1970-01-01 08:33:27
The curtain rises, and a new breed of companies comes to the center stage. This time it is not the well-known behemoths of Chinese industry, it is tens of thousands of smaller and nimbler companies: the small- and medium-sized enterprises (SMEs).
These companies will soon represent two-thirds of China's gross domestic product, and three-quarters of its GDP growth: nobody can overlook them any more.
Conquering those Chinese SMEs is increasingly high on the priority of many companies - foreign as well as domestic, for banks as well as for IT companies and industrial goods players. Companies are fighting for SME-experienced sales teams, forging new partnerships with local distributors and dealers, and launching new "SME products".
But making business with those SMEs is very difficult: price levels tend to be very low and distribution depends on expensive and dense sales networks. No surprise then that the SME market generally appears underserved. The Boston Consulting Group has researched the SMEs in China and found three fundamental patterns:
While SMEs are a huge factor especially in China's industrial sectors, most of them still are "sweatshops" with very low labor productivity.
There is no such thing as the typical Chinese SME. Segmenting them intelligently and then going after the most promising segments is vital.
Success with SMEs depends on executing a "four-point program": adapted value propositions, local reach, innovative sales and distribution systems, and low-cost operational models.
The share of SMEs in the Chinese GDP grows from year to year. They are mostly industrial, wholesale and retail companies, entrepreneur-driven and privately owned, and strongly concentrated in the eastern and southern boom provinces.
But while they are the powerhouses of the economy, most of them share a similar problem: very low productivity. While labor productivity has already reached much more than 50,000 yuan per employee/year in large enterprises, it's still about 30,000 yuan for the SMEs - with an ever-widening gap.
Why's that? As many of the industrial SMEs started as local low-cost suppliers of larger enterprises, they tend to stay very traditional in their behavior. Two examples of this behavior:
They are using loans much less to finance new assets: While large enterprises generally have loans of more than twice their revenues, SMEs have less than half of their revenues in loans.
They only invest about one-third as much money into IT than large companies, and nearly all of that into hardware.
But these general statements need a qualification - there are huge differences within the SME population, leading to the necessity to carefully segment them: by size groups, by industries, and by geographical areas.
The IT industry illustrates this. Large companies have already significantly changed their buying behavior: more professional decision criteria and buying processes, resulting in an increasing propensity to purchase world-class software products and brands despite higher costs.
These SMEs name "expected effectiveness and efficiency increases" and "gaining operational control" as their top two reasons for increasing the use of IT. A failure to serve those SMEs differently from the rest will fundamentally reduce chances of success.
On the basis of this segmentation, most companies will need to set up a structured program to build that business. This program has four pillars:
Rigorously defining your value proposition: an explicit definition to differentiate your company in the market is necessary.
Going local: while many SMEs might have to be served indirectly, vendors need to build strong local capabilities - for distributor/dealer management and support, and for the understanding of specific conditions in regional and local markets.
Finding innovative sales and distribution models: many traditional ways of reaching out to SMEs are not appropriate.
Managing cost: even if a company does not try to differentiate on the basis of the lowest prices, the lower price points in the SME business will require the development of lower-cost models.
Christoph Nettesheim is a senior partner and managing director in the Beijing office of The Boston Consulting Group, Xinyu Li is a project leader in that office
Source: China Daily