Roughly a decade ago, on his first day of work as a consultant in Shanghai, Jeff Lin strolled into his new office, sat down in his new made-in-China chair and leaned back to contemplate his new job. The chair promptly collapsed underneath him. "I'm a big guy by Chinese standards," laughs Lin, now a partner in the China office of global strategy consultant firm Roland Berger.

Lin's point in recalling the story, rather than to heap abuse on the shoddiness of Chinese office furniture, is to illustrate how easy it can be for foreign firms in China - particularly small- and medium-sized enterprises (SMEs) - to let their guard down without knowing it.

Last year, a joint-venture furniture company came to Lin with the sneaking suspicion that it was failing to take full advantage of strong growth in mid-range office furniture - a sector in which the company had traditionally done well. Lin and his team talked to furniture designers and the competition and discovered the problem was with their client's top management. Although seasoned furniture experts with years of experience in China, he says, they had lost touch with the market's changing tastes and rising standards.

Up until very recently, fragile office chairs of the kind Lin managed to break were standard in China. "But not anymore," he explains. "People have suddenly started to realise that the quality of chairs can affect employee productivity, so now they want better design, even from manufacturers that aren't high-end."

It turns out that the company's local managers were well aware of this development, but the people at the top had been too preoccupied with other aspects of the business to listen. They are not alone. Across the country, companies are contending with a perfect storm of China pressures: rising costs, falling prices, endlessly shifting regulations, ludicrous bureaucracy, increased competition and ever-rising expectations from headquarters. Collectively, these pressures make it all too easy for managers, even (or especially) those at growing companies, to let the "little" things slip by. Minor at first, these oversights have a way of becoming major over time. This problem is even more acute for smaller enterprises, a swelling school of minnows that must face the vast, roiling waters of the China pond without the protective bulk of bigger fish. What are these companies to do? What are the little things they're likely to miss? And, given their limited budgets, when - if at all - should they bring in outside experts to help?

Dogs won't eat the dog food

By now most people are familiar with the staggering numbers for China's own SMEs: 42 million enterprises responsible for 65 percent of patent applications, 80 percent of new products and 60 percent of GDP, according to figures from the National Development and Reform Commission (NDRC).

The information available for the country's foreign SMEs, by contrast, is considerably less complete. The NDRC estimated 5,000 European SMEs had invested in China in 2006. At the end of 2007, the European Union Chamber of Commerce in China had 284 SMEs of its 1,300 members, according to the official EU definition (250 employees or less, maximum turnover of €50 million or total assets of €43 million).

Advice for foreign SMEs already established in China is similarly spotty. According to Gilbert Van Kerckhove, managing partner of Beijing Global Strategy Consulting, this is in part because the largest market for advice lies elsewhere. "The big difficulty for foreign SMEs is getting into China in the first place," he says. "The companies that have been here for a few years are generally doing pretty well."

Van Kerckhove nevertheless concedes that there is a certain set of problems that can threaten even experienced SMEs in China. Among the most common of these, he says, are mistakes with product range - the same kind of mistake that bedevilled Jeff Lin's furniture manufacturers.

Don St Pierre, founder and chairman of ASC Fine Wines, calls this the "dogs won't eat the dog food" problem, an expression from the auto industry that simply means customers aren't getting what they want.

ASC, an importer of foreign wines, is one of great foreign SME success stories in China, growing from a small five-person Beijing-based shop in 1996 to a 350-person operation with warehouses in four cities and sales of just under US$70 million (€48 million) in 2007. But, as St Pierre reveals, the company's growth was not always smooth.

"We started out as an American wine product importer/distributor, with limited Old World wines in our portfolio," he explains. "Sales were not growing to our expectations and forecasts."

St Pierre and his son eventually discovered that the Chinese consumers they had targeted were interested in precisely those Old World wines they had neglected. The father-son pair began to secure distribution from Bordeaux, the Loire and other European locations. "Suddenly, the dogs started eating the dog food, and today about 52 percent of our business is French wines."

