INFOCUS | INDIA-CHINA | PRIVATE ENTERPRISE
Private sector in China
Need to democratize small business For private enterprise to succeed there is need to make the set up more democratic so as to keep up with global standards.
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Zhang Weixin
W
ith the spread of reform and opening up as well as the state’s encouragement towards the development of private sector, China’s private sector enjoys broader prospects of development and plays a positive role in developing productivity, expanding employment, meeting diverse demands of society and facilitating economic prosperity. In 1978, the third plenum of the 11th CPC Central Committee made the important decision of initiating reform and opening up, ushering in a new era for the development of China’s private sector. Until now, there are already more than 30 million registered private companies in China, taking up an ever increasing share of the overall national economy. The introduction of foreign advanced technologies and managerial expertise have also helped to increase the competitiveness and size of small and medium sized enterprises (SMEs), which thus gained handsome profits and attracted more people to start their own business. As a result, the private sector has expanded its scope of business activities, prompting the state to open up more harbours and coastal cities, which in return further fueled the growth of the private sector. At the same time, the entry of foreign-funded enterprises also brought fierce competition for Chinese private enterprises. All these factors have contributed to the growth of the Chinese private sector over the past 30 years as well as their remarkable achievements. Private SMEs have many advantages in term of growth. Firstly, self-funded SMEs are highly independent. When they set up their own business, private businessmen raise fund either through wealth accumulation or joint investment, sometimes even bank loans. This makes them pay more attention to business performance and leads to greater efforts in elevating the company’s profitability. Due to low debt ratio, SMEs have less debt burden and are flexible in use of funds.
They also have a strong risk aversion capability because their products are mostly low-tech daily products and their operations are scattered and highly market-based, putting them in a better and safer position during economic crises. Despite these advantages, private SMEs have many problems too.
Firstly
Product quality is not very high, quality awareness not strong enough, technological content is low and brand expansion ability is limited. Especially for small sized private companies, they are not efficiently opened up and their quality management is generally weak. Secondly, “family business” is the main feature of the management mode of Chinese private enterprises that manifests in centralized leadership, autocratic decision-making, and duel identity of both asset owner and manager. Family business will further lead to patriarchal management, i.e. the ownership of the company belongs to one or a few main investors, and the company is led by a strongman that exercises highly centralized management. Such kind of management mode can easily lead to “autocracy.” Lack of effec-
self-funded SMEs are highly independent. When they set up their own business, private businessmen raise fund either through wealth accumulation or joint investment, sometimes even bank loans. This makes them pay more attention to business performance and leads to greater efforts in elevating the company’s profitability.
tive internal and external regulation, feedback, checks and balances against main investors, decision-making in the company is less correct and accurate, especially so when the manager makes ambiguous decisions and his underlings only know of its implementation. The biggest advantage of China’s private sector is its large number of inexpensive labour force. Labourintensive enterprises take up a very big proportion. However, as economy continues to grow and is about to reach new level, private enterprises should get ready and take the initiative to improve their sci-tech innovation ability. Under the competitive pressure of multi-national corporations that boast advanced technologies, without sci-tech innovation, one can be easily defeated by opponents and will suffer from the import and export restrictions of other countries. Therefore, only through improving innovation capability and increasing technological content of products can private SMEs become more competitive and take up more market share. Private SMEs should vigorously improve quality and pay high attention to quality management. They should break the closed management system of family business, better use IT approaches to obtain various management information and set up product quality guarantee system including quality control units with clear responsibilities, procedures and resources etc. It is also important to adopt the most advanced quality standards to the whole process of production from raw material purchase, manufacturing to marketing so as to ensure high product quality. For products already sold but having quality problems, SMEs should take timely remedy measures. Only high quality can win trust and endorsement from customers and better development in future as well. At the same time, enterprises should actively participate in the fight against fake and shoddy goods to help straighten out market order and create a sound environment for fair competition, under which private SMEs can give full play to their advantages and strengthen their competitiveness. They should also learn from western quality management to
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INFOCUS | INDIA-CHINA | PRIVATE ENTERPRISE
India-China cooperation in SMEs
improve product quality and adopt international quality certification to improve their products’ international reputation. Most private entrepreneurs highly value human resources but face serious talent and trust crisis for the time being. The fundamental reason is because of their concept of “capitial hiring labour” as well as a lack of talent incentive system. Competition for talent is a key feature of knowledge economy. But for private business entrepreneurs, not enough attention to talent and cronyism prevent outstanding talent to genuinely integrate into private enterprises. As a result, private enterprises are backward in management and poor in efficiency. To solve this problem, firstly it is imperative to set up modern and new type of management model, with emphasis on improving executive competence, increase their management experience, and give them trainings in marketing, human resources, finance and policies so as to cultivate a contingent of high-calibre private entrepreneurs that know better about business, management and market.
