Have you got guanxi? The top five barriers for SMEs exporting to China
Tuesday, July 15, 2014/
Compliance costs, a lack of resources and difficulty in creating personal networks are among the biggest challenges faced by SMEs when exporting to China, according to research from the Victorian Employers’ Chamber of Commerce.
VECCI Export Services says knowledge of the local market and an understanding of the local culture and language are also barriers for Australian SMEs doing business in China, which VECCI says is home to 300 million middle-class citizens.
The challenges faced by SMEs looking to export to China has led VECCI Export Services to establish the China Ecommerce Platform, an online platform for Victorian exporters of non-perishable food and beverage in partnership with Shanghai-based Yiguo E-Commerce.
Patricia Griffiths, head of international trade for VECCI, told SmartCompany while VECCI has been building relationships in China for 19 years, the association started looking at trends in the Chinese marketplace over the past two years to find a way to help small exporters dip their toes in the water.
“Over the past two years, we started to look at trends at what was happening in the middle class and also purchasing power, and how people buy things,” says Griffiths.
“And more and more we started to recognise more Chinese with middle incomes are doing exactly what we’re doing: looking online to buy,” she says.
“They are time poor, they have young families, and they want the ease of having exactly the same way of doing things as we have.”
Griffiths describes the VECCI platform as “a boutique ecommerce platform”. “We want to help [exporters] at low cost and low risk, and potentially give them a bit of brand recognition,” she says.
Businesses which sign up to the platform are required to initially send a small sample of their products—a pallet or two, says Griffiths—which is then tested by Chinese consumers via the Yiguo platform. Things like labelling and packaging are also tested and if the products get the tick of approval from Yiguo, it is full steam ahead for orders to be placed.
While joining the platform costs businesses an annual fee of $7,500, and the stock is supplied on consignment so there are costs associated with insurance and freight, Griffiths says participating businesses should see the annual cost as part of their marketing spend. They also have the benefit of VECCI “holding their hand” through the export process, she says.
And it’s not just Victorian SMEs set to benefit from the platform, with Griffiths indicating VECCI will work with chambers of commerce in other states to expand the platform down the track.
The top five challenges for Australian business exporting to China, according to VECCI:
1. Contacts and networks
VECCI says business in China is very much built on networks and ‘guanxi’ or relationships. And without these relationships, long-lasting business partnerships are near impossible.
“You have to understand relationships,” says Griffiths. “It doesn’t matter what it is you’re selling, you have to understand the relationships you have and how you work those relationships.”
2. Chinese market knowledge
While there are more than 1.35 billion people living in China, a large population is not the same things as a large market for your product, says VECCI. Businesses need to first ask if their product will be suitable for China, and if so, where the best place within the country to focus their attention is.
“You look at the size of the Chinese population, but you need to separate it from the size of the market,” says Griffiths. “It’s a huge population, but which part of the market is most suitable? Again it’s another hurdle that you’ve got to try to address.”
3. Compliance and local logistics
VECCI says understanding how to do business in China is also one of the major barriers for SMEs looking to export their products to the market. Everything from red tape to the role of government in business can be difficult to decipher.
“Just even getting products into China is not straightforward,” says Griffiths. “The products can leave from here and get to the port there, but they’ve got quarantine areas and they do health checks. Things that might leave here and are right … by the time they get to China it might be something they reject.”
Griffiths says there are specific requirements for how products are labelled in China, and having to relabel products can be a costly exercise for exporters. Businesses also need be aware of potential hazards when using agents, distributors or freight forwarders who do not necessarily know their products well, says Griffiths.
“If you look at traditional exporting, you usually find a distributor and an agent. And that’s fine but if the distributor is buying your product, keep in mind they potentially have your competitors’ products there too,” she says.
“Are they taking your product to push it out to the market, or are they taking your product to stick it at the back of a warehouse and not necessarily drive it? So yes, you’ve got a sale and you can say ‘I’m exporting to China’ but how much brand recognition are you getting? How much of the market size are you capturing?”
“And that’s really hard for a small exporter to work out from here, unless they’ve got someone to hold their hand and try to pave the way,” says Griffiths.
“And then if they do get brand recognition, do they need to get intellectual property protection? And do they really need to look at their branding? Do I need to start protecting [my brand] from the beginning or wait and see how it goes? And how am I going to do that and who is going to help me?”
4. Budget and resources
Exporting is never cheap, and trying to crack the Chinese market is no exception, says VECCI.
“China is no different to any other market,” says Griffiths. “You’ve got to spend money to make money. But when you are talking about small exporters, how are they going to do that? Where is the right place to spend?”
5. Culture and language
Similar to the need to build local relationships, VECCI has found a lack of understanding of Chinese culture and language can also make tapping into the Chinese market difficult.
This is especially true when it comes to misunderstandings in business negotiations or miscommunication, says Griffiths.