SME Alliance and Development in Zhejiang Province

SME Alliance and Development in Zhejiang Province
Hu Ying-de
Ma Chi
(Administrative Management College of Zhejiang University of Technology, Hangzhou 310014, China )
Abstract: There are lots of small and medium-sized enterprises (SMEs) in Zhejiang Province, which
have made a great contribution to the economical development of Zhejiang Province. However, due to
the rising prices of land, raw material and energy and the fiercer market competition at home and abroad,
the environments of SMEs in Zhejiang Province become worse gradually. It is one of effective ways to
build SME alliancess for the further development of SMEs in Zhejiang Province. The definition of SME
alliances and their significances are explained in the paper. Based on the analysis on the necessity and
advantages to build SME alliances, some measures and policies for improving the development of
SMEs alliances in Zhejiang Province are put forward in the paper.
Key words: SME; enterprise alliances; economical development
1
Background
There are lots of small and medium-sized enterprises (SMEs) in Zhejiang Province, making a great
contribution to the economical development of Zhejiang Province. Till the end of 2004, there were more
than 0.3 million SMEs with various kinds of ownerships in various fields in Zhejiang Province, taking
up 99.6% of the total number of enterprises. The total value of assets of SMEs was over 3568 billion
yuan RMB, sharing 82.6% of the social total assets. The total number of employees working in those
SMEs reached 11.3 million, sharing 82.7%. The total turnover made by SMEs was 2770.4 billion yuan
RMB in 2004, making up 71.7%. In short, the SMEs played an important role in the social-economic
development in Zhejiang Province.
However, due to the rising prices of land, raw material and energy and the fiercer market
competition at home and abroad, the situations of SMEs in Zhejiang Province become worse gradually.
The advantages of most of SMEs in Zhejiang Province become weakening, because SMEs depend
mainly on competition with others at home and abroad through low price strategy. According to the
statistics from the Industry and Commerce Management Departments in Zhejiang Province, in average,
130 SMEs in 2004 were close in every day. The survival rate of SMEs in Zhejiang Province was only
45.83%.
In view of the important role that SMEs play, and the situations that SMEs are facing, the public
pays more attention on the development of SMEs in Zhejiang province. Therefore, an effective way of
building enterprise alliances, especially SME alliances, is discussed in the paper, in order to improve
further development of SMEs in Zhejiang Province.
2
The definition of SME alliances and their significances
SME alliances, mean that two SMEs or more go together as a informal group in some effective
methods, such as joint venture, joint exploitation, joint manufacture and sale so on, in order to improve
their ability of survival and market competition. In the group, each SME is legitimately independent to
conduct some activities according to their situations. The reason why SEMs join the SME alliances is
just to meet some special needs in certain fields and make more benefits. Therefore, the SME alliances
are working as a special agency, which connects enterprises with markets effectively. Because SME
alliances could break the internal and external limitation of SME, reduce effectively the potential
uncertainty of market trade and share resources, information and knowledge with other enterprises
involved in the alliances, it is a good systematic arrangement for the development of SMEs in Zhejiang
Province.
Once the SME alliances are built, SMEs in alliances could utilize other partners’ advantageous
resources and information to make decisions quickly for expanding sale channels and improving product
market shares. The more resources SMEs in alliances share, the less risk and uncertainty they have.
Furthermore, SMEs in alliances could cooperate internally in overall fields through subcontract, capital
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debit and credit so on, which will reduce effectively product cost and market risk of SMEs.
In short, SMEs alliances could make SMEs integrate as a group. Then, SMEs in the alliances could
share their responsibilities and cooperate internally in a larger scale according to their weaken points and
strong points in order to improve the ability of survival and reduce various risks.
