Understanding the Chinese Client Experience by Opportunity International

UNDERSTANDING THE CHINESE CLIENT EXPERIENCE January 2019

The Opportunity International research team with their Chinese interpreters and OI China Limited management after debriefing a successful week of client research.

Acknowledgements The authors wish to gratefully acknowledge the key role of the MetLife Foundation in funding Opportunity International China’s work with Chinese entrepreneurs in northern Jiangsu Province, as well as the support of the MetLife Foundation in planning and carrying out this research. We wish to thank Opportunity International China Limited’s management, in particular, K.C. Wong (OI-China, CEO) and Chye Ann Soh (OI-China, Executive Director) who made the study possible, the branch managers: Shane Chen, Simon Han, Jacob Yang, and Ray Wu across the four branches (Siyang, Huai’an, Suyu, and Shu Yang, respectively), and their respective teams who were key in identifying clients for the study sample and facilitating access on interview days. We note also the help of our interpreters, Wei Liu, Xing Gao, Jun Zheng, and Yuxing Zhang, who not only made the interviews possible, but also joined us as we adjusted processes on the ground to make the research a success. We also want to thank the patience and candor of the various clients who participated in the study. The journeys and stories allowed us to experience the hopes, dreams, and challenges that they have faced over the years. And their hardworking spirit was evident across all respondents without fail. We hope that this research has captured key aspects of your experiences. With appreciation,

Authors Abigail Condie, Research and Knowledge Coordinator, Opportunity International Alex Baum, Senior Program Manager, Opportunity International Dr. Genzo Yamamoto, Director of Knowledge Management, Opportunity International Dr. Peter Clark, Senior Projects Manager, Opportunity International

Dr. Genzo Yamamoto

On the cover: Chicken farmer Xu Jianfeng from Northern Jiangsu province in China.

Table of Contents EXECUTIVE SUMMARY

UNDERSTANDING OPPORTUNITYâ&#x20AC;&#x2122;S ENGAGEMENT IN CHINA

Opportunity International in China

Partnering with MetLife Foundation to Serve Chinese Communities

CLIENT-CENTRIC RESEARCH USED TO DEEPEN CLIENT UNDERSTANDING

FINDINGS FROM THE FIELD: THE RURAL CHINESE ENTREPRENEUR

Finding One: Powerful Entrepreneurs, Big Weaknesses

Finding Two: Businesses Are Built on Personal Relationships

Finding Three: Responding to an Unstable Environment

Conclusion: The Challenges Facing Rural Chinese Business Owners

Recommendations 19 APPENDIX 1: RESEARCH METHODOLOGIES EMPLOYED

Business Journey mapping (BJM)

MSME Business Self-Assessment

Strategy Mapping

Executive Summary In April 2018, a research team from Opportunity International supported by Chinese interpreters interviewed a total of 46 clients from four OI China branches. The purpose of this research was to gain a deeper understanding of micro, small, and medium enterprises (MSMEs) across the main sectors served by Opportunity International China (OI China). The research team employed three distinct methodologies aimed at understanding the “past,” “present,” and “future” of each client business. Findings from this study provide important insights about the goals, needs, and abilities of rural business owners in China. This research identified common strengths and weaknesses among Chinese rural MSME owners that impact their ability to succeed in a challenging business environment. Findings from the research include the following: 1. Rural Chinese entrepreneurs have a strong desire to grow, but gaps in business knowledge and practice often made this difficult. While many participants expressed significant ambition in expanding their business, poor practices in financial accounting, marketing, and market assessment posed significant limitations to their ability to grow. 2. Many of OI China’s clients rely on their personal social network for key parts of their business. Friends, family members, and neighbors often serve as significant advisors in business strategy and technical expertise. Many business owners rely on dedicated relationships with a small number of buyers in running their enterprises. These preferences can often lead to suboptimal operations and increased business risk. 3. The ability of business owners to respond to the unstable business environment in rural China varies substantially. External shocks like environmental disasters, disease, and government restrictions can have major impacts on rural Chinese businesses. Certain skills and business practices provide OI China’s clients with a better ability to weather these shocks and respond to increased difficulties.

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Based on these findings, the research team believes that the following recommendations will benefit OI China and other organizations looking to serve MSME owners in northern Jiangsu: 1. Provide clients with access to additional training and resources. Many clients struggle with issues of financial management and skill development—relying on friends, family, and neighbors in order to get important information. A database of available, quality resources and connections to government, academic, and sectoral training opportunities would be highly valuable for clients. These resources could be provided in a digital format for easier access. 2. OI China and other organizations working with Chinese MSMEs should center customer care and engagement around the traits valued by their clients—trust, respect, and honesty. These values should be incorporated into efforts to clarify loan procedures and strengthen clientloan officer relationships so that clients will see their loan officer as another trusted member of their personal social network. 3. Differentiate clients by sector, region, and business size instead of loan size, which is often the current practice. Upon careful policy review of what constitutes appropriate levels of technical assistance, OI China staff can be trained to pinpoint key areas that would help businesses— differentiated in various ways—strengthen their operations.

