No longer business as usual for SMEs

The year 2016 has certainly not been kind to many of the small and medium-sized enterprises (SMEs) in Singapore. Many are feeling the triple whammy of weak economic growth, technological disruptions, and the reverberating effects of the oil-and-gas downturn.

And, right now, it doesn't look like 2017 will be much better.

While that hardly sounds reassuring, the good news is that our SMEs are now being forced out of their comfort zone to rethink their business models and strategy to find new ways to compete.

Industry insiders tell BT that the general sentiment among SMEs is one of general pessimism. Surveys have supported this view.

The latest Singapore Business Federation (SBF)-DP Info SME Index for Q4 2016 to Q1 2017 registered the lowest profit expectations and second- lowest Overall Index score in seven years. In fact, the lowest score was recorded just two quarters ago.

Chiu Wu Hong, head of enterprise at KPMG Singapore, noted that the current mood is one of "worry and caution" for many SMEs.

"While labour and rental costs remain key business concerns for SMEs, factors such as the rise of disruptive technologies and uncertainty over policies are affecting SMEs that operate not just within Singapore, but also those that have gone international."

SMEs are struggling to cope with the increase in unpredictability that comes from two main areas: innovations that threaten their traditional way of doing business; and global trade conditions as more countries turn protectionist.

SME scorecard: Internationalisation

To get out of this slump, the government has often reiterated the need for SMEs to work on three main fronts: internationalisation, innovation, and deep skilling.

This is a message that has been repeated in recent years as it has become more and more apparent that global economic headwinds will take their toll on businesses.

But the performance of our SMEs in these areas has been a mixed bag.

ASME president Kurt Wee believes our SMEs are on the right track. "Our SMEs are generally very nimble in their ability to respond to situations . . . Of the three perspectives, the most important in my opinion is internationalisation."

But Michael Teng, CEO of Singapore Manufacturing Federation's Singapore Innovation & Productivity Institute (SiPi), is more cautious.

"The truth is, many are not coping well on these fronts due to the weakening of their business model and not having branded products that can be marketed globally," he says.

One company that has turned to internationalisation in the midst of trying times is McPec Marine and Offshore Engineering.

With the oil-and-gas (O&G) sector in turmoil, managing director Jonathan Lee says the company is diversifying its client base and expanding further into new markets such as the Middle East and India.

The necessity for internationalisation is also a message often echoed by the SBF.

Koh Tat Liang, assistant executive director, Capacity Building & SME Committee Secretariat, SBF, says: "We encourage local companies to venture overseas for growth, especially in ASEAN, which is expected to enjoy good growth of 5.2 per cent over the next five years."

But according to the SME Development Survey 2016 by DP Info, the percentage of SMEs that continue to have a presence overseas fell 2 per cent in 2016 to 52 per cent, due to a "challenging global environment."

SME scorecard: Innovation and deep skilling

When it comes to innovation and automation, the results seem bleak.

In a study by the Singapore Chinese Chamber of Commerce and Industry (SCCCI) earlier this year, only about half of SMEs were trying to innovate, with less than 35 per cent having invested in innovation in the past two years.

But to be fair to SMEs, innovation and technological advancement require a significant investment on the part of the enterprise, both in terms of financial and manpower resources that they may not have.

Says Mr Wee: "One of the main issues troubling our SMEs is the scale and size of the market they service, which can sometimes limit your ability to automate or innovate."

Finally, when it comes to deep skilling, survey findings tell us that while employers have a higher awareness of the need to train staff, most face obstacles hindering participation.

According to the SME Development Survey 2016, as many as 85 per cent of SMEs say they face obstacles, with half constrained by a lean workforce, while 38 per cent say they have other priorities to focus resources and time on.

This is a worrying trend as companies ought to be making use of this downturn to send employees for training in order to prepare for an eventual economic recovery.

The road ahead

Progress is slow, but it doesn't mean that our SMEs are doing nothing about their current plight. In fact, it is quite likely that the results are not visible yet.

At the ASME Anniversary event, Deputy Prime Minister Tharman Shanmugaratnam announced that, since the launch of the SME Working Capital Loan in Budget 2016, loans worth more than S$500 million have been made to over 3,000 SMEs.

Since the beginning of the year, more than 23,000 grants have been awarded to support businesses which are investing in innovation, productivity or overseas market access, with more than half of these grants going to SMEs.

Such government support will take time to bear fruit, but it is an encouraging sign that our SMEs are making the effort to improve their situation themselves.

Going forward, aside from the usual cost challenges of manpower, materials and rent, one emerging issue faced by SMEs has to do with financing and cash flow.

According to the SME Development Survey 2016, it has become the fourth biggest cost challenge for SMEs, up from 6 per cent to 22 per cent this year.

It seems that in this climate, banks and institutions have become more cautious about lending to small businesses.

Even DPM Tharman, in his speech at the Infocomm Commerce Conference and SME Expo organised by the SCCCI in August, called on banks here to be mindful of the cashflow difficulties of SMEs during a slowdown when they are the hardest hit.

All in all, one thing for certain in today's uncertain economic climate is the need to constantly innovate and progress.

Dr Teng concludes: "The challenge is turnaround and transformation.

Our SMEs can no longer operate business as usual . . . This is the best of times, and the worst of times.

Only those companies with the right mindset, courage and determination to embrace new business models can ride on the opportunities and pursue sustained growth."

"While labour and rental costs remain key business concerns for SMEs, factors such as the rise of disruptive technologies and uncertainty over policies are affecting SMEs that operate not just within Singapore, but also those that have gone international."

Chiu Wu Hong, head of enterprise at KPMG Singapore, noting that the current mood is one of "worry and caution" for many SMEs.

Graphic: The Business Times

This article was first published on December 21, 2016.
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