Indian business
and industrial ecosystem has no exit or bankruptcy provisions as in the US. In
fact, Indian business ventures are expected to be resilient in adversities and
aggressive with opportunities. Like the oriental philosophy, the spirit of the
enterprise is expected to linger on for perpetuity. This is rightly so as India
needs to be on a virtuous cycle of continued growth and employment in its quest
to reach its full potential. With resources being scarce, a completely
capitalistic view (survival of the fittest) or a completely laissez faire view
(the markets will eventually correct) are perhaps not so appropriate for the
Indian economy at this stage. The Indian Governments as well as economic
experts have been supportive of the perpetuity approach.
That said,
failure (which starts with loss of competitiveness and ends with close of
sales) is also an inevitable consequence of a globalized economy and fragmented
industry structure. While there have been stories the world over of failures
being turned around into successes, the preferable option is not to fail at
all. In this context, the declaration by the Indian Union Government of two of
the largest banks in India the State Bank of India and the ICICI Bank as being
“too big to fail” comes as a fresh thought, probably taking off from the
viewpoints that emerged after the 2008 global financial crisis. The markets,
however, did not seem impressed. The declaration possibly needed to be backed
up with concrete initiatives to achieve strong profiles. Also required is an
approach to remedy the constraints that keep small scale firms too small to
grow.
Big may be bountiful, but….
In developed
economic ecosystems, big is considered bountiful. Size is considered to bring advantages of
economies of scale and scope, and providing several levers for driving business
competitiveness. Growth, however, is a function of time and effort. It is also
a function of adjacency of several related businesses. If one looks at the
Indian automobile industry, there is clearly a difference between the bigness
of a company like Tata Motors which manufactures virtually every type of four
wheeler (Car, SUV, LCV, MCV and HCV) versus the bigness of Maruti Suzuki which
specializes only in passenger cars. Similar examples of specialized scale
versus diversified scale can be found across industries. Management gurus have
not yet figured out when and how adjacencies must be actively sought out to
achieve bigness or, on the contrary, when and how they turn out to be
disincentives for growth.
The aspiration
for bigness as an end in itself is a deeply ingrained characteristic of human
behaviour. Bigness is taken as the marker for achievement. Listings of the
largest firms by leading business magazines such as Fortune and Forbes abroad
or Business Today or Business India in India have only positioned the concept
of big being praiseworthy in an unassailable way. Bigness has negative consequences
for the firms, industries and economies too. Apart from vulnerability to
smaller and nimble competitors, in economically adverse situations they are
sharply impacted. As an example, a free
fall in oil prices (imagine a deep slump from USD 100 to a forecast USD 20 per
barrel), oil exploration firms are not only roiled for short term performance
but also forced to drastically prune investments for the long term. Steel
giants in India that have grown with huge reliance on debt are negatively
impacted by the decline in global steel demand and pricing. As long as bigness
is accompanied by deep cash, the advantage of being big sustains through
the crises.
Small is essential
Big may be bountiful
for developed countries but for emerging economies like India small is still
critical. India can be considered to be a pioneer in encouraging setting up of
small scale enterprises, from the early days of independence. In fact, the
emphasis on cottage industries was a well merited approach towards sustaining
and developing rural artisanship, individual craftsmanship and distributed
self-employment. The reason for the lukewarm impact of this pioneering effort
can be attributed to ignorance of the need for, and challenges of, integrating
high technology with low scale in the small scale sector. Reverting to the case
of automotive industry or aerospace industry, nuts, bolts and washers or
springs could be simple to make but need complex technology for quality and
endurance, which in turn calls for major investments.
There are areas
where technology, in recent years, has helped small enterprises in marketing,
and to an extent even in design. However, manufacturing continues to present
major challenges for integration of high technology and small scale. India’s
success in Make in India theme would depend on how this complex challenge is
tackled. India’s new start-up economy is highly encouraging but given its
preponderant orientation towards services and information technology, it hardly
offers a solution for the small scale industry’s manufacturing owes and
resource constraints. High technology equipment and new generation materials
require investments which the small scale sector can ill afford while skilled
scientists and engineers are not easily attracted to small enterprises. Low
entry barriers to setting up of manufacturing enterprises in small scale in
India only compounds the difficulties.