Understanding Opportunity’s Engagement in China Over the past few decades, the percentage of China’s population living in poverty has fallen by unprecedented levels. Between 1990 and 2015, the percentage of the Chinese population living below $1.90 per day dropped from 67% to just under 1% with nearly 750 million people moving out of poverty over this 25-year span.1 Despite these dramatic improvements, China has continued to face economic inequality, with a Gini coefficient in the bottom third of countries globally.2 This inequality is most prevalent when comparing China’s rural and urban populations. This rural-urban dichotomy is a result of differences in access to economic opportunities. This can be seen most starkly in the availability of employment, which over the past four decades has driven job seekers from rural areas to urban centers in one of the largest internal migrations in human history. In the 30 years since 1982, between 200 and 250 million people migrated from rural to urban areas, resulting in 286.5 million rural migrant workers in China in 2017.3 This employment imbalance has been one of the key causes of several high-profile issues in China, including rural-urban inequality and the prevalence of “left behind” family members. The relative absence of economic opportunities in rural China has been exacerbated by a lack of access to financial services. While 41% of the Chinese population have saved at a financial institution, only 10% have borrowed from the formal financial sector, and financial inclusion is even lower in rural areas.4 Access to finance is also a challenge for Chinese companies. Only 14% of small Chinese firms have a loan or line of credit—nearly half of the average among other G-20 middle income countries (27%)—and 22% of Chinese companies saw access to capital as their biggest obstacle, compared to 10% for other G-20 middle income countries.5

China, despite its economic success, is still a country with significant gaps in terms of poverty and financial inclusion. Lack of access to capital and economic inequalities point to a need in China for lending to MSMEs—particularly in more rural parts of the country. It is in this context that Opportunity International has worked to create jobs and serve entrepreneurs in rural China.

Dr. Genzo Yamamoto (left) with Kindergarten owner Ding Yu Xia

1. World Bank Poverty & Equity Data portal. http://povertydata.worldbank.org/poverty/country/CHN 2. World Bank World Development Indicators. http://wdi.worldbank.org/table/1.3# 3. National Bureau of Statistics. Annual survey of migrant workers. Accessed via China Labor Bulletin. http://www.stats.gov.cn/tjsj/zxfb/201804/ t20180427_1596389.html 4. Jain-Chandra, Sonali., Niny Khor, Rui Mano, Johanna Schauer, Philippe Wingender, and Juzhong Zhuang. “Inequality in China — Trends, Drivers and Policy Remedies.” International Monetary Fund. WP/18/127, June 2018 5. Bai, Dangwei, et al. “Toward Universal Financial Inclusion in China: Models, Challenges, and Global Lessons.” World Bank Group and People’s Bank of China. February 2018. https://openknowledge.worldbank.org/bitstream/handle/10986/29336/FinancialInclusionChinaP158554. pdf?sequence=9&isAllowed=y

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Opportunity International in China Since its first loan to a chicken farmer in 1971, Opportunity International (Opportunity) has served the economically disadvantaged by innovating to address the multi-faceted challenges of poverty. Opportunity is a global non-profit organization that has pioneered financial inclusion in developing regions, working at the forefront of savings-led banking, agricultural lending, micro-insurance, and education finance. Building on 47 years of experience, Opportunity continues to drive innovative solutions that effectively end the cycle of poverty for families around the world. Primarily as a response to the inequalities and levels of poverty in rural China, in 2003 Opportunity established Opportunity International China (OI China) in Hefei, the capital of eastern Chinaâ&#x20AC;&#x2122;s Anhui Province, to provide financial services to impoverished microentrepreneurs. In 2009, OI China expanded operations into the rural districts of northern Jiangsu Province, an area of about 32 million peopleâ&#x20AC;&#x201D;many living on less than $2 USD per day. OI China now operates through five bank branches in Jiangsu and Anhui provinces, providing loans to businesses, alongside training, capacity building, technical assistance, and business development services uniquely tailored to the needs of rural China.

Partnering with MetLife Foundation to Serve Chinese Communities In 2014, Opportunity and MetLife Foundation began partnering to bring vital financial access and business training to rural entrepreneurs in Jiangsu Province, with the goal of creating and sustaining jobs and improving livelihoods. Since that time, Opportunity and MetLife Foundation have impacted over 25,000 jobs and trained more than 7,500 participants, helping spur economic growth in some of the most depressed regions of Jiangsu. As part of this partnership, Opportunity and MetLife Foundation initiated a learning agenda aimed at better understanding the experience of rural Chinese entrepreneurs. In April 2018, a research team from Opportunity interviewed a total of 46 clients from four OI China branches. The purpose of this research was to gain a deeper understanding of the strengths and needs of rural Chinese MSME owners. In the following sections, this report outlines the research methodologies used in this research, the major findings regarding Chinese rural MSME owners, and recommendations for how to improve service to these entrepreneurs and support them in building successful businesses.

OI China client Ms. Xumei owns and runs a knitting factory

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Client-Centric Research Used to Deepen Client Understanding In order to gain more in-depth understanding of this client group, the Opportunity research team used a combination of three distinct methodologies during interviews with research participants to get a more robust level of insight. This strategy also allowed for the research to combine well-established methodologies with newer techniques that could be refined into a useful tool for OI China’s future operations. The three distinct methodologies employed as part of this research were aimed at understanding the “past,” “present,” and “future” of each client business:

Sweet melon farmer Qin Dong Cheng with a map of his business journey

To understand the “past”—how clients started and subsequently grew their business—the team used Business Journey Mapping (BJM), a participatory methodology that uses openended, exploratory questions to create a visual mapping of their business journey utilizing human-centered design principles.

