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UPDATED: April 28, 2009 NO. 17 APR. 30, 2009
A Fighting Chance
How China's small businesses can survive and thrive in gloomy times
By HU YUE
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COMING INTO FOCUS: Financing, employment and growth were the top concerns of SMEs at this year's session of the Boao Forum for Asia (GUO CHENG)

A lthough Asia was not the epicenter of the economic earthquake that has rattled the world, it has failed to escape a collapse in exports that forced firms to scale back investments and lay off workers.

When Asian policy-makers and business leaders gathered in the picturesque town of Boao in Hainan Province in mid-April, they prescribed remedies for their economic ailments. More importantly, they demonstrated the need for calm and confidence in responding to the crisis.

Dried-up export orders and a sour business sentiment have called into question one of the foundations of China's economic miracle—small and medium-sized enterprises (SMEs). Their financing strains, management inefficiencies and weaknesses in branding and marketing have made them even more vulnerable to the current economic chill. But a staggering SME segment could mean more factory closures that would send tens of thousands of migrant workers back home.

"A strong, sustainable and viable economic machine has to have the fundamental SME components because they are a source of job creation and innovation," said Jim Quigley, CEO of Deloitte Touche Tohmatsu Services Inc., during a panel discussion at the forum. "Despite the chilly headwinds, they will continue to help position China as a globally competitive force."

While the downturn mounts pressure on enterprisers, at the same time it can be a needed breather. The market turmoil has forced industries to consolidate and has eased competition by hitting bigger rivals—foreign companies in particular. More importantly, it prompted SMEs to rethink their growth models and future plans.

If SMEs want to turn the crisis into an opportunity, they should restructure their businesses now and build greater brand recognition and customer loyalty, said Gunjan Sinha, Chairman of MetricStream Inc., a U.S. financial service provider.

"When bad times strike, the survivors will be those who can swiftly adapt themselves to market changes ahead of competitors," he said.

It is also critical now for entrepreneurs to be aggressive with market resources, for private equity investors to spot potential SME partners, and for governments and regulatory bodies to step up their support to the sector, Sinha said.

Richard Zhang, President of the Apax Partners Inc. Greater China, echoed Sinha's opinion. Apax Partners is a world-leading global private equity firm headquartered in the UK.

"When facing a turbulent economy, it's unwise for SMEs to simply tighten their belts and wait for the situation to improve," Zhang said at the forum. "They should try to achieve greater synergies by strengthening professional management and setting an organization up for accelerated success when the economy starts to recover."

From a broader perspective, SMEs would enjoy an improved ecosystem of survival as the government seeks to widen domestic demands, he added.

But economists also stressed the need for SMEs to maintain valuable practices during transition, such as the efficient use of limited resources, fast cash flows and agility in corporate governance. These would help polish their long-term prospects on a growth path, they said.

Financing bottleneck

While the economy heads into a downturn, the funding stress is considered a top stranglehold weighing down budding SMEs. Their access to capital has been severely curtailed as the economic slowdown prompted banks to cut back on loans to small companies that need funding the most.

As a result, many small businesses have financed their own expansion with their savings or investment gains as well as private loans through family networks, although these are all limited and unsustainable.

Meanwhile, the SMEs themselves should demonstrate to their lenders that their current loans will be repaid in the future, Quigley said. To achieve this, they must increase their account transparency and provide timely and reliable financial reporting, he said.

Wolfgang Lehmacher, CEO of GeoPost International SAS., a Hong Kong subsidiary of France's Geopost Group, agreed with Quigley, citing the importance of maintaining constant contact with the banks to prove their growth potential. It also would be necessary for SMEs to look for alternative vehicles, such as international sources of funding or different equity financing, he said. If that did not work, they could simply avoid or reduce the use of financing by saving costs through a closer tie-up with suppliers or other competitors, he added.

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