Western SMEs often lack the resources to invest heavily in China and only have one chance to do it right. Reports have shown that almost half of start-up projects in China fail within the first two years. Therefore, it is not only extremely important for SMEs to be well prepared and select the right entry mode for China, but also to find a way to follow up and master the project once it’s started.
Here are some key recommendations for Western SMEs when considering a China venture:
- Stay in control: Whatever business model you choose, it is important that you permanently stay in control of what is happening in China, including intellectual property rights, management, finances, marketing, etc. Obviously there’s a good chance that it will be necessary to have a local partner (or partners) in China (for example distributors), but that doesn’t mean that you have to give away the control over your business.
- Localization: Even if you have been successful in any other market in the world, when outlining your strategy for China you need to completely reconsider your strategy and take into account the local situation in China, particular market requirements and any other local aspects. Simply copying your strategy for other markets to China does not guarantee success in China.
- Mitigate the risks: There are always risks when you enter an emerging and challenging market such as China. It’s important that you identify and analyse any possible risks, assess which risks you are willing to take and find ways to manage them. Ideally, you should choose a business model that offers the best prospects of success, limits the initial investment and minimizes risks.
- Flexibility: It is important that you remain flexible in your China business model at all times – even change it if necessary, learn from your experiences and adjust correspondingly. You should also be able to change your partner or add additional partners.
- Commitment: Maybe the most important factor for your success in China is the commitment of your entire organization to the China project. Merely starting the project and signing the contract with your Chinese partner, and then letting it advance, will unquestionably not work. You need to travel to China on a regular basis, build the relationship with your Chinese partner(s) and customers, get to know and closely monitor the market and follow up accordingly.
- Exit strategy: Although a business model will be chosen which generates the best possible chance of success, nevertheless, you should build in an exit strategy from the beginning. This will enable you to easily withdraw from China in case the project turns out to be unsuccessful (for whatever reason) or in case another opportunity becomes apparent.
As a final recommendation, staying away from China because of lack of knowledge and understanding or even anxiety about the Chinese market and Chinese business practices should not be an option. Unfortunately many Western SMEs often get lost in long decision processes and as a result lose opportunities in China. There are still huge opportunities in China for many Western SMEs with unique products or technologies. We highly suggest that you seek advice or assistance from China experts or advisors and other companies active in China.
Bart Horsten, 21.11.16