Kindergarten director Xia ranking her motivations for having her own business

To understand the “present”—how clients currently perceive their business—the team created an MSME Business Self-Assessment tool, allowing MSME owners to conduct a thorough assessment of their unique strengths and weaknesses in areas that are central to the success of their business. Opportunity created the tool and piloted it in China during this study. To understand the “future”—clients’ goals and future aspirations for their business—the team used Strategy Mapping. Strategy Mapping assists the participant in thinking strategically about the tangible steps (What?) and motivations (Why?) necessary for reaching a specific objective. Information on each of these methodologies can be found in Appendix 1.

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Findings from the Field: The Rural Chinese Entrepreneur Findings from Opportunity’s research highlight a complex picture of OI China’s clients as ambitious economic actors, but with real weaknesses that jeopardize their accomplishments. The rural MSME owners interviewed for this research are driven entrepreneurs who overcame significant obstacles in order to establish their businesses. However, gaps in their business knowledge and practice often create unnecessary risk—particularly given the volatile business environment in which they operate. The Opportunity research team identified numerous examples of challenges and business failures that could have been lessened, if not outright prevented, by employing improved business practices. Highlighting these issues and possible solutions can provide opportunities for organizations like OI China seeking to better serve rural Chinese entrepreneurs. This section will highlight three primary findings about the Chinese MSME owners that participated in this study: 1. Rural entrepreneurs in China are driven to grow their business but are often held back due to a lack of capital, financial expertise, and market knowledge; 2. Many MSME owners place a heavy reliance on personal networks, which creates opportunities for strong business relationships, but also is partly responsible for suboptimal business decisions and a high susceptibility to major shocks; 3. Study participants identified numerous ways in which rural China poses an unstable environment for businesses, which can present significant challenges to business owners who cannot respond effectively to major changes. Together these learnings suggest that gaps in the business practices of rural Chinese entrepreneurs make them vulnerable to the inherent risks that come from working in an uncertain and highly regulated environment.

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STUDY PARTICIPANTS During this study, researchers interviewed clients served by four of OI China’s five branches—all located in northern Jiangsu Province. Table 1 shows a breakdown of the clients interviewed in this study. TABLE 1: OI China MSME Owners Interviewed by Branch, Size, and Sector

Suyu

Siyang

Shu Yang

Huai'an

TOTAL

Enterprise Size Micro

Small

Medium

Animal Husbandry

Farming

Production

Services

Sector

FINDING ONE Powerful Entrepreneurs, Big Weaknesses The OI China clients participating in the study demonstrated an ambitious drive for expansion. Strategy mapping and business journey mapping exercises often detailed significant goals for business growth, and the MSME assessments highlighted the attention respondents placed on acquiring the tools and capital needed to grow their businesses. This shows the entrepreneurial spirit of many businessowners in northern Jiangsu, many of whom returned from jobs in larger urban centers in order to launch businesses in their home communities. Yet in many cases, the researchers identified significant obstacles to intended growth resulting from gaps in business knowledge. Certain poor business practices described by many of the respondents introduced serious risks to the stability and potential of their businesses. The following details how MSME owners were driven to grow and what weaknesses made such growth challenging.

A Desire to Grow Nearly every MSME owner participating in the study—regardless of branch, segment, or sector—expressed a desire to continue expanding their business. Expansion was most commonly articulated in terms of acquiring new assets such as land, buildings, and equipment. Across all sectors, but especially for owners working in production, there was also the assumption of hiring more staff, both as a means of expanding their business and supporting their communities. “To help others” was ranked as a more important motivation for operating a business by MSME owners with employees, compared to owners without employees. Plans for business growth ranged from general, long-term goals to ambitious, step-by-step plans. For example, chicken farmer Fan Lang says he has been thinking about plans for expansion but will wait until he has capital in-hand to flesh out the details. In comparison, Jin Liang, a wheat farmer living near Siyang, provided 9 OPPORTUNITY INTERNATIONAL

researchers with a thorough strategy map for the development of an agricultural tourist business. Mr.Jin’s plans included details ranging from asset purchases, managerial training, and hiring needs to licensing requirements and potential investors. Despite differences in approach and sophistication, ambitious growth plans remained consistent across the MSMEs. Clients’ business journey maps were seven times more likely to list expanding their business as an explicit goal than they were to have no expansion plans or express a goal to continue business as usual. On the MSME business self-assessment, more than three quarters (77.5%) of respondents rated themselves as having a score of 4 or 5 for “Have expansion plan in place,” the highest percentage for any question related to business planning and strategy. While the quality of these plans may vary, the responses suggest that the large majority of respondents viewed significant expansion as a major part of their business goals.

Facing Major Constraints This ambitious focus on growth is often limited by gaps in both business practice and resources. Especially for owners of small businesses, a lack of knowledge in areas like finance and market assessment may prevent Chinese entrepreneurs from growing as effectively as they want.

Wheat farmer Jin Liang with his wife

OPPORTUNITY INTERNATIONAL 9

While some clients with larger businesses have hired accountants, many remain the sole financial managers of cash-based businesses, making asset depreciation challenging. Only 3 out of 46 businesses said that they had an accountant, and asset depreciation received the lowest score of any question from the MSME self-assessment. In these predominately cashbased businesses, awareness of the need for professional financial management but lack of follow-through was attributed to limited managerial staff, lack of standardized accounting practices or training, rapid cash turnover, and the preference to not hire an outside professional for accounting assistance. Ye Bin poses in front of his newly-purchased embroidery machines

The most clearly expressed constraint for study participants was a lack of capital. Most MSME owners said they had faced challenges in accessing capital at some point in the life of their business and now utilized multiple lending streams. Headaches related to accessing capital were some of the most common during the journey mapping portion of this study. The MSME business self-assessment also revealed challenges with lack of capital. “Obtained sufficient startup capital” and “Able to access more growth capital” were among the lowest scoring questions in the entire assessment.

