Memorandum submitted by the Federation
of Small Businesses
1. INTRODUCTION
1.1 The Federation of Small Businesses (FSB)
welcomes the opportunity to submit written evidence to the Treasury
Committee Inquiry: Impact of China on the World and UK Economy
on behalf of its members. The FSB is the United Kingdom's (UK)
leading non-party political lobbying group for small businesses
existing to promote and protect the interests of all who own and/or
manage their own businesses. With over 185,000 members the FSB
is the largest organisation representing small and medium sized
businesses in the UK.
1.2 China has a growth rate three times
higher than that of Europe and wages levels there are typically
close to a tenth of the UK's. The mere fact that China is such
a successful player in the global economy means that small businesses
in the UK are affected by the growth of the Chinese market. Indeed
UK Government sources reveal that UK direct exports to China were
worth £1,505 million in 2002.
1.3 The FSB envisages that there are mutual
benefits for both UK and Chinese businesses. China has a strong
manufacturing base but is in need of technical expertise and innovative
technologies that can be provided by UK companies. Moreover, there
is a strong incentive for Chinese companies to co-operate with
the UK as it can be used as a gateway to Europe and in turn the
biggest consumer market in world.
2. MANUFACTURING
AND LABOUR
COSTS
2.1 Chinese labour costs are very low. Therefore,
there is a fear, from some FSB members that the UK manufacturing
base could be undermined. Indeed if a large manufacturer relocates
to China this could have implications for UK small manufacturers
who are first or second tier suppliers to the large manufacturer.
In terms of labour costs a UK small manufacturer cannot compete
and many members are suffering as a result. Other members indicate,
however, that labour is not their highest overhead and when transport
costs are included believe that they can compete favourably with
Chinese products.
3. CHINA AS
AN EXPORT
MARKET
3.1 As China's economy develops its workforce
will grow in wealth and in turn is potentially an extremely large
consumer market for goods.
3.2 There is also potential for business
to business commercial activity. Opportunities exist for western
experts to provide services and sell innovative technologies.
Indeed there is a keen demand for environmental technologies to
reduce pollution outputs.
3.3 As a first step for a small business
exporting into China it is important to find local distributors
for products as it is unlikely that a small business without a
local presence would be in a position to service the Chinese market.
4. SOURCING PRODUCTS
FROM CHINA
4.1 Sourcing goods from China can be particularly
demanding and it is necessary to go to China in order to verify
that the work is of the right standard and that the correct control
systems are in place. If this is not properly managed it is possible
that the goods will be of poor quality with potentially damaging
consequences to the business concerned. A small business may not
have the resources to manage the supply chain and many small businesses
complain about uncertain service and quality during the first
stages of sourcing.
4.2 It is possible to mitigate this risk
and one technique is for a small business to "piggy-back"
a larger company and source products form Chinese companies that
have already have well established European or North American
customers who have already helped the Chinese company implement
best practices.
5. COOPERATION
AND JOINT
VENTURES BETWEEN
BRITISH AND
CHINESE COMPANIES
5.1 At present China lacks a fully liberalised
financial services market. Therefore, Chinese businesses are in
need of private investors and are looking towards Western companies
to provide them with finance to develop and grow. In this way
there is scope for Joint Ventures with Chinese companies.
6. "RED
TAPE" OBSTACLES
6.1 Initially a business will need to make
a visit to China and they may find it difficult to obtain a business
visa. To secure a visa it is necessary to first have a formal
invitation letter from China inviting them to attend a meeting
or an event. If this requirement is not met a visa will not be
issued by the Chinese Embassy.
6.2 Understanding local laws and customs
is important. For instance there is a lack of protection of intellectual
property (IP) in China and some businesses run the risk of having
their products copied. It is therefore advisable to register trademarks,
patents and copyright with an accredited agent. With China's adhesion,
however, to the World Trade Organisation (WTO) it is hoped that
the problem of protecting your IP will be reduced. One of the
main conditions of accession to the WTO was that China sign international
treaties on business law. Nonetheless, a small business will not
have the resources to take enforcement action in China to stop
infringements against its intellectual property.
