EIU Study I: SME Opportunities in Emerging Markets

October 23, 2012 by Susan Galer 8

Photo: istockphoto.com

Can small and mid-size enterprises (SMEs) in emerging markets keep growing despite economic uncertainty? To find out, the Economist Intelligence Unit (EIU) surveyed over 500 senior managers from SMEs in Brazil, Russia, India, China and Mexico.

Unwavering confidence persists

Despite widespread expectations that economic conditions will worsen, managers at SMEs in emerging markets appear confident about their firm’s prospects over the next 12 months. Sixty percent of respondents believe the overall business environment has become much more difficult over the past three years. Yet 78% of those same managers expect their turnover to increase during the next year. Additionally, 72% expect to boost their company’s workforce in the next 12 months.

Top priorities: growth, efficiency, technology

SME executives shared the following business priorities for the next year:

  • Growing sales and earnings (55%)
  • Greater efficiency (55%)
  • Using technology more effectively (50%)

Senior Solution is an example of the rapid growth experienced by SMEs in emerging economies. When this Sao Paolo based specialist software developer has its initial public offering (IPO) in 2013 on Brazil’s Bovespa Mais market for high-growth companies, CEO Bernardo Gomes expects to invest the proceeds into acquisitions for more growth. In the past six years, the firm’s revenues have increased an average 28% annually—far outpacing its own sector, as well as the Brazilian economy. If the IPO is a success, Gomes predicts even higher growth rates for his company.

Technology powers efficiencies and growth

Sixty-four percent of survey respondents are automating more tasks and functions now than three years ago. A senior manager at a Russian healthcare, pharmaceuticals and biotechnology firm describes the firm’s biggest single opportunity in the coming 12 months as “improving performance with new, innovative technology that helps cost reduction.”

Another example came from Oktogo.ru, an online travel agent founded in Russia in 2010. While the firm’s business model is web-based, it also now offers access through mobile platforms for both customers and suppliers. “Mobile is quite big in Russia and the penetration of smart phones is very high,” explains CEO, Marina Kolesnik. “The company is also investing in social media to build its brand, strengthen client loyalty, and grow sales.”

Next page: What are SMEs doing to capture business opportunities?

Source: EIU Study 2012

Executives agree that greater efficiencies are a must in the face of increased wage costs and relatively high commodities prices. “We have to work harder to improve efficiencies in our operations, to mitigate the increase in costs,” says Arvind Singhania, the chairman of Ester Industries, India’s leading producer of polyester films and engineering plastic compounds. “We are looking at manufacturing processes to see where we can reduce our costs and improve efficiencies to boost productivity, quality, and turnaround times.”

Show us the money, experts, and data

To make the most of available business opportunities, SMEs in emerging economies are:

  • securing new financing (41%)
  • hiring outside experts (34%)
  • increasing or redirecting spending on training (33%)
  • replacing or upgrading equipment (33%)

One challenge these companies face is that loans to SMEs amount to only 3% of GDP in emerging markets, much less than the 13% level seen in developed countries, according to the World Bank. Not surprisingly, 50% are more worried about access to finance in the past three years.

Gomes of Senior Solution confirms that raising capital has been a struggle. “Raising long-term debt through commercial bank loans is rare in Brazil,” he says. “In most cases development banks are the only source of long term debt for SMEs.” In 2005 Senior Solution succeeded in raising capital from BNDESPAR, an investment arm of the Brazilian National Development Bank, and from the Stratus Group, a private equity provider. Now, with 45 potential acquisition targets in his sights, Gomes sees his firm’s planned IPO as the best way to fund the company’s continued rapid expansion.

The world economy depends on SMEs

Few would argue that small businesses aren’t significant drivers of growth, job creation, competition, and innovation. In emerging economies, SMEs account for 45% of total employment, according to the Global Partnership for Financial Inclusion. Unfortunately, SMEs in emerging markets have a higher failure rate than those in developed economies according to The Global Business Failures Report published by Dun & Bradstreet. In the developed economies tracked by the report, its proprietary Insolvency Index fell from 100 in Q2 2010 to 91.1 by Q4 2011, marking a sharp drop in the number of business failures. In emerging markets the index rose to 101.3—meaning more businesses are failing in emerging than in developed markets. SMEs need more than their unwavering confidence to success. Governments and large enterprise must foster a more supportive climate that helps SMEs thrive for the good of the entire economy.

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