KEY FINDING The most clearly expressed constraint for study participants was a lack of capital. Although capital is clearly a concern for MSME owners, the research suggests that a lack of business knowledge is also a common weakness for many rural Chinese entrepreneurs. One of the most common examples is regarding financial management. 10 OPPORTUNITY INTERNATIONAL

Marketing strategies were also limited, and usually restricted to the initial business launch. Marketing was either misunderstood or seen as irrelevant by most business owners, with nearly half saying that they did not have a marketing plan regardless of how they scored themselves on the MSME self-assessment. A common rationale was that they simply didn’t need to market anymore; —people knew where to find them and their businesses stayed busy. For example, Ye Bin, who owns an embroidery factory in Suyu, traveled hundreds of kilometers by motorcycle to visit potential clients when he first started his business, but now says he has a steady enough stream of orders that he does not worry about marketing his business. Other business owners responded to the marketing plan question by talking about sales quotas rather than marketing or communication plans (36%) or by saying that they simply worked with friends or local customers (18%). Regardless of size, businesses in the service sector were the most likely to have a marketing plan (60%) and seemed most aware of the importance of good marketing. Many clients in agricultural sectors believed that marketing was irrelevant due primarily to established pricing and predetermined buying arrangements. However, more evidence is needed to determine whether this assessment is accurate, and for which value chains.

Few business owners prioritized market information such as competitors’ marketing strategies or perceived demand, despite articulating business challenges that could be resolved with greater attention in these areas. For example, some respondents noted the challenge of “limited visibility” for their product, while other business owners discussed “identifying their target segment.” Several clients talked about relying on connections with their community, family members, or friends to find customers. Among the 25 business owners who commented on how well they knew their competitor’s marketing plan, only 24% said that they had a good sense of their competitor’s marketing. Of the remaining respondents, 24% said that they needed more information about their competitors’ marketing and just over half said that knowledge of their competitors’ marketing was irrelevant. This evidence suggests a disconnect between the growth targets of Chinese entrepreneurs and the business practices that will enable that growth. While not every business requires a coherent marketing plan or reliable accounting practices, many MSME owners are likely unaware that the absence of these practices limit their growth prospects.

Pig farmer He Xiao Hong has an exclusive relationship with one company who sells her piglets and inputs, then buys her grown pigs at the nationally-established price

KEY FINDING Lack of business knowledge (especially regarding financial and business management, along with market information/ strategies) is a common weakness for many rural Chinese entrepreneurs. MSME owners with more sophisticated financial management, a thoughtful marketing strategy, and an awareness of their local business environment may be better placed to expand their businesses, thus creating more jobs in their communities. Yet the current research suggests that many, if not most, of OI China’s clients struggle in these areas. 11 OPPORTUNITY INTERNATIONAL

FINDING TWO Businesses Are Built on Personal Relationships Interviews conducted as part of this research revealed how Chinese entrepreneurs rely heavily on personal relationships for running their businesses. MSME owners discussed how their social networks—including family, friends, and neighbors—play a central role in everything from staffing to strategy and from technical assistance to their primary customer base. Even outside of these close social networks, a relationship built on trust is seen as a critical requirement for any important business relationship.

This has given many rural Chinese entrepreneurs a strong social base from which to launch and grow their businesses. But it also leads to glaring weaknesses and risks that can create suboptimally designed enterprises.

The Importance of Trust Rural Chinese entrepreneurs consistently noted the importance of trust in any business partnership. Multiple participants reported that values like trust, honesty, and respect were integral for basic business operations. During the MSME self-assessment, business owners scored the values of respect and honesty as the most important of the available options. One client from Siyang stated that honesty is the basis for being human, especially for the Chinese, while a client in Huai’an said that respect is the basic requirement for interaction. MSME owners frequently mentioned how important it was to be seen as trustworthy by their staff and business partners, especially regarding payments. “Paying expenses on time” was one of the highest scores of the assessment, with 85% of respondents giving themselves the highest possible rating, and the rest receiving the second highest. Business owners rated themselves highly for having a clear and fair pay scale and spoke of these high scores with pride. For many, a reputation for paying on time was a primary recruiting tool—they are seen in the community as trustworthy and are thus able to attract qualified employees. This relationship is especially critical for employees who don’t have formal contracts. Several business owners relayed stories of how they were able to attract employees from their competitors because they were seen as trustworthy (paying on time) and their competitors were not. Across the board, MSME owners ranked themselves very highly for running trusted businesses and shared examples of how they had built strong relationships with both customers and business partners. Hu Mobing, a fishery owner from Siyang, noted that the bosses of his customers no longer come themselves to buy his fish. Instead they simply send a truck and pay over WeChat, which he believes means 12 OPPORTUNITY INTERNATIONAL

KEY FINDING Chinese MSME owners see trust with staff and business partners as crucial for running a successful business. he has won the trust of his clients. She Shuai, a factory owner in Suyu who produces plywood planks, commented that his customers and other members of the community often ask him out for drinks because they trust him.

