Companies

SMEs need to have more than courage

By Karen Yip (China Daily)
Updated: 2010-07-29 10:20

Hidden gems

While the majority of the SMEs are in the service sector, the downside is their difficulty in obtaining loans from banks.

Due to the nature of the service sector - that thrives on talent, innovation and being asset-light - SMEs in this important sector couldn't possibly show strong collateral, such as fixed assets, to banks.

"Being asset-light is good for efficiency but not good for loan approval," said Patrick Chovanec, associate professor of the International MBA program at Tsinghua University.

"Ironically, it's like punishing those who are innovative and efficient when a lot has been spoken about the need to improve the service sector," he added.

"The least efficient businesses usually get funding because of their heavy assets."

Many SMEs blame Chinese banks for acting like government agencies, pushing them to become more market-driven commercial entities.

But China Europe International's Ge thinks otherwise: Lending to SMEs poses much greater risk of loan defaults for banks. "The solution (is to) improve the lenders' knowledge, skills and ability to discover, assess, price and manage risk inherent in making loans to SMEs," he said.

Chovanec said partnering with foreign banks will help Chinese lenders improve their product range, develop local skills, improve credit ratings and become more commercially-driven.

On the flip side, SMEs' financing problems have a boom in investment opportunities for foreign private equity firms and venture capitalists.

These firms are trying to deploy as much money as possible in China because of the growth opportunities. And discovering businesses that have good growth potential is key in the private equity and venture capital businesses.

Related readings:  SMEs make gains while economy sees rough times  Hebei SMEs lack billions of yuan  New loans for China's SMEs up 23% in Q1  Financing remains difficult for SMEs

Major private equity firms such as Kohlberg Kravis Roberts & Co recently said it aims to raise $800 million to invest in Chinese companies. Texas Pacific Group invested over $30 million in ShangPharma Corporation, a Chinese pharmaceutical and biotechnology research and development outsourcing company.

In February, Carlyle Group partnered with one of China's largest conglomerates, Fosun Group, to form a yuan-denominated fund to invest in emerging Chinese companies.

Chicken or egg?

While China focuses on pursuing technological advancement, a shift to develop stronger soft skills is equally important compared to technological skills.

"Technology and/or the product are only a small piece of the puzzle to being profitable. It takes leadership, managerial skills and strategic planning skills to turn an invention into a product and a product into a profitable company," said Ge, who is also an entrepreneur.

For He, both technological and soft skills are important for Beijing OriginWater, but a skills shortage and rising labor costs stand in his way.

"These (issues) give me headaches every year."

SMEs also feel they are not equally protected by the law when compared to large companies such as State-owned enterprises. Damage claims or legal disputes involving SMEs, which usually entail small amounts, cannot be legally addressed, as China doesn't have a "small court" system.