Challenges for SMEs in the Manufacturing Sector

July 15, 2010 5:21 am

“International trade is no longer just the realm of multinational companies. Millions of SMEs around the World have gained visibility in the global marketplace through e-commerce. With more multi-national corporations looking at India as one of the major manufacturing hubs, now is the time for Indian suppliers to proactively market their products beyond India,” shares Brian Wong, Senior Director, Global Sales of Alibaba.com
 
With international buyers encouraged to source more products from other low-cost manufacturing countries, India is no longer merely the World’s ‘back office’ but is transforming into a global manufacturing hub, lucrative domestic market and a major exporter.
 
SMEs have always played a crucial role in the economic development of India and will continue to be an integral part of the country’s economy. The SME sector constitutes a crucial fraction of the Indian economy because it contributes significantly to the country’s industrial production, exports, employment and entrepreneurial base. The SME sector has been consistently contributing 45% to India’s total manufacturing output and 6% to the GDP over the last 5 years.
 
Moreover, there is no denying that the SME sector provides an ideal platform for growth and development of the entrepreneurial character of an economy. But how can an Indian SME forge into the global marketplace given their limited resources?
 
A lack of financial resources continues to be a hindrance in their development and sustenance. Unlike large enterprises, SMEs do not have a dedicated platform to raise funds from the capital markets. To further compound this, banks and other financial bodies are usually cautious while lending funds to start-ups. Without sufficient financial muscle, SMEs are restricted in their opportunities to set-up advanced manufacturing units, install the latest equipment or hire talent, thus, limiting their growth.
 
Being strapped for financial resources puts an additional strain on SMEs to control their variable costs. In the manufacturing sector especially, with a rise in costs of global commodities and inflation in the domestic economy, raw material costs spiral out of control. Also, managing the costs of day-to-day operations combined with the high marketing costs to make their products competitive put a strain on their profit margins.
 
The application of technology has been a challenge for small businesses. For industries in the manufacturing sector, technology pertains not only to advanced techniques of manufacture and R&D capabilities but also to the use of the internet and e-commerce. The slow rate of technology adoption is partly due to financial constraints. However, a lack of knowledge is also responsible for this. Other infrastructural restraints such as irregular electric supply or low internet penetration also affect the technology appetite of SMEs.
 
The global economic slowdown spared no major industry or business sector and SMEs in the manufacturing sector were no different. The recent financial meltdown and subsequent world-wide jitters left a many SMEs pleading for lower costs of finance, provision for additional fiscal measures and other government support measures. With many SMEs in the sector being dependent on exports to propel their business, the recessionary trends in many of the world’s developed economies impacted the earnings of SMEs. Exports to the USA & European markets, which are the key export destinations for Indian economies, fell drastically. This compelled Indian SMEs to look for alternate markets, even turning to the domestic markets. The global downturn also brought about an upward swing in the prices of various raw materials, denting the revenues and dampening future earnings ­expectations as well.
 
Most small enterprises dismiss the export market as too expensive and only a feasible market for big enterprises. They need one reliable, simple and cost-effective solution that can help them find customers in India and worldwide. Many businesses are finding that solution online. Alibaba.com found that the number of buyer enquiries to India on Alibaba.com has grown by almost 60% in 2009 compared to that
of 2008. This shows that international buyers have become increasingly active in looking for products/services from India.
 
With the emergence of the Internet new marketing channels have emerged. Today, the Indian suppliers
have become more active in marketing their products/services to the World through this platform.
 
E-Commerce has made it possible for companies in large cities and rural villages alike to connect and trade with customers from around the world. Many companies in India are small, and with less than 50 people, they do not have the bandwidth of setting up full fledged sales offices. Online trading platforms make it easy for potential trading partners to find business prospects together, and liaise with each other, irrespective of whether they are based in Chennai and California or Ludhiana and London. Moreover, they are unable to organise and execute sophisticated marketing campaigns such as advertising. They also do not have the financial resources to afford expensive lead generation tactics such as attending trade shows or exhibitions. With the help of online trading platforms, they can overcome this challenge easily. For less than Rs. 375 a day, SMEs can now set up a premium online storefront on a virtual marketplace and tap into an active international buyer community that is looking for everything, from frozen vegetables to industrial machinery.
 
International trade is no longer just the realm of multinational companies. Millions of SMEs around the World have gained visibility in the global marketplace through e-commerce. With more multi-national corporations looking at India as one of the major manufacturing hubs, now is the time for Indian suppliers to proactively market their products beyond India. The easiest and cheapest way to do this is through online marketplaces. But being found by an international buyer is only the first step. Indian SMEs must rise to a new level to meet the stringent requirements of the global marketplace. International buyers demand high-quality products at competitive prices, speed to market, compliance with industry standards and technology capability. From a country level, India must also improve its infrastructure and showcase its wide range of products and services to attract more serious buyers.