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The Future Examined: Timid SMEs missing their chance in China

Australian SMEs overall are better at importing than exporting.

Many Australian small-to-­medium-sized enterprises are tapping into the massive economic opportunity in Australia’s trade relationship with China.

But so far they have focused more on importing than exporting, effectively leaving money on the table.

Professor George Tanewski, of Deakin Business School, says there is much room for improvement.

“We know from research that the IPA-Deakin SME Research Centre has conducted, and through other government data sources, that SMEs contributed approximately 14 per cent to Australia’s overall total export revenue of goods, and 27.4 per cent of service sector exports, in 2015-2016,” Tanewski says.

Given Australian exports to China totalled $116 billion in 2017, and imports from China were worth $67.4bn, “that suggests that SMEs exported $16.2bn worth of goods and services to China and imported around $18.5bn worth of goods and services from China”, Tanewski says.

This indicates that Australian SMEs overall are better at importing than exporting, he says.

“Similar trends are demonstrated by SMEs in the UK, suggesting that SMEs — particularly in Australia — are not good at exporting, as they are probably risk-averse and prefer to be more focused on the local (internal) market.”

But more SMEs could be taking the opportunity to tap into overseas business opportunities, he says — and they have a particularly huge opportunity in China.

The Middle Kingdom has become Australia’s largest trading partner: with the signing of the China-Australia Free Trade Agreement (ChAFTA) in 2015, and the convertibility of Australian dollars to yuan in direct trade since 2013, the stage is well and truly set for even closer economic integration.

But many SMEs need encouragement — and further knowledge — to take the plunge.

“In summary, our evidence shows a weak international performance by Australian SMEs and there is much to be done to help Australian SMEs ‘raise their game’ in the international marketplace,” he says.

Turning that around is a role that Deakin University sees for its FutureLearn “cloud campus” online learning platform, which will shortly roll out business course content designed for SMEs — including a subject on doing business in China.

“The course is geared toward small business people, entrepreneurs or anybody interested in the SME environment,” says Dr Bardo Fraunholz, director of post-graduate programs at Deakin University. “It’s geared toward practical, real-world knowledge, using success stories, case studies, best practice, designed to be very applicable knowledge for somebody running a business, or who wants to start a business.”

George Tanewski says internationalisation among SMEs varies by business sector, with the three sectors showing SMEs having the highest levels of internationalisation and success being wholesale trade, information media, and professional, scientific and technical services sectors.

Where SMEs have had success internationally, it has usually been through a unique product or service or method of production.

“The other key success factors are the use of technology — the internet plays an important role in the export/import success of SMES — a focus on quality, use of digital marketing and social media, and networking: that is, being able to rely on a network of people who you can trust in the host country,” Tanewski says.

While international success requires innovation, the flipside is that innovation is more intensive among Australian SMEs that export than Australian SMEs that are non-exporters.

“We’ve found that SMEs that invest in innovation outperform other firms in the international market: as well, innovation increases sales revenue,” he says.

“As innovation is a critical factor in enhancing internalisation, SMEs should invest in innovation, as it will contribute to them developing a competitive advantage.”

Nick Mroczkowski, deputy director of the IPA-Deakin SME Research Centre, says Australian SMEs “tend to take an approach of testing the water” in internationalisation.

“They appear to be a bit worried about getting into it straight away. They want to do their homework. We saw this with Japan, we saw this with Hong Kong, and you can multiply that by 10 if you’re going into China.

“China has specific issues that are not necessarily seen in other countries. It is absolutely huge, there are lots of parties involved, they’ve come out of a tightly run, closed economy to an open economy, they’re moving in leaps and bounds and they’re smart operators. Many SME proprietors find that daunting: it is a huge market but it is fraught with issues. They’re worried about intellectual property, they’re worried about the language, they’re worried about the culture and the guanxi, the philosophy of business relationships.”

But against this, the opportunity is enormous, says Mroczkowski. “One in 15 people on the planet now is a Chinese millennial. Suddenly we have this middle-class community that we never envisaged seeing in China, ready to spend. It’s an economic phenomenon. For anyone that’s got a good or product or a service that is applicable to Chinese consumers, it won’t be easy, and it might take a while, but ultimately it would be worth getting into that market. We really should be encouraging our SMEs to get out there a bit more, and that’s what we’re trying to do,” he says.

Bardo Fraunholz says an important part of that encouragement is to link the SME proprietors in the FutureLearn course with real-life success stories, and networks that can help them.

“We want to link them to successful SMEs who are on the ground in China, learn from them what helped them to succeed, and what resources they utilised, from government and other sources,” he says.

“That’s definitely what we’re trying to do with FutureLearn.”

Originally published on The Australian.

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