Creating globally competitive SMEs

The Micro Small and Medium Enterprise (MSME) sector grapples with the high cost of credit, difficulty in hiring skilled manpower, and complex regulatory procedures. However, many small firms which chose to manufacture goods that can be mass-produced suffer from the existential crisis. Large businesses with large-scale operations can manufacture such products more efficiently.

This is because the productivity of a firm increases with the efficiency with which labour and capital are utilised and naturally is high for large-scale operations. So, small firms manufacturing products that can be mass-produced, is a bad model. What, then, is the most appropriate business model for small firms?

The best business model available to small firms is competing on the basis of innovation-driven niche and differentiated products. But this is easier said than done. India has a weak ecosystem for the development of such products.

What can we do to support small units in manufacturing innovation-driven niche and differentiated products? To start with, we can follow the example of Mittelstands, the innovation-driven small and medium enterprises based in Germany and a few other European countries. Mittelstands are so successful, they contribute to more than half of German economic output and corporate investment. Over 1,300 Mittelstand companies are global leaders in in sectors such as machinery, auto parts, chemicals and electrical equipment.

At the heart of Mittelstand success is a personalised ecosystem supported by government, academia and the private sector in terms of industry-ready innovations, skilled manpower and market development.

Industry-ready innovation : Germany has a network of 67 research institutions which work in close coordination with Mittelstands, German universities, and the government. These research institutions complete 6,000 to 8,000 result-oriented contract research projects for immediate use by Mittelstand. The research is carried out by experts and PhD students. At the national level, these efforts are coordinated by the Fraunhofer Society that identifies innovation and new product needs of Mittelstands. It receives funding from the public sector and through contract research earnings. Such efforts are backed by the government. For example, when the concept of Internet of Things (IOT) took off, Germany’s National Academy of Science and Engineering introduced the concept of Industrie 4.0 to help manufacturing firms tweak their products to become the leading supplier of smart manufacturing technologies.

Supply of skilled manpower : Germany’s apprenticeship system ensures that 80 per cent of trainees in Germany receive a high quality of training in the Mittelstands; they are much sought after for their skills. This way Mittelstands employ about 28 million people which account for 60 per cent of all German industrial jobs.

Market development support : The German economics ministry implements high-quality market development programmes through the use of trade missions, research reports, buyer-seller meets, export credit and investment guarantee programmes.

Can the Mittelstand model be applied to the entire MSME sector? No. We need to exclude micro units and the service sector from consideration as these are not ready for the transition. For example, the micro sector is largely the informal sector of the economy. Some 40 per cent of manufacturing and 70 per cent of service firms in the micro sector employ just 1 or 2 persons. About 73 per cent manufacturing and 91 per cent services firms in the micro sector made an investment of less than ₹10 lakh. Similarly, the services sector accounts for about 70 per cent of all MSME units. Most units deal with wholesale and retail trade, hotels and restaurants, transport, storage, warehouse, etc. Retail traders alone account for 40 per cent of service units.

Micro and services sector units have not acquired the critical mass in terms of level of investments, availability of skilled manpower and use of technology to benefit from product innovation. That leaves us with manufacturing units in the small and medium sector. There are 1.6 lakh units in the small and 7,100 units in the medium sector. Of these, about 60,000 firms have invested more than ₹1 crore in plant and machinery, while over 17,000 firms employ more than 50 persons. This looks like a manageable small number where a personalised programme can be drawn up for each unit.

The Government currently has a number of programmes. Thus it helps MSMEs get credit from banks; it promotes productivity centres, testing, quality certification, skill upgradation and training facilities. It also supports product development, and packaging and marketing efforts. The yardstick for assessing the efficacy of this system should be: How many new innovative products have been introduced by MSMEs in the past few years through the use of this system. We may consider consolidating this structure and benchmark each service with those provided by Germany. Tying up engineering and management institutions with local small and medium manufacturing units will help each unit introduce modern technology and management practices, and also make students more employable.

On the regulatory front, setting up Export Single Window will allow a large number of units to export directly without getting bogged down by commercial and regulatory processes. Today, a large number of Indian SMEs, despite manufacturing quality products, have to remain content supplying products to large exporters who keep most of the margins.

Establishing an ecosystem on the German pattern will create a pipeline for the development of MSME-relevant innovative products which can be exported effortlessly. This will also make India’s technical and management education system more useful to the needs of the industry.

The writer is from the Indian Trade Service. The views are personal