Small is not beautiful

ENTREPRENEURS do more with less, proclaimed Fiona Woolf this week on a visit to Shanghai. Lady Woolf, the current Lord Mayor of the City of London, was speaking at an academic conference devoted to helping small and medium enterprises (SMEs) flourish in China. These businesses face all of the same obstacles as big firms trying to enter China but have far fewer resources.

Intellectual-property rights are hard and costly to defend. The tangle of red tape involved in tax, compliance, customs clearance, business registration and so on can overwhelm small firms. Alexandra Voss of the German Chamber of Commerce points out that local firms often work overtime and on weekends during negotiations—and that foreign SMEs with staff shortages and little local knowledge can quickly get overwhelmed.

A bigger snag is that getting China right demands a huge amount of attention from the top brass, explains Franklin Yao of Smith Street Solutions, a consulting firm that advises firms keen to enter China. The problem is that the market is enormous, complicated and opaque. It is also hyper-competitive, thanks to a proliferation of both low-cost locals and deep-pocketed multinational companies.

For intrepid SMEs still keen to try, help is at hand. All developed countries have trade offices and business chambers devoted to helping smaller firms clear the many hurdles. Consultants are also coming up with new ways to connect these firms to unfamiliar customers.

Deb Weidenhamer runs iPai, a trailblazing foreign auction house in China. Her outfit holds dozens of auctions a year, run simultaneously online and at a trendy site in Shanghai, mostly peddling excess inventories from distributors of fashionable goods. For $15,000, she will add a foreign SME’s product to three of her auctions over several weeks and get user feedback. The result, she says, is that her clients learn quickly and easily if and how much Chinese customers will pay for their novel products and what they think of them.

Another encouraging development for smaller firms is the rise of e-commerce in China. Frank Lavin of Export Now, an e-commerce firm, argues that going directly to online sales lets foreign newcomers build a national brand far more quickly and cheaply than through bricks-and-mortar outlets. For 17-20% of a firm’s Chinese revenues, he will take care of the regulatory filings, product testing, warehousing and so on required for online sales.

Alibaba, a Chinese e-commerce giant that recently went public in America, is explicitly courting foreign SMEs. A recent success story involves sales of imported fresh foods on its Tmall portal. Keith Hu of the Northwest Cherry Growers, which represents American farmers of the fruit, explains that selling to China was made even more difficult as the fruit ripens only during an eight-week period each year. But a clever collaboration with Tmall helped his farmers reach customers even in smaller Chinese cities, boosting sales over fourfold in the past year to over 600 tonnes.

While it is possible to make it, Mr Yao is blunt about the chances: “If your firm doesn’t have at least $100m a year in sales, don’t bother trying.” Life is hardly a bowl of cherries for most small entrepreneurs trying to enter the Middle Kingdom.