For many small and midsize enterprises in Europe and North America, the prospect of doing business in China can be daunting. In fact, as a result of their reluctance, such companies seem increasingly vulnerable on several fronts: they are not only forfeiting opportunities to sell goods and services in China and to source low-cost products in its factories and workshops but also face new Chinese competition at home.

But rather than wait passively for the day when these competitors show up on their doorstep, they can pursue strategies that could help them overcome the barriers to entering China's domestic and export markets. To be sure, those barriers are considerable. Many small and midsize companies are hardly eager to deploy scarce management resources to identify qualified Chinese vendors or to research and understand the tastes of the country's consumers. Nor do they have the time and resources to recruit staff and manage operations there.

By the time these companies act to overcome such barriers, it may be too late: their multinational customers, which are rapidly expanding in China, may already have created networks of local Chinese suppliers. What's more, as these suppliers hone their skills by serving demanding multinationals, they will be even better placed to compete both in China and overseas. The textile industry already suffers from the lifting of quotas on Chinese exports. In the foreseeable future, the continuing liberalization of China's exports will probably affect sectors such as basic machine tools, automotive components, and home and office furniture.

Where should small and midsize Western companies turn? Businesses seeking to break into the Chinese market sometimes consider partnerships with local enterprises. This approach may work for some, but even large multinationals find it extremely challenging. Identifying a trustworthy partner thousands of miles away can be an enormous drain on management time and company resources. And once partnerships or joint ventures get under way, small and midsize foreign companies often discover that their views on important issues (such as governance, equity participation, and operational control) differ markedly from those of the Chinese.

Fortunately, small and midsize companies have more effective ways of expanding into China. Most such companies belong to powerful national trade bodies that could help them band together and share resources within or across sectors. A trade body might, for instance, create a shared sourcing center to screen hundreds of potential Chinese vendors and generate a short list of those qualified to meet the needs of member companies. This center might offer expertise in areas such as contract negotiations, monitoring suppliers, and quality assurance.

Trade bodies might also want to link up with the owners of industrial parks or development zones to establish shared facilities that small and midsize foreign companies could use as manufacturing bases. Partnering with a Chinese industrial park would, for example, give member companies access to shared infrastructure and management resources, which could help them get through the start-up phase. They could also benefit from economies of scale by sharing market research, sales agents, and access to distribution channels. Once a member company had built a sufficiently large business, it could move to its own facilities within the same industrial park.

Joining forces under the umbrella of a trade body is only one of several options. A company could also strengthen its ties with its most important multinational customers, many of which are expanding operations in China and would prefer to source from the same network of suppliers they use at home. Multinationals might therefore be willing to help suppliers from their home markets share infrastructure, establish relationships with industrial parks, navigate China's investment approval processes, and recruit talent. Some might even be willing to lend management expertise to help suppliers speed up the launch of their Chinese operations.

Most small and midsize manufacturing companies must face up to the challenges posed by China or risk being squeezed out of their home markets in the years ahead. Cutting operational costs is essential. But companies can turn the China threat into an opportunity if they pool resources and share capabilities and experiences. This approach shouldn't require large amounts of capital. Instead, companies should try to renew—and tap into—the entrepreneurial energy that helped them establish themselves in the first place. With a little help from their industry peers or multinational customers, they may find that they can achieve far more in the Chinese market than they ever would by going it alone.