from EuroBiz Magazine

January 2009

by Bill Dodson

These are the most challenging times in several generations for Small and Medium Sized Enterprises (SMEs) to manage international operations. The global economic slowdown mixed with the meltdown of international financial markets are forcing SMEs to revisit their business and staffing models in China to survive the downturn and to hopefully gain dominant industry positions as conditions improve.

Many SMEs are taking a wait-and-see attitude through the Chinese Spring Festival 2009 period, if an informal survey of foreign-invested SMEs by government officials of a Jiangsu Province economic development zone is any indication. One of the officials, Ms. Li – a bright, articulate woman in her early thirties – explained, “Most Western companies are seeing a slowdown in their business, but they expect they will be alright through the Spring of next year. Many of them think that by autumn 2009 the business environment will begin to improve.” Local SMEs were cautious but not frightened, she noted. And none to date had closed shop nor considering terminating their China operations.

Of course, there is a substantial difference in company performance in today’s adverse conditions depending on the extent Western SMEs serve the Chinese domestic market versus exporting to the EU and/or the United States. “Our business has slowed a bit this Fall,” the GM of one European SME told me, “but we had already exceeded turnover projections for 2008 by mid-Summer by as much as 50%.” The company sells its product to high-end Chinese and Western buyers in the Chinese domestic market. Still, with the price of raw material inputs having plunged from the end of Summer 2008, buyers are re-negotiating contracts with Chinese suppliers to return to production cost levels seen before last year’s rapid escalation of costs.

Some SMEs have re-structured their businesses to develop additional revenue streams. A popular expansion of business scope for production companies has been the addition of trading and distribution rights to approvals for manufacturing in China. The rights give foreign-invested manufacturers in China permission to purchase components and materials in China to sell on to their mother company, or directly to international customers, invoicing directly from the China operation. Production operations can trade up to 30% of the total value of production output.

Still, other companies are finding creative ways to reduce their overhead. One electronics assembly SME has cut back on its weekly hours of operation: from five days a week to three days a week with salaries scaled back in proportion. Many employees would rather keep a part of a job than have no job at all; and employers are loathe to pay the severance packages demanded under Chinese labor law. A European service provider has been farming out its staff on contracts of three to six months to other companies that could use some of the special skills that employees have.

Proactive managers are actually soliciting suggestions from their Chinese staff for ways to reduce operating expenses. Local staff may be amongst the first to advise turning down the thermostat in the office a few degrees, or reducing overall utility bills by rotating work between home and office. The European service provider is returning its under-utilized office space to the property management company (in lieu of a penalty) to reduce its over-all rent obligations, consolidating staff in the remaining space. Factory operations are sub-leasing un-used plant space to other companies to reduce operational over-head.

In case next year is a more difficult environment in which to operate my own company we have set about reducing internal and client-related travel costs: staff travel to clients in Nanjing, Shanghai and even to projects in Xuzhou, in Northern Jiangsu, by bullet train, instead of by company car (with driver), and will sometimes take the over-night train to Beijing for business, instead of flying.

Most SMEs outsource their IT support. Our company a couple months ago took the initiative to treat the IT company as though it was an internal department. We created communications and support processes that radically reduced the amount of support employees originally required, with an eye to re-negotiating the IT-support contract at a lower rate early in 2009.

Robert is a Chinese HR Manager with more than ten years experience working for Western companies in China. He explained to me the approach his SME is taking to maintaining operations through the tough times. “You need to have a company plan about managing through the downturn,” he said. “Employees want to know, ‘What’s the economic impact on the company?’” They also want to know if they will have a job the same time the following year. Once you have some sense of impact and direction, Robert told me, “Communication [with the employees] is the most important [in keeping people in the job]. Don’t worry about over-communicating. Find out what’s happening in related companies and communicate that to your staff.”

In the end, though, the most accessible cost to reduce in any operation is labor. The implementation this year of rigid labor laws have made it expensive for companies to lay off staff due to stiff monetary penalties and the risk of retaliation by former staff. Employers with the expense of expat managers, though – with greater control over their fate – has accelerated the recall of Western expats, especially those with children and wives to support.

Of course, companies may be forced to lay off staff, however. Robert advised, “You have to keep your core staff for the future, even if you lay off employees. The Core is always protected.”

The key to thriving in these challenging times will be to streamline operations without cutting costs so close to the bone that a company cannot effectively compete when economic conditions improve. Early and creative corporate makeovers will win the day come the next decade.

Copyright ©William R. Dodson, 2009