SMALL FIRMS

SMEs dominate new political agenda

Srisamorn Phoosuphanusorn and Busrin Treerapongpichit

While issues affecting small and medium-sized enterprises were largely ignored in the past, they have re-emerged in recent years, taking centre stage under the political spotlight in the wake of the 1997 economic collapse.

SMALL FIRMS The government hopes SMEs can turn around the economy but small firms need access to management expertise, capital, information and technology

SMEs account for more than half of the nations's gross domestic product and have created more than 75% of the jobs in the real economy, so it is little surprise that the government can no longer ignore their plight.

Small businesses have long been at a disadvantage compared with large firms, owing to higher funding costs, lack of technology and greater difficulty in expanding markets.

However, a lack of financial support from commercial banks is a bigger problem for SMEs as banks have been hesitant to lend because they are still burdened with non-performing loans.

Several political parties have articulated policies to assist SMEs, particularly those in export-oriented businesses. Key proposals have included low-interest loans channelled through state agencies, plus help with production expertise and marketing knowledge.

The government hopes that SMEs can help turn around the economy in place of the larger conglomerates that are still struggling to reorganise their debts.

The state organisations involved with assisting SMEs include the Small Industry Finance Corporation, the Small Industry Credit Guarantee Corporation, the Government Savings Bank, the Government Housing Bank, the Bank for Agriculture and Agricultural Co-operatives and the Export-Import Bank of Thailand.

The One Tambon, One Product policy is designed to stimulate local initiatives among small entrepreneurs.

Other investment funds set up to invest in small businesses include the one-billion-baht SME Venture Capital Fund and the $100-million Thailand Recovery Fund.

But even state and quasi-state agencies have to be alert to the increased risk of lending to small businesses. Despite the best of intentions, few agencies have come close to disbursing the budgets they had set aside for SME loans. One reason is that business plans are hard to evaluate as most small businesses are notorious for untransparent bookkeeping.

The Thai Recovery Fund is an example. It has so far invested a paltry three million baht out of $100 million. Some critics claim that customer lists were reviewed to determine the potential size of each investment.

Most SMEs complain that financial institutions selectively lend to borrowers who have high business potential and high rates of return. They also complain of long lead times for loan approvals, poor services, a lack of public relations, and excessive delays in budget disbursement.

One former credit officer at a financial institution said she had been looking for a loan of 100,000 baht to start her own hand-made decorative products business.

"I had tried my utmost several times to get financial support from a state organisation, but to no avail because of chronic bureaucratic red tape."

Kanok Abhiradee (second from left), the former president of the Small Industry Finance Corporation, and Manu Leopairote (left), the permanent secretary for Industry, watch a pizza maker at a franchising exhibition.

Another small businessman complained: "I had applied for a loan at a state-owned financial institution specialising in lending to small and medium-sized enterprises, but it turned down my request saying its policy was to lend to existing operators only and that my project was too small."

Another said: "I'm terribly disappointed with the state assistance programmes. They are too slow and complicated every step of the way. What I have to do now is to stand on my own two feet."

The Federation of Thai Industries (FTI) admits these problems are real and the big challenge for the government is to increase SME loan approvals.

However, state funding agencies claim the government limits capital resources and future allocations need to be prioritised.

As well, many economists warn that pumping money into small and medium-sized businesses without ensuring that the borrowers have sound business plans could trigger a new financial crisis.

COMPETITIVENESS

A display of bamboo products.

Competitiveness is another issue for SMEs. Many operators still lack experience and have limited access to professional management and technical skills despite receiving financial assistance and knowledge transfer.

The biggest challenge faced by SMEs in Thailand can be defined in one word: access _ access to management expertise, capital, information and technology.

According to recent research by the Thammasat University Research and Consultancy Institute between March and April 2002, the most important problems for SMEs were competition in international markets, falling sales revenue, shortages of funds and non-performing debt.

The survey of 1,080 respondents in 12 business sectors also showed that jewellery, retailing, handicrafts, leather goods and services businesses were most affected by competition from major foreign companies. Construction, finished cloth, ceramics and pottery businesses were the ones whose market share was falling the most.

Most SMEs that had successfully recovered were those that could update their technology, restructure their marketing strategy, lower costs, improve operations and productivity, and gain access to state assistance and financing.

However, financing combined with new marketing channels and productivity were still the biggest obstacles to survival for SMEs in the current fragile economic environment.

"SMEs should be defined by their business approach, not by revenue or assets," said one businessman.

An SME, as defined by the Industrial Promotion Department, is an enterprise with assets of no more than 100 million baht, and employing no more than 200 people.

According to Thanong Bidaya, chairman of the National Economic and Social Development Board (NESDB), Thai industries need to improve manufacturing lines, quality, strengthen competitiveness, reduce costs and shift to more value-added industrial production.

He said industrial restructuring required various government agencies and private-sector groups to pool their efforts but to date, the Industry Ministry had handled the task alone.

Industry Minister Suriya Juengrungruangkij said the government was focusing on improving labour skills and technology, both essential to strengthening small firms in the long term.

The Industrial Promotion Department and the SME Development Institute are also going to evaluate which sectors should have priority support.

The FTI, meanwhile, has urged the government to implement more support measures to discover what the obstacles are to improving the competitiveness and productivity of SMEs, including a review of the tax structure and government assistance measures.

But any broad SME initiative should link government policies with market forces, the federation aid.

The government cannot manage SMEs but can provide the necessary infrastructure for them to survive and thrive within the broader economy.

LIBERALISATION AND CHINA

Although many economists agree the government's focus on SMEs is appropriate, they voice concern that this may not be the case in the future.

If economic liberalisation and greater foreign participation continue, Thai enterprises will become more multinational in nature, meaning they will have a competitive edge in technology, expertise and skills, and more efficient operating procedures.

Furthermore, in the future, the Thai economy will be influenced more and more by globalisation, transformed by the global economic web and forced to open itself to freer international trade because of the World Trade Organisation's determination to fully remove all international trade barriers by 2020.

Certainly, by that time, Thai small businesses will find themselves swimming in a sea of turbulent competition.

If there is a lesson to be learned from the crisis of 1997, it is that the government must take a long-term view on the future of the country, rather than a present-oriented perspective.

According to Pisit Leeahtam, the president of telecoms operator TT&T and a deputy finance minister in the previous government, China is now being targeted by industries seeking to relocate labour-intensive production as well as high-tech operations and food production.

Kittiratt Na Ranong, the president of the Stock Exchange of Thailand, said Thailand had been a favourite destination for overseas investors for decades, attracted by low-cost labour. But now China offers lower labour costs.

He said small and medium enterprises should also be governed by stricter regulations to improve their accounting and management skills.

A transparent accounting system combined with an efficient management structure would be key factors in protecting small and medium-sized firms against economic volatility, he said.

However, many economists argue that to stay competitive in the world market in the long run, the country must depend on small and large enterprises or SLEs.

Medium-sized enterprises may survive in the short and medium term, but not in the long term.

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