Relying on Social Networks Personal relationships are a central determining factor for how rural Chinese entrepreneurs choose to conduct their business. A neighbor, friend, or family member was the most common external source of knowledge, and few MSME owners mentioned taking formal courses or accessing digital or print resources. These personal relations were relied on in a number of important business areas, including: XX Business

strategy;

XX Product

diversification and technical knowledge;

XX New

business ideas and guidance during the start-up phase; and

XX Business

relationships, such as identifying or serving as a buyer or supplier.

By relying on personal networks, MSME owners often substituted traditional business practices with more informal solutions. One example is marketing strategies. A number of MSME owners discussed using connections to their community, family members, or friends to find customers instead of more traditional methods like taking out advertisements or offering promotions. In some cases, this reliance on personal connections may be one of the reasons why so few study participants had a marketing plan or felt a marketing plan was necessary, as noted in the section Finding 1: Powerful Entrepreneurs, Big Weaknesses.

For example, restaurant owner Xu Shoudong launched his restaurant by inviting friends and family. Since then, he has mainly seen his clientele grow past his own personal network through word-of-mouth. This reliance on personal connections for business knowledge is risky, since it can be difficult to gauge the quality of the information received. A priority is given to proximity and familiarity instead of expertise, which can lead to suboptimal business decisions. Additionally, relying on locally available knowledge may prevent business owners from gaining an advantage over similar businesses in their community. An example of these challenges comes from Shang Dongmei, an ermine farmer living in Siyang. She initially started a pig farming business based on the recommendation of a friend, who then provided advice on running the farm and sold her the first three acres of farmland. Because this eventually proved too time intensive, Ms. Shang sold her pigs and, again on the advice of a friend, switched to ermine raising. However, her lack of experience led to her animals getting sick, and it was only after seeking help from a veterinarian that she was able to save her investment. After some years of growth, she again tried a new animal, foxes, but this too went poorly, and she had to close her farm. This has discouraged her from diversifying into new products, and her focus is on maintaining her ermine business. In this case, Ms. Dongmei relied on friends for business strategy, technical advice, and even an initial land investment. While these personal connections did provide support when launching her new business, Ms. Dongmei incurred significant losses when her businesses failed due to a reliance on a limited number of information sources with questionable expertise. Choosing to accept the support of family members and friends is not inherently problematic. However, the tendency among many rural Chinese entrepreneurs to rely heavily or exclusively on the support and advice of a personal social network may result in unnecessary business risks and limitations on potential business success.

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USE OF EXTERNAL KNOWLEDGE While study participants did primarily rely on social networks, there were some examples of entrepreneurs going outside of their communities to acquire knowledge or skills. The rise of online sources was one of the primary other options of note. Some other examples include: XX Entrepreneurs

working in animal husbandry would call vets and access national meat prices.

XX At

the medium enterprise level, businesses in the production and service industries were using the internet, but only to recruit employees.

XX Urban

clients in production industries were the most likely to talk about how they had taken a course or studied online.

KEY FINDING Chinese MSME owners rely on their personal connections to launch and run their businesses. This can result in risky or suboptimal business practices. A Few Big Buyers Personal relationships also featured heavily in sales strategies, with many of the MSME owners reporting that they rely on close partnerships with a few important clients in order to build their businesses, and yet did not identify this as a risky business behavior. MSME owners consistently gave themselves high ratings in the self-assessment for having a â&#x20AC;&#x153;strong customer base.â&#x20AC;? Smaller businesses in particular seemed content to rely on a limited number of large contracts.

This was especially true in the agricultural space, where 70% of smaller businesses said the question of multiple partnerships and/or markets did not apply to their business. In general, larger, more sophisticated businesses have more successfully diversified their client base and created strong strategic partnerships. Urban clients in production industries rated themselves the strongest in terms of having multiple partners and/or markets and noted that they had 12, 20, or even 50 strategic partners as part of their business operations. Larger farm businesses were more likely to have established partnerships, with only 20% saying they had no partnerships and some businesses having up to 50 partners. Smaller production businesses appeared more willing to take on the risk of fewer, high-volume customers. Many business owners attributed smaller numbers of clients to the limited capacity of their factories.

of companies to purchase the wooden brush components he producesâ&#x20AC;&#x201D;especially one large customer with its own brand of products. Others attributed their strong customer base to loyal customer groups who provide repeat business year after year. Zhang Wei, a furniture producer from Suyu, noted that a number of his customers have purchased consistently from him for the past three years. These loyal return customers are an important source of revenue for many businesses, with business owners often using this reliable group instead of focusing on increased marketing. These examples demonstrate how many MSME owners view a limited customer base as a viable business strategy without acknowledging the inherent risks involved. Take for example Yu Lei, who runs a clothing manufacturing business. He launched his first business selling original clothing designs in 2010. The business failed when a major customer did not pay for an order and he was forced to close his business.

