Asia's resilient SMEs set to capitalise on region's recovery

Demand in China and India has the potential to drive growth in smaller Asian countries, Economic Intelligence Unit (EIU) highlighted in its latest report titled Towards the recovery. Citing an example, the report said that growth of 3.2 per cent recorded by South Korea in the last quarter of 2009 was achieved because of demand for Korean products in China. Asia (excluding Japan but including Australia) will grow at 6.5 per cent in 2010 as compared to an expansion of 4.2 per cent in 2009, the report said. The report which dwelt in detail on the role of small and medium enterprises (SMEs) in Asia's recovery, said these enterprises are now in a position to take advantage of the upturn in the continent's economy. "The fate of SMEs is particularly crucial since they account for the bulk of employment in many of the region's economies and are the cornerstone of Asia's entrepreneurial dynamism. "They have been hit disproportionately hard by the global recession of recent months, particularly companies reliant on exports, but have shown a resilience that bodes well for their ability to capitalise on the region's unexpectedly rapid recovery," it said. On the other hand, according to the Asia-Pacfic Economic Co-operation forum, 95 per cent of businesses in the Asia-Pacific region are SMEs, and they employ 80 per cent of the workforce. There is a need to rebalance the smaller Asian economies away from a reliance on exports to developed markets in the West, and towards domestic demand, EIU said. Secondly there is an increasing importance of intra-regional trade, by which mechanism SMEs in smaller nations may take advantage of the rebalancing of the region's giant economies, namely China and India, the report noted. "The times are tough, but Asia's SMEs are tougher – and they are in the right region to take advantage of the upturn. Asia's SMEs have faced a multitude of problems in recent months: a severe squeeze in financing, tumbling orders, diminishing cash flow and rising inventory costs. But some think the severe competition and a cost-control culture have helped them develop resilience in adversity. On a macroeconomic level, they are well-positioned to take advantage of the region's surprisingly rapid growth." Cost control is crucial Cost control and inventory management are crucial to survival of these Asian enterprises, the report noted. "Although the region is recovering quickly, many SMEs are still in crisis mode and are focusing on cash flow protection and strategic reassessment. Cost control, always important for small companies, has become crucial, as has inventory management. The prompt collection of accounts receivable is also a priority, while quality control is gaining increased scrutiny to ensure clients have no excuse to delay or avoid payment," EIU said. SMEs could benefit from a rebalancing of Asia's largest economies. Given the weakness of Western markets, Asian SMEs, many of which are cogs in a global supply chain, would benefit from a new source of final demand within the region, EIU observed. "There are signs that China may be able to provide this, as its middle-class becomes richer and policymakers seek to rebalance its economy away from a reliance on exports and towards domestic demand. If this trend is sustainable – rather than just a result of massive fiscal stimulus in recent months – it could create a virtuous circle benefiting Asian exporters," EIU said. With Western consumers unlikely to return swiftly to pre-crisis levels of spending, some larger export-oriented SMEs are asking whether a strategy focusing on domestic markets – or at least on reducing their reliance on consumers in the US and European markets – is preferable, the report noted. However, accessing domestic markets may not be easy, EIU said. "Reshaping SMEs' corporate strategy to reduce reliance on final demand in the West is not necessarily easy. In China, for example, stiff competition, very diverse internal markets and the high costs of brand-building and product differentiation may make entering the market an unrealistic proposition for some export-focused SMEs," EIU said. "Indeed, some have decided against this strategy and are waiting instead for demand in the West to recover," the agency noted. A new intra-regional trade dynamic could help SMEs, if Asia's larger economies do become sources of final demand as this will help drive intra-regional trade, EIU said. "The proportion of Asia's trade within the region has been rising steadily over the past two decades. The proliferation of free-trade agreements (FTAs) in Asia is testament to policymakers' commitment to this goal. Those that already have cross-border business within Asia, generally regard such agreements positively – and are hopeful that the China-Asean FTA, which came into effect in 2010, will be beneficial," EIU observed. Benefiting from FTAs However, the Asian SMEs need more information to take advantage of FTAs, EIU said. "While tariff reductions through F