Large-scale – and generally state-linked – Singapore conglomerates have made their presence felt in China. CapitaLand and Keppel Land have both racked up successes in real estate, while in banking Singaporean state-owned investment giant Temasek Holdings has stakes in Bank of China and China Construction Bank, as well as in privately owned China Minsheng Bank.
Running beneath these billion-dollar deals, though, is a rich vein of Singaporean small- and medium-sized enterprises (SMEs). Hitherto dependent on multinational firms for subcontracting business, these enterprises are now positioning themselves in the China market with the help of the Singapore government.
SMEs contribute 42% of Singapore’s GDP, employing more than half of the city state’s workforce, according to the country’s Association of Small and Medium Enterprises. Most are involved in the service industries – catering, engineering, logistics and finance.
Hand of the state
Support comes through the “3C” – connections, competency and capital – framework devised by International Enterprise (IE) Singapore, a government agency under the Ministry of Trade and Industry tasked with making local SMEs competitive overseas.
IE Singapore has a total of 45 staff working in eight offices around China producing market research for Singaporean enterprises looking to establish their presence in China.
Tung Lok Group, a restaurant and catering firm, used IE Singapore when it first started exploring locations in China in 2004, said Andrew Tjioe, the company’s executive chairman. Tjioe oversees four upper-end restaurants, two in Beijing, and one each in Shanghai and Wuhan, employing about 280 people.
“They [IE] are well represented in several major cities in China,” he said.
Tung Lok Group was drawn by huge numbers of expatriates doing business in China, as well as an increasing number of made-good overseas Chinese returning home. Economic growth has created a “huge number of nouveau riche in China, like never before in the history. They are high-spenders,” Tjioe said. “We could not afford to miss the opportunity to share a slice of the growing market… China has the fastest growing restaurant industry in the world.”
The Singapore government is keen to see SMEs expand beyond what Kathleen Hong, north China manager for IE Singapore, describes as the “limited domestic market.” China’s relatively underdeveloped service sector is a prime target.
The 2006 SME Development Survey, compiled for the Singaporean government by the DP Information Group, listed China among the top three destinations for Singaporean SMEs seeking to expand abroad.
To guide companies into China, IE Singapore has developed an internationalization road-mapping program that helps companies build long-term strategies to break into new markets, while an international partners’ program matches Singapore-based SMEs with those in their target markets.
“Such partnerships can achieve economies of scale and maximize chances of success for the SMEs in overseas markets,” Hong said.
In order to facilitate partnership-building at local level, IE Singapore supplements its educational and information sharing activities with government level exchanges. Economic and trade councils have been established with five Chinese cities – Tianjin, Shandong, Liaoning, Sichuan and Zhejiang – allowing business networking opportunities with officials.
The government has encouraged support from trade associations as well as from law and accounting firms. A SME securitized loan scheme was established in 2005 and has generated US$65 million in loans for some 400 SMEs.
In 2006, the government worked with the Action Community for Entrepreneurship (ACE) to set up the first private equity trading platform (OTC Capital) to offer SMEs a more cost-efficient way of raising capital.
Commercial banks have also been encouraged to assist. In March 2007, the Singaporean operations of HSBC introduced a fast-track financing package for SMEs which bases repayments more on the company’s earning potential than its current assets.
Government guidance and encouragement has paid off on the ground in China, according to Koh Chin Yee, director of the Singapore Chamber of Commerce and Industry in China, a non-governmental organization representing Singaporean business interests.
An example is Raffles City Mall in Shanghai, which was built by CapitaLand but has generated commercial opportunities for a host of smaller businesses.
“When a big player enters China, several smaller players may ride on the waves… Many Singapore-based retail enterprises came in,” Koh said.
One of these, BreadTalk, actually chose the worst possible time to enter China, with executives making their first visit to a local bread market in the midst of SARS in May 2003.
But the company – which had just raised capital through a stock market listing but was now under pressure from investors to expand regionally – pressed ahead and opened its first outlet in Raffles City in November 2003. Four years on, BreadTalk shops can be found in 15 cities in China.
“The Singapore government has also supported us greatly, from our startup to our expansion abroad,” Frankie Quek, chief executive of BreadTalk’s China operations, said.
One of the resources used by the company was IE Singapore’s familiarization seminars.
“There are many different ways of working and living styles compared to Singapore… IE Singapore and the Singaporean embassy in China provided us with market information to help us devise our incentive schemes to draw Chinese customers,” Quek said.
Grouping of Singapore-based enterprises has also helped reinforce the country’s brand name.
Strong management skills and fast adoption of modern, global practices have helped distinguish Singaporean companies in China, Michelle Peng, marketing manager at Frasers Hospitality, said.
It was this brand strength that helped Frasers compete in an expanding market for serviced residences among local expatriates and wealthy Chinese in major cities like Shanghai and Shenzhen. The company is still relying on its reputation for professionalism and reliability as it expands into emerging centers such as Chengdu, Nanjing and Tianjin.
How to stand out
“In China it is all about building a brand to set yourself apart from the competition,” Peng said. “There are strong local boutique names in Shanghai but no one with the brand name.”
The Singapore brand has worked to the advantage of Tung Lok Group too. Tjioe has found that Singaporean companies are known for being law abiding and their executives honest, upfront, hardworking and trustworthy.
The relatively close cultural backgrounds of China and Singapore can also be a big help, with cultural affinities helping Singaporean firms gain business from Chinese companies seeking to tap into an international network.
“This enables Singapore companies to act as a bridge between Chinese companies and third country partners,” IE Singapore’s Hong said.
The combination of cultural affinities, corporate values and government assistance were the ingredients for success for Origami, a Singaporean software startup operating in China. Origami works closely with Infocomm Development Authority, a government body responsible for technology strategy inside and outside Singapore.
“Our competitive edge has been blending our global experience and technology innovations with an understanding of local Chinese relationships… Singaporean IT service companies can get business on the mainland because they’re trusted to deliver on time and to standards,” Origami CEO James Ong said.
Despite the obvious progress made by Singapore companies in China, challenges still remain.
For the likes of Frasers Hospitality and Origami, finding good Chinese partners is an issue. Similarly, BreadTalk has experienced problems recruiting local staff who are up to the job. Quek also cites rising rental and labor costs in big cities as particular annoyances, as well as the abundance of copycats.
“We have to protect ourselves against people using measuring tape to measure our outlets’ counter height, and stealing our branding story boards,” he said.
These complaints are similar to those of SMEs from all places seeking to enter China, according to Hong. She has found that strong overseas competition, a lack of overseas business knowledge and contacts and a lack of external funds and manpower for overseas expansion are the other frequent bugbears.
The big picture
Singapore has no shortage of programs to help its SMEs gain market share in China but businesspeople agree the best thing Prime Minister Lee Hsien Loong’s government could do is strike a free trade agreement (FTA) with Beijing.
Free trade agreements negotiated with countries around the world have proven to be “superhighways that connect Singapore to major economies and new markets,” Koh said. He also stressed that, in addition to tariff concessions and faster market entry, an FTA with China would give Singaporean firms preferential access to certain sectors and better intellectual property protection.
As it stands, most Singapore firms are doing well. The top 500 SMEs increased total revenues by 30% to US$8.7 billion over the past five years, and almost doubled net profits to US$409.6 million.
Future growth is likely to follow a similar pattern to that of the past – success built on the back of strong government support mechanisms. This is particularly true of China’s hard-to-navigate business environment but, that said, there is only so much that grants, guidance and cultural affinities can do.
Singaporean SMEs will continue to face challenges in China and, given the city-state’s limited market for ambitious players, the pressure to succeed will only rise.