KEY FINDING Many Chinese MSME ownersâ&#x20AC;&#x201D; particularly smaller business, are willing to stake their business on a limited number of high-value clients. They did not perceive this as risky behavior. However, other business owners noted that they were willing to take on additional customers, since they could always manage the customer relationship themselves and then sub-contract work out to other nearby factories. This appeared to be a wiser strategy, as business owners also shared the challenges their business had faced when a client had refused to pay after an order was completed or suddenly stopped sending them contracts. Many business owners have a limited client base started their business with the intention of selling to a specific client, or else had identified a small group of key clients who were responsible for a bulk of the businessâ&#x20AC;&#x2122; sales. For example, Fang Chong Xing relies on a small number 14 OPPORTUNITY INTERNATIONAL

Yu Lei at his clothing manufacturing business

Now Yu Lei has reopened a factory, this time creating designs commissioned by others. He’s hoping to significantly scale-up the size of his business in the next couple of years and is in discussions with two major current clients to see about handling larger orders of theirs. Despite previous pitfalls, Yu Lei is still willing to base significant scale-up on larger orders with two existing customers, rather than reducing risk by diversifying to a wider client base.

FINDING THREE Responding to an Unstable Environment Like in many rural and developing areas, businesses in northern Jiangsu are susceptible to external shocks. Changes in the business environment can have significant effects on a business’ products and profits, especially if the enterprise has limited resources, lacks access to effective technical support, or relies heavily on a small client base. In China, government involvement in the economic sphere through regulation and government programs frequently impacts the business environment. While it is not within the scope of this research to comment on the effectiveness of Chinese government interventions, the findings show that these initiatives frequently have a significant impact on rural MSME owners. This can lead to instability, frequent change, and challenging situations for business owners. How a business owner reacts to these changes can have an important bearing on the success or failure of their business, and findings from this research indicate that responses among OI China’s clients have varied substantially. Effective business practices like market analysis or access to technical information can often reduce the impact of instability or allow for a stronger recovery in the case of a setback. Yet many of these practices were not widely adopted among the MSME owners interviewed for this study. This suggests an area of potential for many entrepreneurs, especially those in sectors that are most at risk to external shocks, such as agriculture.

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Causes of Instability MSME owners recounted significant challenges brought about by disease, weather, regional and national economic changes, and government regulations. Over one-third of the business owners interviewed as part of the business journey mapping mentioned significant impacts on a previous or current business due to external factors. One of the most frequently mentioned sources of instability was government involvement. Businesses across all branches, sectors, and segments mentioned government regulation to varying degrees, although smaller businesses were the most likely. Their experiences included the forced closure of a previous business or serious business limitations. Of the Chinese entrepreneurs who participated in the business journey mapping, nearly one quarter (22%) reported that they had either lost their business or faced serious growth issues as a result of a government restrictions—not including additional business owners who expressed general frustration about government restrictions or fear that their business may be shut down in the future. Some medium-sized businesses talked about existing legal requirements causing bottlenecks or limiting the growth of their business.

KEY FINDING Nearly one quarter of MSME owners interviewed attributed loss of their business or a significant setback to a government regulation or policy.

For some of the smaller MSMEs involved in agriculture, the desire to grow their business was driven by concerns that the government had begun shutting down smaller animal husbandry businesses and establishing minimum farm sizes.

Ms. Boâ&#x20AC;&#x2122;s previous restaurant in a mall food court was shut down when the government decided to close all restaurants

One client in the service industry had already been forced to close an earlier duck farm business by the government. Smaller businesses often saw the need to adapt as an important skill. Flexibility was the most commonly discussed trait during the Business Journey Mapping exercise, mentioned by 41% of all MSME owners (including all of the microentrepreneurs).

Reacting to Instability While a challenging and unstable business environment could be seen across businesses of all sizes, sectors, and locations, responses to these difficulties varied widely. Although numerous factors influence a businessâ&#x20AC;&#x2122;s ability to respond to these kinds of pressures, one of the most prevalent revolved around business knowledge and skills. A diversified product offering and additional technical skills can be a major benefit to businesses that have been impacted by external shocks. Respondents also showed how a more sophisticated approach to market assessment and business strategy was important for a truly successful recovery. Below are comparisons from agriculture and production businesses that demonstrate these findings.

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Agriculture Client #1: When swine flu struck Wang Jinzhongâ&#x20AC;&#x2122;s pig farm, the government forced him to stop breeding pigs and sell his entire stock. This took a serious toll on his business and he was temporarily required to return to his previous work doing mechanical maintenance. He is now slowly working to rebuild his pig farm and takes greater precautions to vaccinate his pigs. Client #2: He Xiaohong, who is also a pig farmer, owns a medium-sized business in a designated eco-area where farming is supported by the government. She previously ran a rice winery, which she was forced to shut down for undisclosed reasons. After extensive research, she settled on pig farming as a lowrisk, high-reward opportunity. Her piggery runs successfully because she works closely with an agribusiness that supplies piglets and inputs and guarantees to purchase her pigs. She has an orchard of peach trees that clean waste water from the piggery and is looking to diversify by relaunching her rice winery business soon.

