Promised Land

The Advantages of Being Small

Smaller companies face difficulties in China, but they possess several advantages, says Ming-Jer Chen, an expert on Chinese business at the University of Virginia in Charlottesville. "Small companies operate below the radar of government officials-certainly below the radar of central officials in Beijing, and they less often go head-to-head with big Chinese companies favored by the state," Chen says. "So while a Disney or a Microsoft might have to spend huge amounts handing out favors, smaller companies do not have to do so much wining and dining."

Since entrepreneurs usually escape the government's notice, they are less obligated to locate offices and factories in areas favored by Beijing. When Honda decided to build a new auto plant in China in 2002, it allegedly came under intense pressure to erect the factory in Guangdong, a southern province that the government wanted to develop. The area is far from a port that could handle car shipments, automobile industry experts say, but Honda shouldered the increased cost and set up shop there.

Bruce Wang tells a different story. "There's always some element of dealing with the government in any country, but we have as much freedom to compete as we would in the U.S.," says the 48-year-old co-founder of NewTone Communications Corp., a $6 million software company with 140 employees, an office in Shanghai and a virtual office in Silicon Valley.

Derek Sulger, co-founder and CFO of Intrinsic Technology, a Shanghai mobile telecom service provider founded in 1999, agrees: "For a small private company, China is quite an open place."

Because smaller firms also have fewer resources and less ability to absorb losses, they tend to focus more on short-term profitability in China. "Companies like Anheuser-Busch or GM always talk about how they're losing money now because they want to be heavily invested in China for the long run, so when the market grows they will have established their brand," says Kathleen Ng, an expert on business practices in China who works in Hong Kong. "But that market could be 20 years from now, and by then, local companies might be more powerful, or the shape of the industry might be totally different."

What About Chinese Competition?
You may want to compete with Chinese companies in China, but what about in the US? Read Are Chinese Companies a Threat to Your Business? to learn more.

Conversely, says Johnson Shen, founder of Chic Logistics, a $4.6 million Shanghai-based transportation company with funding from American VCs: "We were profitable last quarter, only three years after we started up, because we don't have the luxury of not being profitable once our VC funding runs out."

"I stick to the basics of business," says Kushner. "I expand when it's financially possible, and I make a profit on my orders because I can't afford to have a grand China plan for making money in 2020."

Most smaller companies also keep their overhead costs lower by minimizing the number of expatriate staff, who usually require "expat packages" that can include company-provided housing and even a driver so they do not have to navigate China's chaotic streets themselves. "We thought about bringing in more expatriates, maybe a CEO-type with experience running young telecom companies," says NewTone Communications co-founder and CEO Howard Li, 49. "But it wasn't worth setting someone up with expatriate perks, because they wouldn't necessarily have more knowledge than local staff who know how to operate on the ground, which is crucial in China." And local talent is cheap, though it can be hard to retain Chinese managers: Wages for local professionals are roughly 20 percent less in China than in India, China's major competitor for foreign investment.

Keeping salaries down allows smaller firms to operate more flexibly, a key to surviving in a place where long-term contracts are rare, deals are sealed with a handshake, and Chinese factories seem to open up or close down overnight. "You have to have more trust in your local partner here because you cannot rely on the courts, and you have to be able to change your plans incredibly quickly," says George Man, vice president and general manager of sales for the Asia-Pacific region for Phoenix Technologies Ltd., a San Jose, California-based software provider with 30 employees in China.

"You must become part of the local ecosystem in whatever city you are in [in] China," says Albert E. Sisto, Phoenix's CEO, chairman and president. "You have to be seen as close to local partners and knowledgeable about local trends-otherwise you will not get respect, and you're more likely to have your products copied."

In fact, even bigger firms are considering using local staff more and emphasizing flexibility. "The multinationals investing in China the right way are using hungry local guys or expatriates who are comfortable in China and can live without some of the special benefits," says Roy Bagattini, managing director of SABMiller China, considered the most successful major foreign brewer in the country. "We don't want everything dominated out of our headquarters in Beijing-we want to have a few expatriates out in the field at our brewery sites and competent local managers."

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This article was originally published in the January 2004 print edition of Entrepreneur with the headline: Promised Land.

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