3
The necessity of building SME alliances in Zhejiang Province
While SMEs in Zhejiang Province make a great contribution to the economical development of
Zhejiang Province, the development of most SMEs depends on consumption of raw materials and
increase of investment, not the technical innovation. Therefore, the core competition ability of those
SMEs is not strong. Once the prices of raw material, labor and energy rise, the profits of SMEs will
reduce. For example, in 2005, with the oil prices increasing sharply, lots of SMEs in Zhejiang Province
in the fields of plastic, tool and molds had to stop production, even bankrupted. Becuse the situations of
SMEs become increasingly severe, the difficulties and problems that SMEs are facing also become
outstanding. Therefore, It is one of effective ways to build SME alliances in Zhejiang Province for
further development of SMEs of Zhejiang Province.
3.1 SME alliance is good at relieving the restrictions of raw material resources
While Zhejiang Province is one of the most powerful economic provinces in China, it’s poor in
natural resources. The further economical development of Zhejiang is negatively effected and limited by
the shortage of natural resources. Most SMEs have to face the challenging problems of the shortage of
natural resources. With the economical growth in Zhejiang Province, the demands of the land, raw
materials, energy, labor, ect, increase greatly, which leads to their prices rising rapidly. SMEs in
Zhejiang start to enter a new but challenging period, in which the product costs of enterprises rise and
the profits of most SMEs become smaller. In some cases, the more products SMEs produce, the more
lose the SMEs create. Due to the increasing prices, it is difficult and risky for a single SME to deal with
such challenging situations. SMEs should join up and build SME alliances to relieve the negative effects.
The reasons are explained as follows:
Each SME has various resources. The utilization efficiency and scarceness of resources vary
among SEMs involved in alliances. In the alliances, resources could be shared in a lager scale.
Each SME will have a chance to utilize others’ resources, which will reduce their products
cost.
Alliances will improve the cooperation internally of SMEs. In alliances, SMEs could make
internal contract of alliance instead of market trade, which will not only reduce the cost and
risk of market trade, but also break the limitation of the scale of enterprises and form scale
economy, which will leads to as more profits as some large-size enterprises do.
3.2 SME alliance is good at reducing the risks of SMEs
The management situations of SMEs are changing greatly while the Zhejiang economy growing,
and it also leads to lots of market risks and tricks for SMEs. Due to the limitation of human resource and
other resources in SMEs, it is difficult for a single SME to deal with the fierce market competition and
risks. Therefore, SMEs should integrate to form SME alliances for the following reasons:
The information and other resources of a single SME are limited. When a SME makes a
decision, the more information and other resources it has, the less risk it will bear. With the
help of the alliances, SMEs could use more information and resources to help them make
decisions appropriately.
In alliance, the managers of SMEs could have a chance to communicate more closely for
market chances, technical innovation, etc, which will reduce the uncertainty and risks of
management of enterprises.
The bigger scale the enterprises have, to some extends, the stronger ability they have. Usually,
the abilities for a single SME for bearing risks are limited in management and production
processes. Expanding enterprises scale is a better way to bear marketing risks. Therefore,
SMEs alliances are good for reducing the risks of SMEs
3.3 SME alliance is good at accelerating the technical innovation of SMEs
With the development of technologies, the lifetime of product is shortening increasingly. SMEs
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have to pay more attention on the technical research and development for market competition. So far,
most SMEs in Zhejiang Province have little ability to conduct technical innovation. The investment of
technical innovation in SMEs is low obviously. According to the statistics, 80% SMEs in Zhejiang
Province didn’t carry out technical innovation. The investment of technical innovation in most SMEs
made only up 0.2% of total sale. In Zhejiang Province, most SMEs survive and develop in the market
competition through technical imitation, even simply copying technologies. For most SMEs, the cost of
product innovation is expensive and the activities of innovation are full of risks. Once the activity of
innovation loses, the SME will suffer severely, even bankrupt, which is one of reasons why SMEs don’t
want to carry out innovation. However, SME alliances are good at the technical innovation of SMEs for
following reasons:
In alliances, SMEs could utilize more resources to conduct innovation, which will reduce the
cost and investment of innovation. In other words, SMEs in alliances could share the cost and
investment of innovation in a certain scale, which will accelerate the product innovation
process of SMEs and motivate more SMEs to conduct technology innovation.
