Meet the Small-Biz-Friendly China

Once upon a time, China was a risk only big multinationals were willing to take. But these days, more and more U.S. small businesses are taking the plunge. Pint-size suppliers are following big customers to the mainland. Venture capitalists are pushing startups to develop a China strategy before ponying up any cash. And even if you're on your own, sooner or later you'll end up competing with the so-called China price, so boning up on the country now makes good business sense

In this multipart Special Report during the week of Jan. 3, BusinessWeek Online looks at China from a small-business perspective. We examine the opportunities it offers, look at the challenges it poses, and offer a guide for getting started.


  While there are still plenty of reasons to proceed with caution, today's China is more small-business-friendly than ever. Unlike their big counterparts, small and medium enterprises (SMEs) can often remain relatively low-profile, which lets them take advantage of a host of incentives that can add up to significant savings. The recent influx of foreign businesses has also led many Western service companies to head to China, which makes it easier and cheaper to round up legal advice, accounting help, and other business services.

And China's 2001 entry into the World Trade Organization has spurred Beijing to open its markets. That has meant the lifting of many restrictions that made it tough for SMEs to sell in the mainland. Until recently, for instance, in many industries companies wishing to sell in China were required to establish factories in-country.

But a policy change that's in process will allow more companies to directly import goods -- so they'll be able to get into China with significantly lower risk. "These regulations, once successfully implemented, will drastically improve the playing field for smaller companies," says Charlie Martin, president of the American Chamber of Commerce-China. Martin notes that most of the organization's members are now SMEs.


  Manufacturing and outsourcing continue to be prime opportunities for both big and small companies alike. Since the Chinese government is encouraging foreign investment in manufacturing, bureaucratic hassles there tend to be minimized. And in many cases, consulting companies can help you set up shop without ever crossing the Pacific. "On the small- to medium-size end of things, we're getting requests on everything from pencils to vitamins," says Rod MacGregor, CEO of China Corp., a Hong Kong-based consultancy that specializes in helping Western companies enter China.

The cost advantage of moving production to China can easily top 20% with no loss of quality. Pet Dreams, a maker of bedding for dogs based in New York, cut manufacturing costs by 61% after moving production to China, even after factoring in the greater expense of shipping the goods across the Pacific. And the quality is actually superior, says Pet Dreams founder Annette Grignard. "I had to go to China," she says. "If you want to be big, your product has to go down in price so it appeals to a wider audience."

But China's rapid urbanization, ballooning middle class, and preparation for the 2008 Olympics are all paving the way for U.S. small businesses to go far beyond simple manufacturing in China. As many as 300 million rural residents are expected to move off the farm over the next two decades, and China is building a half-billion square feet of new residential and commercial space every year to house them. That has spurred dozens of foreign design and architecture firms to set up shop in China.


  The mainland is home to more than 100 million Internet users, but until now China's e-commerce market has been relatively untapped. Again, smart entrepreneurs are jumping in to fill the void. Helen Wang, a Stanford grad who originally hails from Hangzhou, is launching a company called e-Mobilizer, which helps artisans sell their wares on an online marketplace that's accessible via mobile phones.

Other niches offer surprising opportunity. Many Chinese consumers are willing to spend up to 10% of their savings on education, making it an industry worth at least $80 billion a year. Matthew Estes, a 39-year-old San Diego native who has lived in China for 15 years, tapped into that by founding BabyCare Ltd. It expects to see revenues of $20 million in 2005 from sales of educational toys, vitamins, baby formula, and classes on breast feeding, Lamaze birthing techniques, and more.

And Xavier Hervé, president of Montreal-based Mechtronix, saw potential profits in the 55% increase in air traffic China has seen in the past five years. With the government scrambling to update its infrastructure, Mechtronix last year sold a $9 million flight simulator to the Civic Aviation Flight University of China, where 90% of China's pilots are trained. "The aviation industry is fairly new there," Herve says. "It's on a scale that is not even imaginable."


  U.S. exports to China have risen 80% since 2001, which makes the mainland the fastest-growing market for American goods. The U.S. Commerce Dept. says American companies are finding success selling agricultural chemicals, automotive components, medical equipment, and more. There's also plenty of work in management training and consulting. Douglas Shelly sensed that when he left telecom gear maker Nortel (NT) after 13 years in 2003 and opened Maple Tree Business Solutions, a software and technology consulting company in Qingdao, an East Coast port city. He has since done work for multinational customers such as GTE, MCI (MCIP), Nortel, and Sprint (FON).

But just because there's more opportunity doesn't mean breaking into China is easy. While the mainland is rapidly shifting to a market economy, remnants of the central-planning bureaucracy remain. The country can be unpredictable, and even basics such as understanding rules and regulations, protecting intellectual property, taking legal action, and getting paid can present serious hurdles to newcomers.

Where many small businesses go wrong is in underestimating the risks involved or in overestimating their ability to survive them. But with careful research, a realistic outlook, a solid plan, and an extra share of determination, China can offer a small business plenty of opportunity to reduce production costs or expand your market -- or both. The hardest part may be getting started.

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