The view from inside the rabbit hole

The viewpoint of these Dispatches tends to be from the outside looking in, seeing China as a business opportunity.

Today, the focus will be on what small businesses in China see when they look around. Most of the information has been taken from a report released by the State Administration for Industry and Commerce. It is the first of its kind to look at what small/micro-sized companies mean to China’s economy and what they need.

The basics

“The definition of what constitutes a small or micro-sized company in China varies by sector. For industrial companies, those with fewer than 300 employees and annual revenues of less than 20 million RMB ($3.25 million U.S.) qualify as small or micro-sized. The threshold for a catering businesses is those with fewer than 100 employees and income under 20 million.”

— China.org

There are 11.7 million small/micro-sized companies, which constitute more than 76.5 percent of all businesses. Sole proprietors account for more than 17.5 percent, leaving the remaining 6 percent, which accounts for all medium and large businesses. Small/micro-sized companies create more than 70 percent of new jobs in China each year.

Tangen

The challenges

  • Lack of access to reasonably priced capital. The large banks are generally unwilling to lend, forcing these businesses to turn to friends and family or pay 25 to 35 percent interest rates.
  • Rising wage rates in many of the more developed areas, especially for mid managers with process experience.
  • Rising rents and utility costs in developed areas.
  • Intense competition, especially in low-end commodity businesses.
  • Around two-thirds of them are from sectors like industrial, retail, leasing and commercial services, which feature low technology, saturated markets and little added value.
  • Innovative businesses, which comprise a 4.62 percent share. Restraints in capital, technology, talent and management made it hard for them to upgrade and transform their businesses.

The opportunities

  • Stable infrastructure in terms of power, water and waste.
  • Large pools of college-educated individuals willing to work at low starting salaries.
  • A weakening RMB, which is improving the bottom line for many small, low margin businesses.
  • Massive markets with large concentrations of people.

The outlook

  • China’s small and micro-sized enterprises have played a leading role in creating jobs but face daunting challenges as most of them are concentrated in low-profit sectors.
  • Generally speaking, most small and micro businesses face a less robust growth outlook in the long term, but for those that can adapt there should be rewards.
  • Individually, despite the challenges, most of the businesses were optimistic about their futures.

Government role

This is the first time the government has published a study focusing on the contributions made by small/micro sized companies. It is a clear signal that Beijing realizes a large part of its future growth will have to come through realigning its business focus away from low-end, low-margin businesses toward more innovative medium and high-end products and services. In laymen’s terms, that means China’s small/micro-sized companies need to move from being faceless OEMs to branded, distributed and supported product and service providers. This will allow them to cut out the middle men, expand sales and increase margins. It will require more product research and development, expanded sales and support systems. You can see this happening already with some of the new cell phone and software companies like Xiaomi cell phones and WeChat phone software.

The big danger to small/micro firms, other than eroding margins due to cutthroat competition, is a lack of affordable capital and knowledge about how to build successful product and service brands. Unfortunately for many, these obstacles may prove insurmountable. While the government pushes its economic pivot, it has enacted a number of measures to help small/micro companies, including:

  • In August 2013, the government put in place tax breaks for small/micro firms, exempting them from paying value added and business taxes on the first 20,000 RMB in monthly sales. On April 3, 2014, it extended the tax breaks to the end of 2016.
  • The government is also considering raising the tax threshold significantly above the current level of 60,000 RMB.
  • Beijing is also increasing available financing to build low-income housing. Low-income housing is important as it relieves pressure on wages pushed by the high cost of real estate.
  • The government is also involved in restructuring its capital systems so that they price in risk and provide better access to capital for smaller firms; as part of this, five new banks have been authorized that will focus on smaller businesses.

Conclusion

Sometimes it’s worthwhile standing in the other guy’s shoes for awhile. In this particular case, while Chinese businesses face pressures similar to their western counterparts, they are at a different stage in their economic development. However, within this crucible there are opportunities for those with the ability to use China’s need for capital and knowledge as a business opportunity.

Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to steve.jagler@biztimes.com.

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