Due to that technical information can be spread in a larger scale, SMEs could learn from
partners’ experiences and lessons to rearrange their innovative activities according to their
advantages. Then the uncertainty of innovation will be reduced remarkably, and innovations
become more feasible.
3.4 SME alliance is good for improving the ability in international trade of SMEs
Most enterprises in Zhejiang are good at international trade. In 2005, the dependent rate of export
trade of Zhejiang economy reached 65.8%. With the export income rising, the risk of international trade
disputes on SMEs in Zhejiang Province becomes larger and various export obstacles appear frequently.
Since China joined in WTO, there were 116 cases of international trade disputes happened on
enterprises in Zhejiang Province, in which some SMEs were sued because of low price of products.
The total value involved in those cases reached $ 2.8 billion yuan RMB, accounting for over 40% of
total number of cases and value. Because most SMEs in Zhejiang province are labor-intensive, profits
margins of products are limited. However, the cost to deal with the international trade disputes is very
expensive. Furthermore, the rules are very complicated and the processes are time-consumpting and
tedious. Even SMEs will conduct the litigants of international trade disputes; the professionals to deal
with the international trade disputes in SMEs are too limited to meet the needs. Therefore, it is difficult
for a single SME to deal with the cases. However, SME alliances are good at improving the ability of
dealing with international trade disputes for reasons listed as follows:
The alliances could represent all the SMEs to deal with the cases of international trade
disputes happening by integrating all the strengths and resources of SMEs in their alliances as
a group, which will reduce the cost and risk of litigant.
The alliances could coordinate SMEs involved in alliances to avoid to self-conflicts in the
internal of alliances.
3.5 SME alliance is good for the industry move of SMEs
With the price of various resources rising and measures of protecting environment being stricter,
SMEs in Zhejiang Province have to implement their strategic choices: to upgrade the structure of
industry or to let some enterprises move out of Zhejiang Province. According to the statistics from the
commerce and trade commission of Zhejiang Province, till the end of 2004, 3058 enterprises moved out
of Zhejiang Province, whose total investment and total production value created out of Zhejiang
Province reached to 22.6 billion yuan RMB and 45.4 billion yuan RMB respectively, in order to reduce
the product cost and protect the advantage of low price in competition. SME alliances are good at the
strategic move of SMEs in Zhejiang Province. The reasons are explained as follows:
Local governmental policies make an important role during the strategic move of SMEs,
especially in western provinces of China. When SMEs negotiate with local government
departments, alliances, as a representative of SMEs, are more powerful and effective than a
single SME. Furthermore, alliances could request local governments to offer more
preferences in policies.
The Alliances could help SMEs utilize more resources to reduce the costs and risks of
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investment. Due to more information and social relationship resources being shared, the
uncertainty of investment will also decrease.
Alliance is good to accelerate the whole industry chain to move to the western provinces,
which will locally improve the whole investment environment and reduce the investment
risks by forming the new and necessary industry chains.
The advantages of building SME alliances in Zhejiang Province
Since the policy of reforming and opening has been implemented, enterprises clusters, which
mainly consist of SMEs, are one of outstanding features of Zhejiang Province. By the end of 2004, there
were 519 enterprise clusters in Zhejiang Province. Each enterprise cluster had the total industry
production values over 0.1 billion yuan RMB each year. The total industry production values of
enterprises clusters reached 50% of the total social industry production values. The growth of enterprises
clusters, which consist of SMEs, not only promote the economical development of Zhejiang Province,
but also create better environments for building SMEs alliances.
Cultural background of Zhejiang Province is good at building SMEs alliances. Credit is the
base of building SMEs alliances. Due to the traditionally open-minded business thinking,
businesspersons in Zhejiang are famous in China for managing businesses and enterprises.