Production Client #1: Shen Bangjin owned a business that processed plastic until the process he used was outlawed. He switched to making plastic bags from pellets in 2016. He largely taught himself the process of making plastic bags, which he described as tedious and economically painful, as customers refused to buy his earlier, lowerquality product. Even now he describes the market price for his bags as unstableâ&#x20AC;&#x201D;he goes and sells them himself in nearby markets. He employs five people and aspires to grow his business to the point where he can sell his bags wholesale. Client #2: When Zhang Wei was also forced to close his plastic pellet business, he chose to switch industries. He noticed that the furniture industry was booming and also sent his two sons to study businessâ&#x20AC;&#x201D;specifically online sales. He started a small business specializing in prefabricated beds with 7-8 employees and began selling online. Since launching his furniture business in 2013, it has since grown to fifty employees and two factory locations, with plans for further expansion and product diversification. These comparisons demonstrate the different ways Chinese entrepreneurs respond to unforeseen circumstances. Each MSME owner was forced to close their business and find a new means of generating income. Client #1 from each comparison fell back on previous knowledge (mechanical maintenance and plastic production) for their business, and did not appear to have conducted any notable market assessment. In contrast, Client #2 from each example used the failure of their first business as an opportunity to research other business sectors. The agriculture client toured other pig farms before finally settling on opening a piggery, and even took government support into consideration. The production client sought out an industry with opportunities for growth and leveraged his sonsâ&#x20AC;&#x2122; education to help his business take off.

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These examples highlight a common trend from the research: rural business owners often use a diversified product offering or additional skill sets as a backup source of income during times of instability. But even more effective in recovering from major disruption is a sophisticated ability to analyze markets, identify new opportunities, and invest in areas of high growth potential. This suggests a need for the provision of 1) technical skills that can provide alternate income sources, 2) knowledge on how to effectively diversify product offerings, and 3) business skills and resources centered around market assessment and business strategy. Providing rural Chinese entrepreneurs with these resources may help mitigate the risks inherent in working in a volatile business environment.

KEY FINDING Rural Chinese entrepreneurs who are the most adept at reacting to instability have adopted more sophisticated business practices such as market assessments, a broad clientele, and product diversification.

Conclusion: The Challenges Facing Rural Chinese Business Owners Taken together, these findings highlight some significant challenges facing Chinese entrepreneurs in rural Jiangsu and offer insight into potential areas of focus for organizations looking to serve rural Chinese MSME owners. Study participants clearly showed a drive and entrepreneurial spirit. Yet for many, ambitious plans are held back by gaps in business practice and knowledge. Poor financial and marketing practices, a lack of understanding of local competition, and difficulty objectively assessing business practices may hinder entrepreneursâ&#x20AC;&#x2122; ability to expand and take the next step growing from a micro to a small business, or from a small business to a medium one. In some cases, these gaps exist because a lack of business knowledge. In others, they stem from an over-reliance on personal relationships, which can often replace or reduce the perceived need for more traditional business practices and external knowledge sources. Many study participants began their current business because of the advice of a friend or neighbor. While this can have its advantages, practices like relying on potentially questionable advice from friends, maintaining a limited base of trusted clients, and replicating businesses in the same limited geographic area can create significant risk for MSMEs. Entrepreneurs shared numerous instances where these risks led to significant challenges, and even the failure of their business. This vulnerability becomes more critical due to the instability inherent in the rural Chinese business environment. External shocks ranging from economic slowdown to unexpected government intervention can create major difficulties for unprepared businesses. MSME owners who showed the greatest ability to respond to these challenges were those who adopted more sophisticated business practices such as market assessments, a broad clientele, and product diversification. Yet it is often these practices that are lacking among rural entrepreneurs. The weaknesses of these 18 OPPORTUNITY INTERNATIONAL

business owners can put them at greater risk from external shocks and make them less able to recover when those shocks occur. There were also other findings from the research that speak to potential opportunities. Trust was repeatedly highlighted in the study as a top priority and was viewed as necessary for a strong business. Engaging with business owners from a position of trust and understanding will be very important for organizationâ&#x20AC;&#x2122;s like OI China. Additionally, OI China serves a wide variety of MSME business segments in northern Jiangsuâ&#x20AC;&#x201D; each with different strengths, weaknesses, and needs. Key differentiators include business sector, geographic location, and business size. Smaller, rural businesses focused on animal husbandry and farming were more likely to be concerned about meeting immediate needs and were more likely to discount certain topics as not applicable to their situation. Larger, urban businesses in production and service industries often adopted a longer vision and had a deeper appreciation of marketing and human resources. Finally, business owners in northern Jiangsu view their enterprises as a source of pride and confidence. Each of them has grown their business despite working in the challenging environment of rural China. While hundreds of millions of other Chinese had migrated away from rural areas over the past 35 years, many of OI China clients struggled to build businesses in their home town or returned to northern Jiangsu to apply the experience they had gained from working in larger cities. Most have overcome major obstacles and setbacks, and many have ambitious plans for growth moving forward. MSME owners in this study routinely demonstrated a belief in their ability to succeed, and the value they place in running their own business.

Recommendations Based on these findings, the research team believes that the following courses of action will be useful to OI China and other organizations looking to serve SME owners in northern Jiangsu: 1. Provide clients with access to additional training and resources. Many clients struggle with issues of financial management and skill development—relying on friends, family, and neighbors in order to get important information. A database of available, quality resources and connections to government, academic, and sectoral training opportunities would be highly valuable for clients. OI China could provide these resources in a digital format for easy access. Staff should then be trained to pinpoint key areas where these resources could be useful to clients and to encourage clients to strengthen their operations. 2. OI China should center customer care and engagement around the traits valued by clients—trust, respect and honesty. These values should be incorporated into efforts to clarify loan procedures and strengthen clientloan officer relationships. Some potential changes to operations include: a. Guiding loan officers on how to build respectful, transparent relationships with clients and implementing related performance metrics to ensure follow-through;

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b. Ensuring clarity and confidence in the bank’s procedures and guidelines. Loan officers must be well-versed in the institution’s policies so they can communicate confidently with clients. c. Create transparent guidelines and timeframes for loan processes. Clients must feel that OI China is honest with them and respects them as clients. d. Develop marketing materials that emphasize OI China as an honest institution that respects its clients. 3. Differentiate clients by sector, region, business size, and education level instead of loan size, which is often the current practice. OI China’s multi-tiered client portfolio could also benefit from lending policies designed for both micro and small businesses, and more traditional medium-enterprise lending policies that could also be targeted to generate jobs among target demographic groups (e.g., elderly, disabled, part-time home-based parents, etc.). Additionally, lending levels might also need to be adjusted based on the branch catchment area.

