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SMEs comprise more than 99% of the organizations world over, including in
India. Global factors like increased FDI inflow into India, China opening
various business avenues for Indian SMEs, positive outlook of businesses: 71%
trade growth in Asian businesses in 2008, are some of the positive external
factors for this sector to flourish despite the global factors reflecting a
slowdown. However, the Indian SME continues to lack the spark and luster. FII,
PE funds, SPV find them less attractive. There is a compelling need to identify
the current challenges which startups and SMEs are facing, and a mechanism to
overcome them.
Current Day Challenges
Over the last decade, SME sector has witnessed a diverse and deep growth.
There has been an acute rise in domestic demand, fueled by increasing domestic
consumption and exports. Larger number of enterprises need even larger number of
small suppliers, causing extreme price competitiveness. The three most important
factors in sourcing decision making process have come down to price, quality and
reliability of delivery. In this scenario, SMEs are always pressed on
controlling costs and not compromising on quality assurance and delivery. The
challenges are further accentuated by lack of availability of startup funds or
working capital, lack of know-how and other regulatory and tax related
information. Other factors are lack of skilled labor due to inadequate
vocational training facilities and business intelligence for various domains and
geographies.
Many times the FII and PE firms shy away from the small and medium sized
companies or even startups, since they find that the business management lacks
financial management skills and offers poor financial positions. Due to lack of
trust, companies try not to disclose the exact details to hide the poor
positioning. They offer insufficient security causing a further degradation in
the FII/PE confidence in the investment.
It is not that SMEs and startups have poor management backing the company. It
can more reliably be attributed as under developed management due to lack of
exposure, mentorship and financial support. Thus an already challenged SME finds
it difficult to differentiate itself from rivals.
There is also lack of innovation in an SME in terms of penetration of
technology, use of productivity enhancement tools, incubation mechanism and
support for research projects, and encouraging or leveraging internal learning
and knowledge management.
What Indian SMEs Need
Incubation Platform: This directly points to the fact that India lacks
business incubation setup. The industry majors need to provide mentorship to
SMEs of their domain, on how they could be better aligned with their objectives
of a low cost structure, broadbasing their services and products, and a more
reliable environment for operation. The enterprises, SMEs, government and the
society are an integral part of the same ecosystem, that can collectively grow
and not in isolation.
Support from Government
In the most recent UPS Asia Business Monitor report, 81% SME respondents
feel that government needs to play a larger role in sustainability practices.
Let us look at the model deployed by Japan, way back in 1953. Japan Finance
Corporation for Small Business (JFS) was created to enable a basic law which
would represent a shift in policies to enable development and growth of diverse
and independent SME businesses. JFS soon became an integral part of policy
drafting and implementation process, and established a deep understanding of the
SME market. It built a pool of businesses and understood its pulse. Today, it
has more than 100,000 businesses and it leverages this information to groom
newer businesses. The essence behind formation of JFS was not just funds, but
critical advisory, that would keep the businesses alive in long term. There is a
strong need for such a platform to be provided in India.
Need for Communication
India is awakening to the need of communication and its importance to
businesses. Till recent past, PR was considered a luxury and spelt in the same
breath as advertising. However, the communication modes and climate is changing.
As a result, businesses are making use of various channels of communication to
reach out to their audiences such as clients, masses at large, industry bodies,
etc. On the globalized platform, global tools like PR need to be used to gather
the outreach and use it towards expanding not only clients but further
expansion, forming associations and tie-ups.
Valuation & Consolidation
Indian economy has progressed towards building knowledge enterprises to
remain competitive in the global arena. Innovation and application knowledge are
going to be the key to growth. However, in the SME segment, it remains vastly
fragmented across mushrooming businesses. Joint ventures and some kind of
consolidation will help pull strengths of companies and businesses together, and
fasten the growth and maturity path.
Incentive for Creating Employment
This is best described by an example. Let us say, an individual A as an
employee, gets Rs 20 lakh salary and pays approximately Rs 3.5 lakh as tax. On
the other hand, an entrepreneur B, who employs eight people, grosses Rs 50 lakh
of revenue and clocks 40% profits before tax. He essentially gets the same
income of Rs 20 lakh and pays Rs 3.5 lakh as tax.
What is the incentive for A to give up a cushy job and become B to create
employment, handle the nuances of running a business, stress and play a larger
role in the value chain?
The only incentive currently is personal satisfaction, whereas a lot can be
done by the government to encourage professional community to start
independently and create employment. Experienced professionals should be given a
boost and encouragement, since they are best placed to start new ventures,
transfer technology and inculcate professionalism in the small and medium setups
as well.
Rohit Gupta
The author is co-founder & director, Pragma Communication
dqmailindia.co.in
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