Still miles to go … Anil Bhardwaj
C
Secondly
Private enterprises should recruit talents of various kinds to elevate the overall quality of the enterprise and improve its current human resources situation. It is important to value both internal promotion and external recruitment. While strengthening internal development of talent, attention should also be paid to support externally recruited talent. Use of people should be merit-based, and outstanding talented people should be given more freedom in management so that their talents can be put into full play.
Use of people should be merit-based, and outstanding talented people should be given more freedom in management so that their talents can be put into full play.
Thirdly
They should establish their own organizational institutions and corporate culture. The success of corporate management lies in sound institutions which can ensure the operation of enterprises according to certain procedures and reduce cost of uncertainties.
Fourthly
They should take scientific management methods, use various incen-
tive approaches that are compatible with the corporate culture, formulate scientific and rational regulations and rules, and set up fair, just and complete assessment system to cultivate employees’ sense of ownership and guarantee the enterprise’s long-term stability and development. Private SMEs have an important position in China’s national economy.
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With their own advantages, they have played important roles in promoting economic growth, expanding employment, driving technological advancement and maintaining social stability. They have also satisfied people’s diversified needs, thus becoming necessary and useful supplement to state-owned economy. Therefore, it is a priority for us to solve their difficulties and provide better development environment for them. The remarkable contribution of SMEs in China is immense. They have not only improved social service and strengthened government support but also provided human resources and promoted technological innovation. In the future, they should better cooperate with enterprises across the world to promote common development.
Zhang Weixin is Director General of World Confederation for Small and Medium Enterprises (WCSME) and Executive Chairman of China Privately Owned Enterprise Cooperation Development Association
hina has emerged as a manufacturing powerhouse over the last two decades. The quantum of export of its manufactured goods has risen so rapidly that it has raised concerns in many countries. But slowly the world is coming to terms with China’s rise as well as discovering the potential of one of the world’s largest and fastest growing markets. In India, perceptions about China have undergone substantial change since the early 90s when India embarked on a systemic economic reforms programme in 1991 resulting in massive lowering of duties and abolishing of Quantitative Restrictions (QRs) on imports. The process was accelerated after India’s accession to WTO in 1995. Meanwhile Chinese exports grew rapidly: from US$ 760 million in 1994-95 to US$ 1167 million by 1997-98 and crossed $ 2 billion mark in 2001-02. It took to an even higher growth phase after the complete removal of QR restrictions in India from 1 April 2001. From 1995-96 to 200001, Chinese exports grew on an average of 13 per cent annually and more than 46 per cent annually from 2001-02 to 2004-05! It was during this period that the fear of Chinese swamping Indian industries, especially the small and medium enterprises, was at its peak. It also led to anti-dumping duties on many Chinese products. Till then China was on the radar of Indian traders only, now SMEs also started looking at it seriously. Indian industry, including SMEs, started visiting trade fairs in China and mounting trade delegations. Such enhanced business to business contact was facilitated by a higher level of political engagement: The visit of Indian President KR Narayanan in 2000 to China, Premier Zhu Rongji’s
