In Germany, many small and mid-sized enterprises (SMEs) are often viewed as the backbone of the German economy. With fewer than 1,000 employees at the headquarters and a maximum annual turnover of 100 million euros ($ 134.8 million) worldwide each, SMEs may not yet be popular names, but their contribution to the global economy can not be ignored. Their expanding presence in China indicates their growing importance.

To estimate the development of German SMEs in China, German Industry and Commerce Taicang Ltd conducted a survey of more than 270 German operations including wholly owned foreign enterprises (WFOEs), joint ventures (JVs) and representative offices (ROs). The findings of the survey provide a unique opportunity to have a deep look into how German companies do business in the world’s first emerging market.

Success in China

German SMEs achieve success in China. Of all respondents, 80 percent say they have made their goals. Production companies break even within an average of 4 years, while trade and services break even within an average of 2 years after entering the market.

China continuously ranks first in the global business’s list of future prospects. All through ten years, SMEs comprised 20 percent of German companies in China. Four years ago their share rose to 53 percent.

The promotion for this trend is that the key customers moved to China and provoke a domino effect. SMEs suppliers establish operations close to their customers’ Chinese subsidiaries. The advantage of being prepared to solve potential problems sometimes plays a decisive role in sourcing decisions in China. A percent example of this effect is the scaled economies developed in cities and regions such as Taicang in Jiangsu province, which boost, promoting over 80 German companies.

Both the number and nature of German companies is changing. Traditionally dedicated to heavy manufacturing for export, German companies are shifting to the service sector. SMEs dominate these trading, logistics and consulting companies sectors.

RO, JV or WFOE?

With China’s market growth, more and more companies have expanded from a RO to a WFEO or JV, with WFOE being the most popular trend. The proportion of ROs has decreased from 50 percent in 2002 to 27 percent in the latest survey. The WFOEs has taken 80 percent of the companies with two years or less market presence. The push behind the transition are the growth of the domestic market calling for a stronger presence, and the modifications to China’s foreign investment regulations, which used to limit a JV to operate in China, now allow companies more freedom.

WFORs more often report their satisfaction with their legal framework than JVs. Eighty-six percent of WFOEs respondents said that they would stick to their strategy while only twenty-four percent of JVs take their strategy as the best choice. As a result, the trend of increasing number of business entering China as a WFOE will continue and climb.

Contrary to the common perception in the West that companies shift to only to exploit lower cost structures and export back to Europe and North America, most companies produce in China for the Chinese market. According to the survey, only 28 percent of German SME production in China is oriented for export, with many of them going to other countries in Asia.

Localized production

China’s domestic market is the current growth sector for most German SMEs, especially the young generations, sometimes names as “Little Emperors”, aged 35 and younger. This generation, many of which are only-children, is well qualified to consumerism and more open to new products unlike their comparatively conventional grandparents. Smaller families mean more women with more working time and lower costs, resulting larger household incomes.

The convenience of the on-site production enables German SMEs to compete with their Chinese rivals more effectively. In the survey, 75 percent produce goods on site, and 71 percent make domestic sourcing in China. Local content share ranges from 25 percent to 100 percent, with 56 percent marking the average. Generally, companies with longer years in China possess more local content. This strategy allows SMEs to keep prices closer to domestic levels.

Like all consumers, the Chinese want the goods providers to gear to their taste and needs. German SMEs are applying this more than ever, with 38 percent adapting their products to a great extent to meet Chinese customers’ expectations. Nearly 18 percent of respondents claimed that they do even more to adapt in low-price segments.

As German SMEs are growing more experienced in the Chinese market, they gradually transfer operations to their Chinese subsidiaries. However, they still put great importance on remaining corporate culture and contacting with the headquarters. Moreover, sensitive items such as strategic decision-making and R&D are closely overseen by the German headquarters. For example, only 32 percent of SMEs undertake a part of their R&D in China.

Are you interested in the business opportunities in China?

China is one of the world’s great growth markets and is likely to be for many years to come. Foreign companies often face difficulties in assessing Chinese market demand and enacting effective strategies because of the language barriers, culture differences, and high expense.

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bright, China, future, German, SME