Appendix 1: Research Methodologies Employed The research team employed three distinct methodologies aimed at understanding the “past”, “present”, and “future” of each client business. Taken together, findings from these three provide important insights about the goals, needs, and abilities of rural business owners in China.

Business Journey mapping (BJM) A journey map tells the story of an individual’s experience, whether that involves documenting their life, their business, or their relationship with an organization. The journey map is created as the interviewer asks the participant (in this instance, a client of OI China) openended questions to understand the growth of their business and then details within the map significant events along this journey—including challenges, solutions, and goals for the future.6 The interviewer uses simple drawings to depict these steps and challenges, and the tactile mapping process helps the interviewer ensure that they are hearing the participant correctly and understanding the order of events. Opportunity’s journey mapping methodology is a variety of the Client Journey Mapping methodology first learned from 17 Triggers, a research and marketing firm that utilizes humancentered design principles. In the case of Business Journey Mapping, the goal was to understand how clients had started and subsequently grown their business, as well as to gain some insight into their plans for the future. By asking open-ended questions about their business, the research team was able to identify the challenges business owners faced starting, running, and growing their businesses and the solutions they had employed to

overcome these obstacles. This information— compared across the maps—has allowed the team to gain a better sense of both common business trends, as well as circumstances or challenges that may impact businesses of a certain size, in a particular geographic area, or in a specific sector.

MSME Business SelfAssessment The MSME Self-Assessment research had two primary purposes. The first was to gain insights into Chinese business owners from northern Jiangsu by asking them to identify their own strengths, weaknesses, preferences, and dislikes. The second was to test and refine the Self-Assessment tool for OI China’s use in the future. For this latter objective, the goal was to develop a simple-to-use tool that could help improve a client’s business operations through self-reflection and a needs assessment. The initial MSME Business Self-Assessment tool that we piloted in this study was developed inhouse following an extensive review of available resources for MSMEs—including industry experts such as the International Labor Organization, The Donor Committee for Enterprise Development, Making Cents International, the Ashoka Foundation, and more. Participants were asked to rate themselves on a scale from 1 to 5 on prompts from the following categories:

6. Prior to this study, Opportunity’s Knowledge Management team has tested and adapted the Journey Mapping approach for a number of other contexts. In Ghana, Client Journey Mapping was used to understand how clients first hear about and then decide to use a financial product or service. Client Journey Mapping Report. In another five-country study, Life Journey Mapping was used to understand girls’ education and career pathways—both realized and aspirational. Life Journey Mapping Report.

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1. Business Planning/Strategy

Strategy Mapping

2. Marketing/Sales

Strategy Mapping is intended to help people think through the steps and motivations involved in reaching a key goal. This research approach allows an individual or business to engage the process of reaching a future objective by:

3. Human Resources 4. Finance/Accounting 5. Social Capital 6. Personal Traits

1) Breaking it down into tangible steps and challenges;

7. Values

a. What do I do next?

A final section on Motivations asked participants to rank a list of ten common motivations for starting a business from the most relevant to the least relevant for their personal experience.

b. How will I achieve [certain, key] sub-goals?

There were three primary benefits of this tool for MSME business owners and the financial services industry. First, Opportunity envisioned an assessment that worked well for the context of northern Jiangsu: one that was easy to understand for less educated clients, didn’t require clients to regularly take time away from their businesses, and didn’t necessitate a large investment of Opportunity China staff time and resources. This would provide rural Chinese business owners with a means of quickly and easily identifying the strengths and flaws of their businesses. Second, following the extensive literature review described above, the team was unable to find an existing, widely accepted self-assessment for MSME owners. Being able to develop an assessment tool that could potentially be applied beyond northern Jiangsu, and hopefully globally, could have a significant benefit for the industry. Finally, a self-assessment for MSMEs was considered highly valuable because it would provide a more detailed look at rural Chinese business owners, an oftenoverlooked segment of the Chinese economy.

2) Evaluating the motivations for, and consequences of, goals. a. Why do I want to ____? b. What will this goal achieve? This critical thinking helps an individual consider whether their end goal truly matches their core motivations, or if other alternative goals exist. Strategy mapping has been a commonly used methodology in evaluation, research, and business circles, especially in North America and in Europe. Many practitioners feel that the methodology could be used with good effect in a wider range of situations.7 The implementation of this method was intended to ascertain the clients’ sense of the future, but also to test whether—given the flexibility of the methodology—such exercises could be made useful within the context of MSMEs in northern Jiangsu Province. Given the simplicity of the methodology, strategy mapping could potentially become an easily used tool that clients utilize themselves.

7. John Bryson. Visible Thinking: Unlocking Causal Mapping for Practical Business Results; Visual Strategy: Strategy Mapping for Public and NonProfit Organizations

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