China can help show the way to enterprises just entering the market. The ones in China often organize information sessions, which can be interesting for enterprises that newly arrive in China. Business Associations are organized by country; in Shanghai, Belgium, the Netherlands and Luxembourg have joint into the Benelux Business Association.
During our research in China we met relatively many people who did very useful work for SMEs but with the means of a fund. In many cases these persons were students or younger people who applied for a kind of scholarship. Mostly these scholarships ask the applicants to do some kind of project or at least follow an internship in a company operating in China. Below are some of these funds introduced.
5.1 Prince Albert Fund
The Prince Albert Fund organizes a program for young people interested in Asia and China. After three months of courses (Chinese languages and others) at China European International Business School of Shanghai or another business school, scholarship students do a nine-month internship with a Belgian company in China. This is a good opportunity for the scholarship students, but also for the SMEs allowing the internship: very useful and cheap research work can be done.
More information about the program can be found on the website: http://www.fondsprincealbert.be/.
5.2 Junior Management Program
This program focuses on managers, who have already had some experience in European enterprises. As well as an intensive Chinese language course, it is possible to follow an internship in a Chinese or joint venture enterprise or carry out a task proposed by the own enterprise. The scholarship has to be sponsored –not necessarily financially- by an enterprise, which makes it different from the Prince Albert Fund.
Eonic, the firm that is now incorporated in Windriver, sponsored the application of one of its employees, who later proved there were real market opportunities for Eonic in China.
More information can be found in Appendix G.
5.3 Asia-Invest Program
“Asia-Invest is a European Union (EU) initiative that aims to promote and support business co-operation between the EU and Asia. The Program provides assistance to intermediary organizations to facilitate mutually beneficial partnerships between companies, in particular SMEs, in the EU and South and South-East Asia and China, as well as to strengthen the business environment to increase trade and investment flows between the two regions.”
The fund has different components of which Asia Interprise seems to be the most interesting for European SMEs. The goal of a project in the category of Asia Interprise has to be to facilitate partnerships between European and Asian companies by organizing medium-scale sector-specific and multi-sector business-to-business encounters.
Like many of these funds, applicants have to be non-profit organizations. The Asia-Invest project points at chambers of business, sector-specific trade and industrial associations, employers’ federations, administrations promoting trade and investment between the EU and Asia. A partnership between European and Asian organizations is obligatory for most programs.
Another program of the European Union is the Asia IT&C Program. SMEs can participate but in our opinion the non-profit mark is a little too high to make it interesting for SMEs looking for business support.
More information about these and other aid programs of the European Union can be found on their website: http://europa.eu.int/comm/europeaid/projects/index_en.htm
These funds can be very useful for SMEs to obtain pre-entry market research for instance at low costs. Here we have focused primarily on what is available on the Belgian market. Other European countries certainly have similar programs. We judge these kinds of funds as a very good way to tackle the financing problem of many SMEs in their internationalization process. More such funds and more publicity about the ones that already exist would certainly help SMEs internationalizing towards China.
 Sysmo Systems, Stow, MDD, Microvert and the former Eonic
 More about the Junior Management Program can be found in Part Four of this thesis.
 IER is introduced in point seven of this chapter.
 More about the Prince Albert Fund can be found in Part Four of this thesis.
 More about the Junior Management Program can be found in Part Four of this thesis.