For German SMEs, the decision to become active in China is usually reserved for the top management. Smaller companies in particular lack specialists who can provide analyses of the market, suitable business sites and competent partners. If their customers ‘force’ a supplier to follow them to China as a subcontractor, this has advantages.
The choice of a business site is simple, and there is already an existing business volume to start with. But how else can a company find the ideal location for its investment in a country that is roughly the size of Europe and still difficult to access for many in Europe due to its language, cultural differences and distance?
Medium-sized companies have to make do with fringes
Economic zones trying to attract foreign investment make a lot of promises. These promises are not always kept, especially when it comes to “small” investments. Up to 300 employees is still considered a small company in China. Medium-sized companies have between 250 and 2000 employees. As a result, certain standard production halls are completely oversized for medium-sized companies that want to gradually enter the market.
All too often, the enthusiasm of a business location cools rapidly once it becomes clear that potential investors do not want to invest millions straight away. Attractive sites near metropolitan areas are thus reserved for large corporations. Small investments are pushed into outlying areas and further inland.
Employees prefer well-known companies
This amplifies another competitive disadvantage small companies face in the market: Their appeal as employers. In the annual surveys conducted by the German Chamber of Foreign Trade in China, finding and binding qualified employees has been one of the biggest challenges in business operations for years.
Chinese employees tend to prefer internationally known companies. The chances of them knowing about the hidden champion from the Black Forest or the internationally successful family business from the Upper Palatinate are low. Accordingly, the effort such a company must make to attract skilled employees and then keep them in the long term is high. Modern human resources management, flexibility and creativity are necessary to meet the growing demand for the work-life balance of Chinese employees.
Covid prevented training in Germany
The list of examples why the road to China for SMEs is difficult beyond the obvious barriers goes on. Three years of Covid restrictions have exacerbated them. The much-needed exchange on a business and technical level could only happen via screen. Already established companies were at least able to build on the existing trust with their local employees when the Covid crisis hit.
For some local employees, the situation even turned out to be an opportunity to emancipate themselves and take on more responsibilities. But for ventures that had just started in China, the travel restrictions meant that they never had the chance to bring their staff to Germany for training and familiarize them with their corporate culture.
Realistic expectations ensure investment success
Nor could technical service personnel be sent to China. Those who had foreign managers on site had to fear or accept that they would leave the country after almost three years of restrictions. The sudden departure from zero-Covid gives hope that the human exchange so urgently needed at all levels can be resumed in the coming year.
And yet, more than 5,000 German companies have successfully settled in China. A broad network of local service providers, foreign chambers of commerce, German Centers and country representations are certainly helpful in this regard. Private service providers have also specialized in supporting SMEs entering the Chinese market. Perhaps the secret of success lies precisely in the fact that these decisions are reserved for the top management of small and medium-sized enterprises. Good preparation, realistic expectations and a step-by-step approach ensure the long-term success of their investments.
Julia Guesten is the managing partner of Sharehouse (Nanjing) Co., Ltd. She has lived in China since 1994. Before Sharehouse, she established and managed the logistics department of a German subsidiary in South China and worked for 17 years in Nanjing as a representative of the State of Baden-Wuerttemberg and Managing Director of Baden-Wuerttemberg International (bw-i).
This article is part of the “Global China Conversations” event series of the Kiel Institute for the World Economy (IfW). On Thursday, December 15, 2022 (11:00 CET) Julia Guesten (Sharehouse (Nanjing) Co., Ltd) and Claudia Glaeser (Glaeser GmbH) will discuss the topic: “German SMEs in the Chinese Market: What are the Current Challenges and Opportunities?”. China.Table is the media partner of the event series.