6.3 To date FSB members' experience of contracts
is that Chinese companies will not in the main operate under international
law. Therefore, it could be necessary to establish what the Chinese
laws are and how best to draft agreements. This could be potentially
very expensive and in turn would dissuade many businesses from
doing business in China. To avoid this problem some small businesses
draft their own trading agreements in simple terms. In the unfortunate
event of a dispute it is possible to use the Hong Kong International
Arbitration Centre.
6.4 Import/Export Regulations and customs
tariffs on both the Chinese and UK side can cause problems for
small businesses, especially if they are doing this for the first
time. It is therefore, important for small businesses to find
a good freight forwarder who can deal with customs, documentation,
storage and insurance.
6.5 Letters of credit can be difficult to
obtain and understand for a small business. They are nonetheless
vital as they are a promise from the bank to pay. The seller gets
the money and the purchaser is then able to specify the quality
parameters, standards, specifications and delivery time.
7. FSB ACTIVITIES
AND FUTURE
DEVELOPMENTS
7.1 The FSB believes that there are mutual
benefits for doing business in China there are however, examples
when FSB members have dealt with Chinese companies with disastrous
consequences. With a view to help members avoid negative experiences
the FSB has commenced a research programme looking at ways to
facilitate trade between FSB members and Chinese enterprises.
It is currently analysing the situation and hopes to highlight
both the advantages and disadvantages of doing business in China
to its members. To date it has commissioned an article for its
in-house publication that will be published in February 2005.
7.2 Initial investigations have revealed
that some FSB members are already engaged in the Chinese market
place and are importing products into the UK.
7.3 The FSB has established links with the
Association of Chinese Engineers in the UK who have helped us
develop contacts with local authorities in China.
7.4 In November 2004 an FSB representative
attended a trade conference in Wenzhou in South East China. Wenzhou
particularly interested the FSB as it is an area of China distinct
from other business districts as it specializes in small businesses
as opposed to large state owned enterprises.
7.5 At the event in Wenzhou the FSB also
met with representatives from the Shenyang and the Liaoning regions
and had initial discussions on the operational framework and opportunities
for businesses in these areas.
7.6 Depending on the member feedback that
the FSB hopes to receive, it may develop these contacts further.
8. SUPPORT FROM
THE UK AND
CHINESE GOVERNMENTS
8.1 The Chinese authorities appear to be
very keen to cooperate with UK small businesses.
8.2 The effort and focus required to service
the Chinese market is enormous and for a small business this could
mean a diversion of resources and focus. Therefore, it is important
to make good local contacts who can eventually act as partners
or distributors. In this way small businesses require support
to find these local partners. Equally Chinese businesses that
are looking to enter the EU market will also need to find partners/distributors
for their goods. In this way the FSB envisages that there is scope
to develop match-making services.
8.3 At present various UK organizations
are engaged in arranging trade visits to China. Some initial reactions
are that many small businesses are uncertain which events to target
for maximum return for the investment of time or money.
8.4 UK Trade and Investment, the Chinese
Embassy's commercial section and the China-Britain Business Council
provide market research, guides on how to do business in China
and can advise on market entry strategies. Many FSB members have
not fully utilized these services and therefore the FSB envisages
that it can facilitate contact with them.
9. CONCLUSION
9.1 As outlined above a small business will
have to overcome many obstacles and invest a lot of time and effort
in order to trade with China. With all the competing interests
that a small businessperson has to consider there is only a certain
amount of time that can be dedicated to establishing a presence
in this market and the FSB would not advise companies to ignore
other opportunities. Nonetheless, for the risk taking entrepreneurs
there are many opportunities to explore and the FSB is becoming
increasingly aware of success stories.
January 2005
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