Competition in the Shanghai Free Trade Zone (SFTZ) is about to go up a level. The launch of Sony’s PlayStation 4 in China this year opens up a new front in the global console war with Microsoft’s Xbox 360. Yet the Japanese electronics giant is not the only firm taking a technology fight with Microsoft to China.

Nexedi, a small and medium-sized enterprise (SME) from Lille in Northern France, operates in the enterprise software sector, which is dominated by Microsoft and SAP. It offers its flagship software, called ERP5, open source—or free from licensing fees; it generates revenue by helping clients with implementation and maintenance.

This strategy has helped the French software and services vendor rack up a range of government and corporate clients across the world, including Airbus, France’s Ministry of Finance, Japan’s Sankei Chemical and the Senegalese government. Now the company is focussed on China, where the challenges and the potential for growth are equally colossal.

“Half the Internet is in China nowadays,” says CEO Jean-Paul Smets. “It’s a country where Internet technologies are being created, and sometimes are superior. So we can’t just stay outside it.”

But given the legal complexities that govern the information technology and e-commerce industries in China, establishing an on-the-ground presence there never seemed like an option—until the creation of the SFTZ. Nexedi’s wholly-owned subsidiary Nayu (Mandarin for ‘open world’) Software Technology launched in late 2013. For Mr Smets the zone was the solution for some long-standing issues with delivering its largely web-based solutions to Chinese customers.

Windows on the world
Previously Nexedi’s websites were sometimes blocked or inaccessible from China. The obvious fix for this was to establish a website locally.  But this required opening a local company, and the participation of a Chinese joint venture partner—a step Mr Smets was not prepared to take. “This sounded to me like a form of protectionism of another age,” says Mr Smets. “I wanted a fully foreign-owned company, just like we could have in the U.S., Japan, Germany or Senegal.”

It was then that the CEO came across an article about the SFTZ that outlined the zone’s more liberalised environment for foreign businesses—particularly the ability to establish a 100% foreign-owned enterprise and a “negative list” approach to foreign investment that essentially permits any activities that are not expressly forbidden.

However, as a technology vendor, Nexedi still had to ensure it did not run afoul of restrictions that persisted in the zone; rules forbid fully-foreign owned companies from engaging in e-commerce, running data centres, managing private data or providing telecommunication-like services.  Nexedi achieved this by modelling its China business as an online marketplace of business applications, which allows users to download solutions without requiring a login or storing their personal data. Payment processing is outsourced to a third-party provider.

In this way, China acts as a window for Nexedi on emerging trends in international data and Internet regulation. As Beijing implements a more robust data protection regime that includes sanctions for companies failing to secure customer information, Internet companies have to be more creative.

“By designing a service in China, you actually design a service that is compatible with the future of the Internet everywhere else in the world,” says Mr Smets. “We now know how to make a cloud (computing system) where no data is kept anywhere,” he explains, which could cater to growing global concerns about privacy and the leakage or theft of data stored by companies.

Opening doors
While the SFTZ may not have entirely levelled the playing field for foreign technology companies, Mr Smets has nothing but praise for its services. The zone’s ‘one-stop’ platform for company registration enabled Nexedi to set up there in just a few weeks, and the authorities were also “incredibly fast” in issuing the CEO a work permit. Appointments with officials can be booked online in a matter of minutes and the zone’s administrators can be flexible.

“As long as the laws can be interpreted with respect to their purpose, they can accept slight diversions to the formal text as it is written,” says Mr Smets. “When I interact with Chinese civil servants, I feel they try to help, rather than the opposite. We have companies in many countries, and I find the government administration tradition in Shanghai very proactive.”

Nexedi’s investment in the zone has also been quick to pay off. It took five years for the firm to get its first government customer in France, while in China it secured one in just a couple of months. The plan for the next five years is to turn the Shanghai facility into a software development hub. Nexedi intends to hire and train Chinese developers in France who will eventually be transferred to the Shanghai operation. This somewhat convoluted staffing model is a result of a problem for the city as a whole, and increasingly countrywide—a shortage of reliable talent.

“We need our staff to stay five years or more, but this is incompatible with the work culture in Shanghai, where quick turnover is the standard,” says Mr Smets. “We base our profits on accumulated know-how; it takes one or two years to train our people and the average turnover in Shanghai might be 18 months.”

Costs are also an issue, though again Mr Smets does not see this as specific to the SFTZ. “It’s the most expensive place in the world for us, but this is Shanghai, and anyway there’s no choice. Either we do what has to be done and we are present in China, or we don’t and we’ll get competition from China.”

Mr Smets acknowledges that the SFTZ seems to have got off to a slow start, at least from the perspective of attracting foreign investment.  But he is confident that the zone will continue to evolve. Indeed, the authorities recently introduced a pilot scheme to allow foreign investors to fully own e-commerce companies. “It’s given us the freedom to operate our innovative Internet services on our own,” says Mr Smets. “That’s enough for us.” 

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