SMEs remake themselves amid cost pressures

Singapore

COST and manpower pressures are forcing small and medium enterprises (SMEs) to rethink how they do business, with the majority shying away from simply introducing new products and instead re-examining what they do, and doing more of what they can do well.

"SMEs are fighting back and making dramatic changes in order to reduce their reliance on manpower and keep ahead of their competition," noted Chen Yew Nah, managing director of DP Information Group, which conducted the annual survey. "With half of all SME business models being re-evaluated, the next few years will see many SMEs undergo major transformations in order to survive."

A record 2,836 SMEs took part in the survey this year. Of this, 51 per cent said they will be relooking their business model over the next 12 months. Meanwhile, 50 per cent said they plan to increase their production capacity. Notably, the proportion of SMEs planning to expand their range of products and services fell from 33 per cent in 2013 to 17 per cent this year.

More SMEs are also planning to expand overseas (from 14 per cent in 2013 to 20 per cent this year. This corresponded with a noticeable decline in companies pursuing expansion within the local market (17 per cent to 8 per cent) and brand awareness (15 per cent to 3 per cent).

Already, more SMEs are doing business overseas. The survey found that one in two companies are earning money from overseas, up from 46 per cent last year.

Malaysia, China and Indonesia remain the three most common countries where Singapore SMEs are doing business. Meanwhile, the US and Australia entered the top 10 list at the expense of Japan and Brunei.

"In the midst of a challenging domestic environment and intensifying global competition, SMEs expanding overseas need to be quick to seize opportunities in new markets and be prepared to adopt new strategies," said Jacelyn Teo, group director for planning, International Enterprise (IE) Singapore.

SMEs are also adopting different strategies as they venture into new markets. According to the survey, the number of SMEs whose main mode of overseas engagement is export of goods and services has fallen across most sectors. More SMEs in the retail sector now work through overseas distributors, an indication of the importance of local networks and localisation. On the other hand, those in the construction and IT sectors are now seeking overseas alliances as a mode of growth, added Ms Teo.

Even as more SMEs are venturing overseas, the proportion of international revenue they generate is falling. The percentage of SMEs generating less than 30 per cent of their revenue overseas rose to 53 per cent this year from 43 per cent a year ago, while those earning more than 70 per cent of their revenue overseas fell to 21 per cent from 26 per cent a year ago.

Changing market conditions continue to have a polarising effect on the creditworthiness of SMEs. Nearly a quarter (23 per cent) of SMEs have a DP1-4 Investment Grade credit rating, demonstrating they have the financial strength to take on new opportunities and the ability to expand and grow sustainably. But, there is an increase in high-risk companies (DP7-8), up from 43 per cent to 45 per cent.

SMEs with weak credit ratings can have a domino effect on the entire business ecosystem because if they fail to pay their vendors on time, this leads to other companies experiencing weaker cashflow. This can result in an increase in non-performing loans, which will restrict the ability of SMEs to access funding from lenders.

Leung Wai Ling, group director of capability and partnerships, Spring Singapore, said: "The average cash reserves of SMEs have declined steadily over the years from $1,374,000 in FY2010 to $718,310 in FY2013, a drop of 91 per cent. This may affect their ability to respond to emergency cash needs, to invest in the business, as well as their ability to secure new financing."

SMEs may choose to tap the Financial Management Toolkit, adopt bite-size improvements through the Innovation and Capability Voucher (ICV) or embark on a comprehensive project through the Capability Development Grant (CDG) to strengthen their cash-flow management and formulate sound financial strategies.

Other major challenges faced by SMEs include difficulty in hiring staff (49 per cent) and high manpower costs (48 per cent). Increasing competition was the third most common concern (45 per cent) followed by high rental costs (31 per cent).

Not that SMEs are sitting on their laurels, or simply giving up. The majority (87 per cent) are looking to improve productivity in 2014, up from 2013's 58 per cent.

Most are still looking at ways to optimise the use of manpower (54 per cent), but an increasing number are looking at introducing automation (up from 21 per cent in 2013 to 28 per cent in 2014).