Businesspersons in Zhejiang view credit as the most importance to business, which is good at
building SMEs alliances.
Recently, the government of Zhejiang Province puts more attention on the construction of
credit culture. Some effective measures have been taken to improve the people’s attitudes and
consciousness of credit. Legal litigant and social public pressure was to penalize some
behaviors that violate the credit. With the policy of “credit in Zhejiang” implemented, the
credit construction have made great progresses in the whole society, which form a better base
for building SMEs alliances.
Most of SMEs in Zhejiang Province with family-management style often cooperate with other
SMEs, who have certain relationships, such as families, relatives as well as friendships. The
special personal links among the SMEs are good at building SME alliance.
Enterprise clusters offer the prerequisites of building SME alliance. The aims of building
SME alliances are to reduce risks and make more benefits. With the development of SME
clusters, SMEs have to share their responsible and cooperate internally in the industrial
system in a certain area. The relationships among SMEs are not only competition but also
cooperation. It is impossible for a SME to be independent in the industrial system. Therefore,
there are the feasibility and necessity of building SME alliances.
5
Measures of developing SME alliance
SMEs have become an important pillar in the entire economy of Zhejiang Province. It is significant
to build the SMEs alliance for the Zhejiang economy and the further development of SMEs. In order to
accelerate the development of SMEs alliance, some measures should be taken as follws:
1) The measures of further development of the credit construction and further strengthen the
construction of legal system should be taken, which will lead to better environments for the
development of SMEs alliances. Promotions for changing people’s attitudes and consciousness of credit
should be done in the newspaper, TV as well as radios. The public and presses should supervise the
credit performances of enterprises. Once any enterprise doesn’t follow credit, the case should be showed
to the public to increase the pressure of public press on the owners of enterprises. Furthermore,
measures to strengthen the construction of legal system should be taken. While the presses supervise the
credit performances of enterprises, legal methods should be used to deal with credit cases.
2) The government should guide positively the development of SMEs alliances. The formation of
SMEs alliances depends on the demands of SMEs in market competition, which is mainly a certain
market activity. The government should not force SMEs form alliance through political pressure and
orders, but guide them. The government should take measures to improve the environments to guide the
development of SME alliances.
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3) Healthy alliance culture makes an important role in the development of SME alliances. Alliances
are an informal organization to coordinate SMEs. Only if the win-win concept of alliances is formed, the
group spirit of alliance could be build. Therefore, each SME should view the concept of honesty and
credit as a principle, build up their own ability of self-governing and follow the rules and contracts of
alliance. In short, SMEs should put more efforts on the construction of SME alliances.
4) Interests of SMEs in alliance should be protected and the conflicts of interests among SMEs in
alliances should be treated properly. The relationship among SMEs in alliances is not only cooperation
but also competition internally. Therefore, appropriate rules of the alliances should be made to deal with
various potential conflicts and protect suitable interests of SMEs.
5) SMEs in alliances should improve the ability of learning from other partners. SME alliances can
accelerate the further development of SMEs, but the sustainable and healthy development of SMEs is
greatly depending on their own resources and abilities. Alliances only provide a good chance for SMEs
to share more resources in alliances in a larger scale. Therefore, SMEs should be good at learning from
partners and absorb various advantages of others to strength their market competitiveness.
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Pingyuan College, April,2005
2 ） Li Jianhua, Cooperation Development Strategy of SMEs Alliance, Special Region Economy,
1
November,2005
3) Zhan Yimin, ZhangJinlong, Contrast Analyse on Aims of SMEs Alliance from Home and Abroad,
Transaction of Business College of Hulan, August ,2005
4) Study Team of SME Bureau, New Conditions of the Development of SMEs in Zhejiang Province,
Zhejiang Economy, Volume 3,2006
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http://www.zj.xinhuanet.com/magazine/2006-07/04/content_7430135_2.htm
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