SMEs keen on transformation amid challenging times

Singapore

SINGAPORE's small-and-medium enterprises (SMEs) are looking to invest in their businesses despite expectations that the next six months will bring a weaker economic environment and dent financial performance, according to a survey.

The SBF-DP SME Index has edged down from 50.7 to 50.4 this quarter - declining for the fourth consecutive quarter - in a nod to softening business sentiment and increased wariness among SMEs. The index - a joint initiative of the Singapore Business Federation (SBF) and DP Information Group - measures the business sentiment of SMEs for April to September, surveying over 3,600 SMEs between Jan 14 and March 1.

Along with a neutral sentiment reading, the latest index shows lower expectations for turnover (from 5.13 to 5.03) and for profitability (from 5.07 to 4.94). This is the first time in six quarters that profitability expectations has dropped below a reading of 5.0, indicating uncertainty.

However, the index also shows an increase in capital investment expectations across all sectors, except business services. The overall figure increased marginally from 5.16 last quarter to 5.18 this quarter.

In a joint statement, SBF & DP said that this could be reflective of initial reactions to SME-related funding initiatives announced during the Budget this year. They added: "This could also indicate a growing focus on business transformation with a view on investing for the long-term success."

Manufacturing saw the biggest rise in capital investment expectations of the sectors, going up 2.15 per cent from 5.12 to 5.23, which suggests "manufacturing companies are taking necessary steps to transform their business, such as investing in digitalising its processes, as they expect the near-term moderation in turnover and profit to thin".

Similarly, the score for the retail/F&B (food and beverage) sector increased 1.71 per cent to 5.35 "potentially due to SMEs in the sector continuing to embrace technology innovation and digital solutions, such as e-payment methods, to improve customer experience and service". The government also announced during the Budget that it would be tightening foreign worker quotas for the services industry starting January 2020. The dependency ratio ceiling (DRC) for the services industry will be cut from the current 40 per cent to 38 per cent in January 2020 and then down to 35 per cent in January 2021. In addition, S Pass worker quotas will come down from 15 per cent to 13 per cent in January 2020 and fall further to 10 per cent in January 2021.

Meanwhile, the manufacturing sector saw a 1.2 per cent quarter-on-quarter decline in sentiment from 50.3 to 49.7 in January, which is the first time sentiment has gone below the 50 level in the last two years. When comparing year on year, it was down 3.87 per cent.

This was a result of a decline in five out of seven expectations - turnover, profitability, business expansion, capacity utilisation and access to financing. In particular, turnover and profitability expectations saw the largest drop in sentiment, likely on the back of lower factory output.

Ho Meng Kit, chief executive of SBF, said: "The unresolved geoeconomic and geopolitical conflicts continue to weigh on the confidence of SMEs, but we urge our companies to keep their eyes focused on the longer term and persist with their business transformation efforts to sharpen quality and improve productivity. This will help them stay ahead of increasing global competition and keep pace with industry changes."

He also said despite the more challenging environment for exports and the manufacturing sector, there are still opportunities overseas for growth.

James Gothard, general manager (credit services and strategy South-east Asia) of DP Info's parent Experian, said of the manufacturing sector decline in sentiment: "Though we do believe that this is temporary, in the longer horizon, we may see (SMEs) bearing fruits due to their investments in business transformation."

Mr Ho added: "SBF continues to actively engage our companies to make effective use of Singapore's extensive network of Free Trade Agreements (FTAs) and will keep up our momentum of business transformation activities such as training and providing members with overseas business opportunities through business missions and global trade fairs."