Now is the time for small businesses to consider entering China, at least according to Mark Whistler, coauthor of Investment U's Profit from China.
"It's as simple as GDP," Whistler says. In China, "you're talking about an economy growing 200% more than the U.S.," and with more and more Chinese companies competing for U.S. business, "communication and product quality have never been better."
Continued globalization, along with more dependable and efficient businesses in China, have spurred the savviest of U.S. corporations to take up a presence in the Asian country.
"Small-business owners who haven't looked into the possibility of moving or contracting to China could simply be missing a great opportunity," he points out.
recently asked Whistler more about this huge potential for small businesses.
TheStreet.com: What are the benefits of a small business looking to enter the Chinese market?
: Before the new millennium, China was difficult to tap for small businesses. But with its membership to the World Trade Organization in 2001, China has made much progress toward opening trade and business lines for huge multinational corporations and small businesses alike.
Second, the blistering growth of China's middle class ... is creating a surge of consumer spending that rivals any other country in the world. Case in point, sales of mobile phones in China increased 40% year-over-year in 2006. Because China was late to the party in terms of imitating American-like spending habits, residents are now lustfully coveting consumer goods.
With more than 1.3 billion consumers, China's numbers speak for themselves, and given that the savings rate in China is somewhere around 30%, there's plenty of expendable cash to go around. Keep in mind, it may be hard for many businesses to capitalize on this pool of consumer cash unless their products or services have a low enough cost basis to compensate for product pricing and exchange rates.
Third, the low cost of labor, plain and simple. For manufacturing, China's hard to beat. Goods are inexpensive, and labor is even cheaper.
Finally, corporations in China are great avenues of revenue for American small businesses ... through the brokering of goods and services, or through direct sales. For example,
, a company formed by two ex-Goldman Sachs bankers, grew from $500,000 in 1999 to the present market cap of $109 million. The company provides consumer wireless solutions, products and services to people in China.
What types of companies do you think would benefit the most there?
Manufacturing, especially for electronics-related products. Small businesses really have a huge advantage given the scalability of manufacturing runs.
One of my good friends in Colorado, Tim DePumpo, owns a small private electronics manufacturing business with annual sales of just under $1 million. He's been contract manufacturing in China for nearly five years, but also still manufactures products in the U.S. as well.
He recently told me the quality and ease of communication is truly there in China. He mentioned there's virtually no downside in contracting in China. ... the only exception being the volume required for China-based companies to consider even doing the run. He asserts that even the smallest businesses can benefit, if the dollar/volume is there.
He said a few years ago, things were risky, and if you were doing business with a company sight-unseen, there was plenty to be worried about. But now the communication, infrastructure and trust are there, so American small-business entrepreneurs can do business without ever stepping foot in the country.
Are there any public companies whose example a small business would be able to follow?
Sure, take a look at
Watts Water Technologies
. The company manufactures water valves and flow-control products and is the single largest supplier of home-plumbing equipment to
. Chances are, if you've made a weekend trip to Home Depot to buy something for your leaky faucet, Watts had it made in China.
Watts first began doing business in China in 1994, and now the company not only makes products in China, but sells them there, too. In the recent fourth-quarter earnings announcement, the company stated that China segment sales increased a staggering 89% year-over-year.
Smaller companies can simply study Watts manufacturing-plant acquisitions in China over the past decade to see how the company went from contracting in China to being a significant owner of many plants. Really, Watts is a sort of guidebook for smaller manufacturing businesses that hope to grow in China and on a global level.
What are some of the governmental restrictions a small business might face?
If a business is to do more than just contract China manufacturing and services, often the incorporation process can be pretty easy. But there are location-specific governmental issues to contend with.
For example, if a small business would like to become a Hong Kong private limited company, the company secretary must reside in Hong Kong proper, or at least have a registered address in Hong Kong. To avoid this issue, many small businesses often set up joint ventures with local Hong Kong entities.
Any other nongovernmental challenges or risks?
Plain and simple, the threat of having a product or idea ripped off. ... Chinese citizens and companies struggle in a very competitive environment, and thus, both workers and companies have been known to appropriate foreign ideas or product designs, and then either work for another company or simply use the idea themselves.
Though this troublesome issue is starting to find some help from the state council, it is a problem that persists. The PRC made a large step forward in 2001 with the Agreement on Trade-Related Aspects of Intellectual Property Rights
TRIPs Agreement, but for full protection, U.S. companies must file trademarks with the Chinese Trademark Office
Despite the CTO, software, technology and manufactured goods are still particularly worrisome. While those affected can seek protection through both administrative and judicial avenues, resolution can be lengthy.
Can you explain specifically what a company would need to do in order to move to China? What resources and how much capital would it require?
Well, you're really talking about two things here: complete relocation and/or setting up a Chinese subsidy, or simply contracting in China. Relocation or setting up a subsidy definitely takes a significant amount of time and resources, including almost certainly a trip to China.
However, if a company is simply planning on contracting in China, the game becomes significantly easier.
It's tough to put a dollar amount on how much capital a company needs to do business in China. To contract a manufacturer, it may only be a couple thousand dollars. To move an entire small business, it could be hundreds of thousands of dollars.
I would definitely recommend at the very least talking to a consulting firm. A consulting firm similar to Rhode Island-based
China Strategies is preferable, as the company has offices in both China and the U.S.
What's more, by going through a reputable consulting firm, small-business owners benefit from the pitfalls of those who have gone before them. Experience is knowledge, and reputable consultants should have plenty of it.
Is there anything else vital for small-business owners to know?
For those who would like to do ... their own research, the
Hong Kong Trade Development Council has a great Web site to help businesses, including finding China-based companies to work with, along with providing small-business resources..
Trade Information Center of the U.S. Department of Commerce is a must-see for anyone thinking about moving or contracting to China.