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Does size really matter? The ups and downs of owning a small business in China

The dream of business growth is often seen as a desirable progression as

part of a company owner’s long-term business plan. But some business owners

prefer to keep their business in China small because they see far greater

benefits in running very small ventures from so far away. But despite the

apparent benefits of micro firms, keeping your business small can be a major

barrier to growing your profits. So, is there any good reason not to grow

your business in China if you can acknowledge and mitigate the disadvantages

of growth? Here we identify and discuss a few of the key points.

1. Overheads:
It might seem an obvious point, but the fewer employees you have, the lower your wage bill and the lower the cost of business premises or office space. In short, your monthly outgoings are reduced, and you can hold on to more of the profit. In addition, a leaner organization means you can operate the business more efficiently, and with the flat management structure characteristic of a small business, decisions can be made quickly, giving your new China venture the flexibility to adapt quickly to market forces, a luxury most larger companies lack. And here in China, it would seem many foreign-invested companies recognize those advantages: whether they’re on their way to higher growth or choosing to remain small.

The Chinese government can provide benefits to smaller foreign investors in China by giving tax incentives, for example. But this assistance exists to help entrepreneurs establish new businesses, not to restrict their future growth. And the reality is that a small staff and lower overheads aren’t always advantageous: staying small may give you those efficiencies in your management structure, but if you never grow, not only will you be limited in the size and scope of the business you can take on.

In addition, you’ll also never be able to take advantage of the economies of scale enjoyed by larger businesses and your venture will suffer higher costs. And this affects your purchasing power, too: larger organizations can keep unit costs down by negotiating lower prices for large volumes, thus giving them those economies of scale elusive to so many small businesses in China. And with virtually every cost your venture takes on, from healthcare to telecoms, the larger the company, the greater the scope for negotiating costs downwards. In short, whether you’re providing a service or a product, your unit cost is always likely to be higher as a small company in China.

2. The ups and downs of hiring talent:
The draw of being closer to the customer or client is attractive to many employees, and staff who enjoy being part of a small team can often be rewarded with close communication and collaboration with the business owner, as well as the satisfaction of being able to input ideas and deliver new services or products to market much faster as a result of fewer decision makers. This gives the business owner a distinct advantage over larger competitors and allows you to be nimbler in correcting any service or production issues. Furthermore, keeping your business small means you can be quick to adapt according to feedback and quick to handle any negative PR more effectively.

But there’s a drawback: even though many small businesses offer non-financial perks as well as the opportunity to stay close to the creative and decision-making process, the inescapable truth is that, in most cases, larger companies in China can afford to pay employees more and are therefore more likely to attract the best talent. And the key takeaway here? You’ll only ever compete in the Chinese market for top talent if you’re constantly striving for growth.

3. Markets & finance:
Small companies, in order to thrive in China, often position themselves in niche markets where they are unlikely, at least for a while, to be troubled by larger competitors. It goes without saying that a small company operating in an established mass market presents difficulties with more intense competition. But niche markets can offer what economists refer to as a ‘price inelastic demand’, meaning that demand from customers or clients will not change, regardless of whether the price falls or rises. That means that small businesses operating in niche markets can charge a higher mark-up, which in turn allows them to be more profitable, despite lower volumes.

But is that sustainable? The downside here is that you may only be successful in your niche market for a short time. When larger organizations come along they can compete on price because their size allows them to take advantage of economies of scale. And if you decide you want to scale up your business to keep pace with your competitors, you’ll need finance to grow.

And that presents another problem for a small China business owner. Whilst larger and established SMEs can use their track record and growth to help secure further finance, for small businesses, bank finance, where available, can be expensive. And if you can secure investment from angel investors or venture capitalists, business owners will often have to surrender much more equity in their venture than they might otherwise have liked. In short, the bigger and more established you are, the less the risk you represent to potential lenders.

4. The personal touch vs. name recognition:
Bringing with it a heightened appreciation of the value of each customer in China, the personal touch can give a a small boutique business a competitive advantage over bigger rivals. For a start, they’ll know that your company’s staff will have detailed individual knowledge of each and every client and are likely to see a client through every stage of their engagement with your venture. Why? Because when staff members in China in a small business are closer to the customer, they have more of a stake in that transaction and assume higher levels of responsibility, and the upshot of that is that they’re much more likely to show higher levels of engagement.

And that personal connection to the China client or customer can really pay dividends: ‘the consistency inherent in SME staffing can save clients a great deal of valuable time in the long run as there is no need to repeatedly spell out their requirements every time they contact the firm.’ And what does that consistency bring? Primarily, it translates into repeat business. After all, customers you’ve formed a close connection with are more likely to trust your fledgling brand and more likely to choose your venture again, keeping potential competitors at bay.

But there’s a downside here, too: the bigger your business, the more money and time you can spend on brand building and marketing in China. And when you as a business owner spend the majority of your time at the coal face of your business, liaising with and selling to customers, you’ll have little time to develop your brand. The key takeaway here? You don’t have to sacrifice the loyalty of existing customers in order to appeal to a wider market, nor should you.

Small fry or big fish
Whichever camp you fall into, as many companies in China who have been through the growth phase will attest, it always pays to remember how you did things as a small business, and why they were important at that time in your China start-up phase. The advantages of staying small therefore don’t have to be eclipsed by growing your business and your profits, and with the right advice and careful planning, you might just be able to achieve the best of both worlds.
 


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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

 

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