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.

BPOVIA is the leading virtual assistant and Knowledge process outsourcing (KPO) service provider in China. BPOVIA is the only virtual assistant company ever been nominated for the prestigious “Red Herring 100 Asia” Awards 2008. Combines international perspective with local know-how, BPOVIA can provide our clients China business development service and help our clients doing successful business in China.

Please visit http://www.BPOVIA.com/ for details about our service.

Hartmut Rauen, managing director of the Power Transmission and Fluid Power Association within German Engineering Federation (VDMA) said that the world’s second largest exhibition held annually is considered as an important opportunity for German companies to enter the huge Chinese market.

“If you look to the actual PTC ASIA, you will find a lot of successful joint ventures between Chinese and German companies with a long history,” he said. “We expect for 2008 again that we will have together with our Chinese partners a successful show.”

The four-day fair this year started on Oct 27th and ended yesterday displayed over 1,300 projected exhibitors, including member companies from VDMA, which showcased the latest technology for motion and automation solutions as well as energy efficient products to help work out energy problems in most mechanical applications.

Rauen said the trend towards energy efficient products provide new options to the development of the power transmission engineering and fluid power industry. He was very confident about the cooperation between Germany and China in wider range.

Rapid development in trade between China and Germany shows that Chinese market is becoming more and more important for Germany. And the cooperation between China and European countries are being strengthened.

Based on VDMA statistics, exports to China in fluid power products grew 10 times from 28.4 million euros ($38.2 million) in 2000 to 284.6 million euros ($383.6 million) in 2007. In the meantime, power transmission products increased from 96.9 million euros ($130.2 million) to 762 million euros ($1.02 billion) in the same period.

Imports from China also grew significantly. Fluid power products climbed from 3.45 million euros ($4.65 million) in 2000 to 19.44 million euros ($26.2 million) in 2006. Meanwhile, power transmission products soared from 74.6 million euros ($100.5 million) to 185.6 million euros ($250.1 million) in the same period.

Rauen said that this export-import development was the best signal of Sino-German business cooperation.

According to Rauen, both sides still have opportunities to learn from each other. German power transmission engineering and fluid power companies are trying to ser up a win-win situation for the two countries.

“The Chinese society will need environmentally friendly and energy efficient technology solutions combined with a fair product price,” he said. “These characters underlie the competitiveness of German products and are the aims of German engineers.”

Although the cooperation between two countries is strengthened, challenges still exist. It will be tough to build long-term relationships and find fair solutions together for the global problem of intellectual property rights. Because success comes from the understanding of both cultures and fair play in cooperation.

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.

BPOVIA is the leading virtual assistant and Knowledge process outsourcing (KPO) service provider in China. BPOVIA is the only virtual assistant company ever been nominated for the prestigious “Red Herring 100 Asia” Awards 2008. Combines international perspective with local know-how, BPOVIA can provide our clients China business development service and help our clients doing successful business in China.

Please visit http://www.BPOVIA.com/ for details about our service.

30 years of cooperation
In the last 30 years, an important factor of the cooperation between German and Chinese enterprises has been training Chinese employees and technology transfer. German has brought more technology to China than any other country, according to the National Development and Reform Commission of China.

The main pillar of cooperation between German and Chinese enterprises has been mechanical and plant engineering, followed by electronics and electrical engineering as well as chemistry.

In the early 1980s, critical contributions were made by the German enterprises to the development of the steel industry in Wuhan, while in the automotive sector a licensing agreement between German and Chinese truck manufacturers was the first of its kind. With the German government’s financial support, the contribution of German enterprises to the construction of Shanghai’s subway system was especially important.

Compared to other investors in China, German enterprises are highly noticeable by virtue of their involvement in manufacturing joint ventures as early as the 1980s. An important milestone was the founding of an extraordinarily successful automobile joint venture in Shanghai in 1984. But the first joint venture of a German cosmetics manufacturer in the same year and the founding of the first JV with Germany in the aerospace sector are noteworthy as well.

To date, in cumulative direct foreign investment in China, Germany’s $15 billion tops the list of European countries. High-developed German technology has made a major contribution to the industrial development of China. Today, 88 percent of Chinese exports in the hi-tech sector come from foreign-invested firms.

Bilateral relations
A compact network of economic relationships has developed between China and Germany. German exports to China were all of $270 million in 1972, while today’s exports of 45 billion euros ($67 billion) show the increase of more than 160-fold. And China has increased its exports to Germany 280-fold to $48.7 billion. Today Germany is China’s most significant trading partner in the EU and China is Germany’s most significant partner in Asia.

The Chinese government’s opening policy offered a solid environment for the nation’s positive development. In the last 30 years, GDP growth has been impressive—-from 364.5 billion yuan in 1978 to 24.95 trillion yuan in 2007. At the same time, the part the service sector plays in the economy has grown from a subordinate one to a major player today.

Future prospects
In the coming years and decades, German and Chinese enterprises will continue down the path of successful industrial cooperation jointly. Sectors like environmental protection technology, logistics, healthcare and research and development will get importance.

Chinese enterprises with increasing numbers today are aware of the German market. Their investment, already $310 million, is welcome in Germany. The German Chamber of Commerce in China is interested in both supporting German companies’ market access in China and accompanying Chinese enterprises on the road to German market entry.

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.

BPOVIA is the leading virtual assistant and Knowledge process outsourcing (KPO) service provider in China. BPOVIA is the only virtual assistant company ever been nominated for the prestigious “Red Herring 100 Asia” Awards 2008. Combines international perspective with local know-how, BPOVIA can provide our clients China business development service and help our clients doing successful business in China.

Please visit http://www.BPOVIA.com/ for details about our service.