Citing the classic example of China's telecom sector, which largely skipped fixed-line networks in an evolutionary jump straight to mobile technology, Lin warns SMEs to remember that in China, "competitive dynamics typically change much faster than in developed countries."

In other words, the mercurial Chinese market punishes the sin of complacency with unusual ferocity.

Who's working for you?

Failing to keep up with the market is only the most obvious stumbling block for foreign SMEs in China. Kerckhove, Lin and other consultants describe a staggering litany of other little problems - everything from snags in sales networks and supply chains, to employee corruption and failure to keep up with changes in regulations - that can also slow or even derail growth.

St Pierre of ASC attributes most of these problems to "having a bunch of wrong people who don't ‘get it'". He cites as an example an accounts receivable issue that he eventually traced back to a sales team responsible for handling the company's nightclub and KTV business. "We found out that they were all basically dishonest people who were in collusion with the nightclub and KTV owners to get kickbacks and turn a blind eye to A/R collections."

Not all employee-related problems involve corruption. Often, according to Hainan Mu, general manager of Sunland Consulting in Shanghai, things get missed because of because of that age-old problem: cultural differences.

Mu says the tendency among Western businesspeople to favour a clear and strict management style, including well-defined job descriptions, can often be misinterpreted by Chinese staff. "The Chinese employee will think, ‘Okay, if everything is defined clearly, then this particular job here is not my responsibility,' and they will not do it. Or, if the boss tells them to do it, they will be unhappy."

As a result, even if lower-level employees are well-informed, top management may not hear about a new licensing requirement, a problem with a supplier or the rise of a new competitor until it's too late.

Kerckhove insists the only way for SMEs to solve these issues is to "constantly, constantly" keep track of their staff. He points to foreign restaurants, bars and cafes in Beijing.

What to do?

"So many start out well, maybe do good business for a couple years, then they're suddenly gone," he says. "Why? It's because the people who are running them have stopped paying attention, the employees start running the show and everything falls apart."

In addition to advising constant vigilance, Kerckhove suggests successful companies periodically step back and take a "cold, hard look" at their operations to ensure they don't lose their edge. Lin tells his clients essentially the same thing, promoting what he calls the "clean sheet" approach.

"They need to slow down and think about why they are successful today," Lin says. "They need to imagine they are entering the market again now, with no burden or network or experience. How would they do it differently? They need to think about the basics again."

No managers are likely to argue with the need to think about the basics, but many may protest they don't have the time to slow down - hence the consultant question.

While there is considerable debate about the consultant pay-off for an SME with limited resources, there seems to be little question that big-name firms like McKinsey and Boston Consulting Group have little to offer smaller companies. Such firms simply charge too much. Beyond that, Mu argues, the value in a name-brand consulting project is not always in the solutions it provides.

"If you want a good report to show your boss or your investor or the public, of course, McKinsey and these other big names will be your best choice," he says. "Whether the solution is good or not, you can say, ‘We've hired the best consulting group, if it doesn't work it's not my responsibility.'"

But even a consulting project from a smaller vendor can cost more, in time as well as money, than most SMEs can afford. Consultants EUROBIZ spoke with typically take between three to six months to complete a full project, and can charge in the tens of thousands of euros.

There are other options, however.

One of these is Roland Berger's "flash diagnostic," a quicker, cruder version of the full project that aims to identify a company's most vital problems and offer solutions in as little time as possible. According to Lin, the diagnostic takes between two to four weeks, during which consultants construct an "issue sheet" in a process akin to a doctor examining a patient with no specific illness in mind.

"If you can go through all the physical check-ups, of course that's ideal," he says. "But not everyone has the time or money for that. If you only need an X-ray, not an MRI, then let's just do an X-ray." Lin used this approach to solve the furniture company's product problem. He also used it to fine-tune operations at a foreign-invested pipe manufacturer, after which the company posted 40 percent revenue growth.

