SMEs Invest in China

Feature Article | August 24, 2005 by SAP News

Following the lead of the multinational corporations, SMEs are now also discovering the benefits of selling to the Chinese market. A typical example of a well-considered investment of this type is Beumer Maschinenfabrik from Beckum. “Our task is to further develop awareness within the company that the unknown represents a fantastic opportunity,” says Dr. Christoph Beumer, Chairman of Beumer Maschinenfabrik, which is a leading manufacturer in the field of conveying, loading, palletizing, packaging, sorting, and distribution – systems targeted predominantly at the logistics sector. Sales at Beumer are currently around €100m and increasing sharply. Their overseas business accounts for 90 percent of sales. This fall, Beumer, which also has branches in Australia, Brazil, the UK, France, India, Poland, the USA, and Thailand, will start production in the Quingpu industrial park in Shanghai with an initial staff of 50.
The investment decision is based on a detailed feasibility study. As well as customer proximity, a key factor in the selection of the location was the fact that important and valued suppliers who had a proven track record in Europe had set up in the region, and the availability of logistics and transport routes was also taken into account. On the Chinese side, the fact that Beumer will recreate the company’s entire value-added chain at the new site in the course of the project was particularly welcomed.
In this case, the issue is by no means moving about existing jobs out to China, but instead using the company’s presence in the region to create growth for the group in an increasingly important market. “That also boosts our position among international competitors and ultimately strengthens the parent company.” In other words, Beumer, as a global company, wants to generate value added as close to the customer as possible. “In doing so, we will be utilizing the compatibility of processes across all companies of the Beumer group and their complete integration into our IT structure.” This also ensures that the uniform global quality standard is also transferred to the new Chinese subsidiary.
In China, the company’s products are entering a market in which logistics are playing an increasingly significant part. While for a long time logistics and logistics services failed to keep pace with rapid industrial development, the potential slumbering in transport, goods handling, and distribution has now been recognized in China, too. And it is not only international corporations who can benefit from this – midsize suppliers can also establish a firm foothold, provided they prepare well.

China still the fastest-growing economy

For some time, the People’s Republic of China has been the fastest-growing economy in the world. It is now almost twice as large as that of India or Russia, and also outstrips Japan based on purchasing power parity. Official Chinese figures state that GDP has grown from around US$147 billion to US$1,650 billion since the beginning of the policy of openness in 1978. In addition to this, the volume of imports and exports has exploded.
Despite a number of problems, such as the extreme contrasts between urban and rural areas or the constant danger of the economy overheating, China’s competitiveness is growing. It now ranks on a par with Japan, the UK, or Germany. Further, China’s accession to the WTO will make this market even more attractive. It is therefore no surprise that direct foreign investment in China is also increasing and exceeded the US$50-billion mark as early as 2003.
So there are a number of reasons why setting up branches, subsidiaries, or collaborations should be a high priority for German SMEs, too. A study by Deloitte & Touche from 2004 concludes that the potential for growth for European SMEs is considerably higher in China than in Eastern Europe, Brazil, or India. According to the study, more than 70 percent of the 165 companies surveyed had already developed a China strategy.

Market entry hindered by scarcity of logistics services

However, one obstacle for newcomers to the market continues to be the inadequate infrastructure and the current scarcity of logistical services. “The correspondingly high share of logistical costs in the value-added chain is increasingly putting a brake on the further development of the Chinese economy,” explains Dr. Thomas Wimmer, Chairman of Bundesvereinigung Logistik (German Federal Logistics Association, BVL). “While the share of logistical costs in Germany’s GDP is around 7.2 percent, in China it is somewhere in the region of 17 percent.” According to pertinent estimates, transport and warehousing costs make up around 30 to 40 percent of the overall costs of manufactured goods – and that’s with extremely low transport prices. Wimmer forecasts continued price increases in double figures for logistical services in 2005.
The key political and economic actors in China have now implemented policies to avoid bottlenecks and have also set themselves the goal of optimizing the way in which logistical processes are managed. The demand for corresponding systems and services will increase rapidly in the wake of this development. International logistics service providers, such as DHL, TNT, FedEx, and UPS, have already set up a number of bases in the region. FedEx, for example, is now represented in some 190 cities. UPS has been able to fly directly to China since 2002. China Post, currently one of the six largest logistics companies in the world, has concluded agreements for the delivery of goods with key foreign companies. The aim is to establish a dominance on the domestic market in conjunction with partners, instead of forcing them from the market.
The key factors in terms of entry strategy are the selection of the market or location, the time of entry, and the form of establishment. Particular attention should be paid to the final factor. Up to now, only joint ventures with a Chinese majority share were possible in the transport and logistics sector. In future, fully foreign-owned companies will be authorized. The advantage of this variant lies in the fact that the investor has full control. The disadvantage is the lack of a network of relationships and the barriers to communication with public authorities and staff.
“If the decision goes in favor of a cooperation or a joint venture, cultural factors also play a significant part alongside the usual criteria such as capital resources and staff selection,” says Prof. Hans Christian Pfohl, head of the Management and Logistics Department at the Technical University of Darmstadt and member of the BVL board. Building up networks (guanxi) is extremely important. This means that close attention should be paid to the quality and quantity of a potential Chinese partner’s contacts. The bottom line is that, in a context of sustained economic growth, the Chinese logistics market also represents an excellent opportunity for midsize market newcomers. “What is absolutely fundamental in this case,” says Dr. Wimmer, “is that here, like other markets, early entry to the market opens up great opportunities – provided you accept local peculiarities and make sure you observe them.”

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