visit to India in 2002, Prime Minister Vajpayee’s visit in 2003 and Chinese Premier Wen Jiabao’s visit in 2005. In the process, India discovered China which was undergoing tremendous transition: From the major supplier of cheap, mass produced consumer durables, China was emerging as producer of a wide range of sophisticated industrial products and machinery. While in 1993-94, the share of low tech mass produced items such as textiles, footwear etc was over 42 per cent of China’s exports, by 2007 it came down to less than 22 per cent. Simultaneously, the share of exports of machinery and instruments rose from less than 22 per cent in 1993-94 to over 51 per cent by 2007. Riding high on FDI, China strategically attracted technology-intensive manufacturing in number of areas such as electronic/computer hardware, machine tools, robotics, plastics and chemicals among others. The diffusion of advanced technology in China during the period has been rapid and its industry leapfrogged from manual/ mechanical processes to massive automization of operations. Since 2005, Indian industry is taking a more nuanced approach to China: Admiration for some of their better production processes, technology and scale of operations coupled with productive workforce. They realize that with better infrastructure and strategic support from public authorities, Chinese companies can be formidable competitors indeed. But better understanding is slowly leading to spotting of areas of cooperation like never before. FISME – the largest body of SMEs in India has been actively engaging with Chinese companies. It has been sending and receiving a large number of trade delegations annually for many years. According to FISME, while the bulk of Indian MSMEs are still stuck with low productivity and manually operated machines, thanks to large
number of collaborations with Japan, South Korea and Taiwan, their Chinese counterparts have quickly moved from manual to automatic and the genre of machines operated through digital technologies. The number of suppliers of small plants, machines and equipment and the range they offer is mind boggling. FISME has identified huge scope of imports of plants and machines from China for Indian SMEs to help upgrade and scale up their processes. While there is potential in almost all segments, opportunities in a few areas are especially noteworthy such as packaging (for alternative medicines, processed food and cosmetics), rubber and plastics, textiles, machines for garment industry, pollution control equipment, small scale plants for a range of consumer durables among others. Tooling and process machinery for painting, plating and coating also have enormous opportunities. Many Indian companies, even SMEs, are using China as a manufacturing base for exports to other countries. Indian strengths in manufacturing are largely unknown in China; India is largely known for IT software. Also, opportunities for India are currently limited in manufactured exports to China owing to its huge domestic manufacturing base, cost advantages and excess capacities built over the years. More rigorous efforts are required by Indian companies in identifying niches. Exporting to China also becomes precarious because of lack of harmonization of technical standards and absence of Mutual Recognition Agreements (MRAs) between our testing labs. There is a lot of ground to be covered under the ‘Trade Facilitation and Promotion’ agenda by both countries.
Anil Bhardwaj is Secretary General of Federation of Indian Micro and Small & Medium Enterprises (FISME), New Delhi
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INFOCUS | INDIA-CHINA | SME | FINANCE
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SMEs Need to Have More than Courage One of the important factors for businesses’ survival is the availability of a healthy cash flow. Yet for SMEs, maintaining a positive cash flow is often far from their reach. |46|
S-trained chemist Wang Xiaochuan’s Sundia MediTech Company Ltd—a private, Shanghaibased clinical research firm—enjoys brisk business even during tough times, thanks to a continuous flow of contracts from renowned drug-makers, partly boosted by the recession-proof pharmaceutical sector. What was started six years ago by a group of Chinese returnees who are medical practitioners—and was once considered ambitious, new and daring in China—is now a much sought-after business model. Global drug-makers are known for outsourcing research for drug discoveries to contract research organizations. As a contract research organization, Sundia’s services help drug-makers slash costs up to three-fold when compared to their peers in the United States, Wang claimed. Stronger-than-expected growth of new clientele ensured Sundia’s revenue to jump 50 per cent last year alone, up from its annual average of 30 per cent. Currently, Sundia employs 500 skilled workers, has low staff turnover, is debt-free, enjoys robust orders from its multinational clients and has a strong, professional management team from diverse backgrounds, Wang claimed. Figuratively speaking, this success story from a small company is one in a hundred in China.
