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.
|42| India-China Chronicle November 2011
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
November 2011 India-China Chronicle |43|