For companies that are unclear about what ails them, only that they don't feel well, Roland Berger offers long-term "turn-key" consulting services based on a nominal monthly fee. Van Kerckhove's Beijing Global Strategy Consulting offers a similar coaching arrangement, as do a number of other firms (which can be found on page 74 of this issue). While no consultant does everything well, Lin says, a good "partner" consultant can often point clients in the direction of other specialists to handle specific problems as they arise, be they in IT, process engineering, mergers and acquisitions, management or some other area.

"When looking for this kind of consultant, you want a company with an international network," Lin advises. "And you want a company that thinks of you as a friend, not as an ATM."

An alternative: Go dancing

For SMEs that wince at the idea of paying even a nominal fee for such advice, ASC's St Pierre says the decision is simple. "Save your ‘consultant money' to fix your problem, find another business or get the hell out of China."

After being burned badly by a consultant as president of Beijing Jeep in the 1980s, St Pierre says, he decided never to hire another. All of ASC's problems, including those mentioned above, have been handled in-house. "To this day we have not used consultants, although a few drinks at the bar with old friends has often produced some good advice."

Van Kerckhove says almost exactly same thing. The Belgian, who has been working in China since 1981, recommends SME managers do more "saloon dancing" - going to parties and events where more experienced people are likely to be found, buying those people drinks and picking their brains. "Networking like this allows SMEs to know which consultants to consult, if you ever really need one."

With the new Labour Law expected to push labour costs up by 20 to 25 percent in the long run, according to Lin, SMEs will be best served if they dedicate their limited resources to hiring and keeping the right staff, without which no amount of consulting will help.

"Consultants can be great," he argues, "but you need people who understand how to put their advice and reports into context. If your people don't have the right background, they can get into big trouble because the markets will change quickly. A lot of reports are based on certain assumptions, and once the basis for those assumptions changes, the reports become useless."

Keeping up-to-date

Enrico Perlo, chairman of the European Union Chamber of Commerce in China SME Working Group and head of China operations for Beijing Guala Closures.

EUROBIZ: What are some of the unexpected challenges that Guala has faced as it has grown?

Enrico Perlo: Changes in regulations challenge you all the time. For instance, in the middle of June of 2007, we received information that two weeks later the VAT (value-added tax) rebate for our exports would be revised for our product from 12 percent to 5 percent. Suddenly, in the middle of the year, we found out that our costs were automatically increased. We not only face changes in rules and regulations - because that happens in every country - but often very, very short notice on the implementation of new regulations. We have to respond to these changes very quickly, and sometimes you just cannot do it in time.

EB: How do you deal with that?

EP: My manager and I try to keep ourselves as well-informed as we can. There is lots of information on the Chinese government websites, which we check regularly. When we hear rumours about a coming change, we check those sites even more often so we get the information as soon as possible.

For other kinds of information, we have been working for 10 years with a law firm. We receive updates from them on a regular basis and get specific information from them by phone when we need it. We have a similar relationship with an audit firm. We also get information from organisations like the European Chamber. With the Working Group, we organise monthly seminars with professionals to provide updates on specific issues. So we have a lot of different avenues for receiving information.

You have to do this to prepare yourself, like for instance with the Labour Contract Law. It has been debated for the last six months. Up until now, we haven't known exactly how to prepare because the full implementation rules are not out yet, so we are following our regular sources, including our lawyers.

EB: Looking to the future of the China market, how do you see the relationship between foreign SMEs and consultants developing?

EP: Consulting companies will definitely play a major role in helping SMEs come to China. But companies have to study the market themselves. Part of the problem is China is very big. Consultants cannot give the full spectrum of information. If you are investing in Beijing or Tianjin, you are dealing with very different kinds of regulations, different costs in terms of labour and real estate. Every place is different. So consultants can help a lot, definitely, but companies must really feel the market for themselves, and understand where they want to be and where they want to go.