How much is enough? To date, China has over 50 million small-and medium-sized enterprises (SMEs), which account for 80 per cent of the country’s jobs, 60 per cent of gross domestic product (GDP) and half of the national tax revenue, according to the Ministry of Commerce. One of the important factors for businesses’ survival is the availability of a healthy cash flow. Yet for SMEs, maintaining a positive cash flow is often far from their reach. Despite government measures to assist SMEs, the amount of funding and further tax reductions continue to nag officials. Take for example the well-known 7 billion yuan (US$1.03 billion) Torch Project and InnoFund set up by the Ministry of Science and Technology to help technology-based SMEs develop and commercialize new technologies. “The size of the fund is clearly too small for this huge country with millions of qualified technology-based SMEs,” said Ge Dingkun, assistant professor of strategy and entrepreneurship at the China Europe International
Business School (CEIBS). He suggested a common practice among foreign private equity firms and venture capitalists. “The government could have funds for different technological fields, for different industries and for different development stages.” However, the key challenge is to ensure the effectiveness and efficiency of the usage of these funds by SMEs. “I have locally developed technologies that are cheaper and can rival the quality of foreign companies, and I provide employment to China’s best,” said He Yuanping, chief financial officer at Beijing OriginWater Technology Co Ltd, a water treatment services SME listed on the Shenzhen Stock Exchange. “Government support usually goes to state-owned enterprises, universities and research institutes. But who is really at the forefront of the economy?” he asked. Beijing enacted a slew of expansionary fiscal and monetary policies last year to counter the impact of the global financial crisis, including generous tax reductions for SMEs, making it easier for them to get loans. All these measures seem to have brought China through the impact of the global financial crisis as the
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INFOCUS | CHINA-INDIA IT SECTOR | REPORT
country recorded GDP growth of 11.9 per cent in the first quarter this year after 8.7 per cent growth in 2009. Hidden gems While the majority of the SMEs are in the service sector, the downside is their difficulty in obtaining loans from banks. Due to the nature of the service sector—that thrives on talent, innovation and being asset-light—SMEs in this important sector couldn’t possibly show strong collateral, such as fixed assets, to banks. “Being asset-light is good for efficiency but not good for loan approval,” said Patrick Chovanec, associate professor of the International MBA program at Tsinghua University. “Ironically, it’s like punishing those who are innovative and efficient when a lot has been spoken about the need to improve the service sector,” he added. “The least efficient businesses usually get funding because of their heavy assets.” Many SMEs blame Chinese banks
for acting like government agencies, pushing them to become more marketdriven commercial entities. But China Europe International’s Ge thinks otherwise: Lending to SMEs poses much greater risk of loan defaults for banks. “The solution (is to) improve the lenders’ knowledge, skills and ability to discover, assess, price and manage risk inherent in making loans to SMEs,” he said. Chovanec said partnering with foreign banks will help Chinese lenders improve their product range, develop local skills, improve credit ratings and become more commercially-driven. On the flip side, SMEs’ financing problems have a boom in investment opportunities for foreign private equity firms and venture capitalists. These firms are trying to deploy as much money as possible in China because of the growth opportunities. And discovering businesses that have good growth potential is key in the private equity and venture capital businesses. Major private equity firms such as Kohlberg Kravis Roberts & Co recently said it aims to raise US$800 million to invest in Chinese companies. Texas Pacific Group invested over US$30 million in ShangPharma Corporation, a Chinese pharmaceutical and biotechnology research and development outsourcing company.
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In February, Carlyle Group partnered with one of China’s largest conglomerates, Fosun Group, to form a yuan-denominated fund to invest in emerging Chinese companies. Chicken or egg? While China focuses on pursuing technological advancement, a shift to develop stronger soft skills is equally important compared to technological skills. “Technology and/or the product are only a small piece of the puzzle to being profitable. It takes leadership, managerial skills and strategic planning skills to turn an invention into a product and a product into a profitable company,” said Ge, who is also an entrepreneur. For He, both technological and soft skills are important for Beijing OriginWater, but a skills shortage and rising labour costs stand in his way. “These (issues) give me headaches every year.” SMEs also feel they are not equally protected by the law when compared to large companies such as state-owned enterprises. Damage claims or legal disputes involving SMEs which usually entail small amounts, cannot be legally addressed, as China doesn’t have a “small court” system. (Courtesy: China Daily)