Big for small
India needs a
different paradigm. Angel funding rushes in to sectors and firms where it
anticipates huge valuations or good returns. It is unlikely to venture into
areas of manufacturing which require high investments for high technologies on
one hand but are driven down by low margins of supplies to big customers who
have immense bargaining power on the other. Big customers would need to take a
broader perspective on this front, leveraging what could impact their income
statements vis-à-vis balance sheets. In short, they would need to set up a venture
capital pool to support small scale manufacturing enterprises. In a sense, it
could be a revert to the early days of industrialization when big companies,
mostly public sector units, set up their exclusive ancillary estates to enable contiguous,
parent-supported manufacture.
Such
exclusivity has, over the years, been eroded by the desire of small and medium
units to seek wider markets even as big firms started feeling the responsibility
of nurturing units as being uneconomical. The concept of big units sponsoring
the smaller ones, however, continues to be relevant. Industrial parks which
house the parent corporation and ancillary units is a common feature in modern
India as well as developed countries. The challenge to corporations and such
small units is how the growing smaller ones can be weaned away from nurturing
and how new small units can come into play independent of such sponsorship. The
earlier Small Industries Development Bank of India (SIDBI) and the current Government’s
Micro Units Development and Refinance Agency (MUDRA) are evidences that the
Indian governments are well aware of the need to support the small. The need,
however, is for a more intensive and a more cohesive effort as in Japan.
Japan’s SME ecosystem
For people used
to seeing only the big Japanese brands, it would be a revelation that small and
medium enterprises account for 99.7 percent of all firms, over 70 percent of
employment and more than 50 percent of all value added in the manufacturing
industry. Japan’s industrial policy under SME Basic Act viewed SMEs, including
micro units, as diverse, dynamic and independent drivers of manufacturing
industry. The Japanese Government promulgated a host of acts and set up several
agencies including an exclusive university system, a dedicated financial
corporation and credit reinsurance support for SMEs. The policy, which also
provides for lower income tax rates, recognized that SMEs have weak assets and
lack access to finance as well as human resources and established a total SME
ecosystem under the control of Ministry of Economy, Trade and Industry (METI).
Annual budgets provide for significant financial support to SMEs. Large units
also enrich the SME ecosystem through technological support, deputation of
retired personnel as mentors and acceptance of single-sourcing. They realize
that the hidden strength of their component makers underpins their own end-product
quality.
While India may
have all the structures and processes, lack of adequate and focused budgetary
support as well as public sector funded and appropriately leveraged credit
enhancement and credit reinsurance schemes is a lacuna. More importantly, Japan
SME policy succeeds because of the uniquely Japanese obsession with technology
and quality as well as development of human resources. A great example is the
project to upgrade strategic core technologies to support automobile and
engineering industries. Under this, 22 specific core manufacturing fields were
identified to upgrade technologies and processes through experimental research
and commercialization. As a result, and as an example, precision forging
replaced raw forging plus machining for select automobile parts, saving costs
and improving quality. In consumer products, ceramic and pottery industry collaborated
with fountain pen industry to develop highly precise and elegant porcelain
fountain pens.
As part of
improving access to skilled human resources for SME sector, 9 universities were
set up in Japan exclusively for SMEs. Trade and business organizations to
support start-ups and enable overseas business expansion were also set up.
While India may have all of these initiatives in some measure or the other,
what differentiates the Japanese SME ecosystem is the integrated governmental
approach which not only conceptualizes programmes and provides budgetary
support but also monitors and counsels SME sector in terms of specific
technology and business deliverables. Indian Governments and Industries would
do well to study the Japanese SME ecosystem and transfer relevant paradigms
that could transform the Indian SME and Micro sector from the image of low cost
and low quality to one of high technology and competitive cost with access to
State-funded and private-participated credit enhancement and skill honing
institutions.
Posted by Dr CB
Rao on September 13, 2015
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