Thursday, November 5, 2015

Red tape, bureaucracy put brakes on SMEs in China

Dan Levin

4 Nov 2015

BEIJING — With the blessing of local officials, Mr Amir Porat, an Israeli entrepreneur, set up a surgical supply factory in 2013 in China’s coastal Jiangsu province, training workers and taking orders. All he needed to start production was US$250,000 (S$349,471) of specially designed moulding equipment from Israel.

More than two years and US$1 million in costs later, he is still waiting for the shipment. Chinese customs officials have demanded a permit for importing medical devices, although Mr Porat insisted the equipment was ordinary manufacturing machinery. Last year, he decided to close the factory before it ever opened.

“We had to pay salaries and rent,” Mr Porat said by telephone from Israel. “We’re not a big company and we just couldn’t afford to lose and lose.”

At a time of slowing economic growth, Beijing has sought to assure foreign companies that China is a welcoming place to do business. In a speech to United States business leaders in September, China’s president, Xi Jinping, pledged to protect the rights of overseas investors and to provide “a level playing field”.

But the plight of Mr Porat and other overseas entrepreneurs underscores some of the challenges small and mid-sized businesses face once they arrive. While China beckons with opportunity, cheaper labour and a huge market, it often frustrates with bewildering bureaucracy, entrenched corruption and a byzantine legal system, experts say.

“There’s a feeling that fewer SMEs are taking the jump and coming to China,” said Mr Chet Scheltema, a managing partner at Dezan Shira & Associates, a consulting firm that specialises in foreign direct investment in Asia, referring to small and medium-size enterprises. “They’re a little more cautious and we’re closing a surprising number of companies.”

Big cities such as Beijing, Shanghai and Guangzhou have, in recent years, drawn thousands of expatriate entrepreneurs who have opened restaurants, branding consultancies and startups. They have helped transform an economy that had long been dominated by manufacturing, real estate development and government infrastructure spending.

While China is generally a challenging environment in which to navigate, overseas entrepreneurs can be more vulnerable. Many lack the political muscle and deep pockets of multinational corporations or their domestic peers. They also may lack the guanxi, or personal connections, needed to overcome unforeseen bureaucratic hurdles.

The problems run deep. In a recent survey of its members, the US-China Business Council found that 97 per cent of companies, including large multinationals, said they lacked the financing advantages, access to contracts and ease of licensing that state-owned enterprises received.
“When you talk to other expats about setting up a business, one of the first things they tell you is — be careful,’” said Mr Reza Afshar, the British founder of an e-commerce company in China that sells face masks, air purifiers and other pollution-protection products. “Everyone’s got a story of someone who’s been burned in the Chinese business world.”

The Chinese government has tried in recent years to improve the business environment by upgrading legal protections. But critics say political connections and corruption continue to undermine the law.

Mr James Zimmerman, chairman of the American Chamber of Commerce in China, said concerns remained about interference by the authorities in court proceedings.

“Full accountability will only come with an independent judiciary that provides effective oversight and renders decisions without fear of ­retaliation or without influence by the
political process,” he said.

For many international business owners, legal disputes do not always resolve favourably, even with clear legal protections in place.

Mr Neil Schmid had high hopes when, in 2012, he arrived in Beijing to start a Chinese social enterprise under DKT, a global health organisation that provides contraceptives to more than 50 million people in the developing world. But instead of focusing on selling condoms, Mr Schmid had to deal with a series of disputes involving employees.

He said he was forced to fire a sales manager he suspected of embezzling US$60,000, as well as her replacement, who he believed forged documents. The company’s marketing manager later admitted to Mr Schmid that he had used Adobe Photoshop to disguise his true identity and to falsify his transcript from an elite American university after Mr Schmid noticed discrepancies.

Resolving the embezzlement case through China’s legal system, he quickly learned, was not simply a matter of providing evidence. The Chinese authorities have wide discretion over whether to accept a case and there are no clear standards regulating what kinds of cases they must investigate.

While companies can turn to arbitration, this form of dispute resolution carries its own set of issues.

In 2008, the Chinese government passed a law to clarify the duties of mediation and arbitration committees, which gave workers greater ability to seek legal redress for claims of labour violations, according to the China Labour Bulletin, a labour rights organisation based in Hong Kong. Since then, the number of labour dispute cases has more than doubled, to 715,000 in 2014, according to the Ministry of Human Resources and Social Security.

Though arbitration is required by law to conclude within 60 days, many cases take up to eight months. “When you ask them why it takes this long, they simply answer — too many cases to handle,’” said a labour lawyer in Beijing, Shen Binti.

For many entrepreneurs, the shifting legal terrain is proving increasingly difficult to navigate. “Police don’t want to write up a report, courts don’t want any more cases and the government encourages arbitration,” said a US business consultant in Beijing, Mark Natkin. “In that respect it can be an uncomfortable environment for a company that’s not ready to adapt to legal uncertainties.” 


No comments: