The dynamism of the Singapore economy depends on the strength of our SME sector. Often called the “lifeblood of the Singapore economy”, SMEs are said to “make up 99% of the country’s enterprises and contribute to nearly half the gross domestic product”, according to Spring Singapore. Together, they employ as much as 70% of Singapore’s workforce.
Unfortunately, many SMEs lack the scale to extend themselves regionally and internationally. But, such scale can be created through strategic alliances between industry associations, SMEs and the government.
Transition from value adding to value creation
Since independence, the Singapore economy has been progressively moving up the global value-chain. It managed to attract multinational corporations (MNCs) like Texas Instruments and General Electric to invest and set up shop, passing on technical skills and industry knowledge to Singaporeans. Productivity growth was imported into Singapore through these MNCs.
The near non-existence of a manufacturing base meant Singapore to start only from the lowest value-added of goods. From producing mosquito coils and joss sticks, it moved on to precision engineering, like the assembly of Setron television sets, Rollei cameras and Seiko watches. Today, half a century later, Singapore no longer manufactures many of these goods. Rather, it specialises in the highest of value-added products, be it sophisticated Micron wafer fabrication or Sanofi-Aventis cutting-edge drugs.
But the rewards of moving further up the global value-chain diminishes the closer one is to the peak. Returns to invested capital falls with every additional unit of capital — a trend economists term as “diminishing marginal returns”. At the recent SG50+ conference, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam stressed that the next phase of Singapore’s economic growth has less to do with adding value, but “creating value”. This exhibits itself more concretely in the creation of globally competitive brands, new value-chains and an exporting economy of productivity gains, as opposed to our historical role of an importer.
The need to globalise SMEs
Such restructuring of the local economy cannot take place without changes to the Small and Medium Enterprise (SME) space. The transition from a “value-adding” to a “value-creating” economy has to take root most crucially among SMEs.
Yet this transition has never been more challenging. Singapore’s open economy exposes local SMEs to the intensified competition from the region and beyond. Domestic competition becomes international competition as local companies vie with foreign firms for domestic demand.
In order to thrive, SMEs in Singapore need to break into new markets and compete internationally. However, globalisation is easier with the presence of scale, a feature that most local SMEs lack.
Policies to create scale
The proposed strategy to create scale was through Mergers and Acquisitions (M&A). A government scheme was implemented in 2010 to encourage M&A among SMEs by granting tax allowances on the transaction costs incurred during the process. However, the policy failed to take off. As of March 2014, only 67 companies had enrolled in the scheme.
A reason for its failure is because SMEs in Singapore are predominantly family-owned and family-run. Despite the benefits of economics of scale and improved credit-worthiness, M&A result in the dilution of ownership and a loss of executive control. The disparity of operational fit, diverging business cultures, and most crucially, a deficit of trust amongst competitors make M&A a less attractive proposition.
Furthermore, let us not forget that business ownership has its advantages. As the famous Thomas Friedman maxim goes, “In the history of the world, no one ever washed a rental car”. A dilution of business ownership could potentially erode the deeper sense of responsibility and drive for success that comes with most business ownership.
Whilst M&A may not be a popular instrument to create scale in the SME space, strategic alliances between the 1) government, 2) SMEs, and 3) industry associations could.
Going further
Industry associations can assume the role as SME consortium facilitators, agglomerating SMEs, increasing the resource base and gaining economics of scale. At the same time, the government can provide these newly formed consortiums with the opportunity to work together and build trust, via state tenders.
Industry associations play a critical part in this tripartite relationship. The in-depth understanding they have of their respective industries places associations at the best position to persuade and convince SMEs of the rewards of consolidation. Coupled with their thick intra-industry networks, associations are capable of coordinating SMEs most effectively and expeditiously.
The Singapore government should revitalise the role of associations. Its recent endowment of six trade associations and chambers with approximately $7 million for the funding of their Local Enterprise and Association Development (LEAD) programmes is encouraging. However, more can be done. The state could offer financial support to more industry associations in the country to encourage them to play an active role in consolidating their individual industries.
One example of a successful SME consortium in Singapore is the Econ-Minimart franchise. With the advent of supermarkets in the eighties, the survival of neighbourhood provision shops were at threat. The lack of scale and variety in their purchases placed them at a disadvantage against their much larger counterparts. Looming bankruptcy throughout the sector prompted the Singapore Provision Shop Friendly Association to act. In 1974, the association established the Provision Suppliers Corporation (PSC), a company jointly owned by its members, to procure stocks in bulk and lower the cost of doing business.
Eight years later, the consortium of provision shops decided to deepen their cooperation by launching the Econ-minimart franchise. Sharing identical brands, consistent pricing and standardised aesthetical displays, these former provision shops were given a facelift. Training programmes were also organised by the association to equip owners with basic entrepreneurial skills like inventory control and profit management. Their price competitive goods, wider variety of items and a more organised appeal resulted in a three-fold increase in sales volume from 1983 to 1987. All these were achieved without a single firm losing ownership of their company.
The same should be done for other fragmented industries. Although the details of collaboration would vary from industry to industry, the concept undergirding it remains unchanged.
The Singapore government is probably the largest single customer in the SME space. In the past two years, eight out of 10 government tenders were awarded to SMEs, accounting for approximately 55% of total tender value. With such leverage, the state can incentivise SMEs to form consortiums and bid for high value government contracts.
Doing so would benefit the government, with tenders awarded to larger and more efficient SME consortiums, instead of individual small firms. SMEs, on the other hand, would gain from the experience of cooperation and the practice of compromise.
Successful coalitions will breed trust and social capital in the SME landscape. Unsuccessful ones would reveal valuable knowledge of which company not to partner in the future.
Singapore aspires to transit towards a value-creating economy and an exporter of productivity. The Economist Special Report on Singapore listed a few of the city-state’s most innovative and expansive private enterprises recently, namely,BreadTalk, Charles & Keith, and Hyflux. In the next chapter of Singapore’s economic narrative, we need more home-grown brands to make their mark on the international stage. Scaling up SMEs is the first step towards this aspiration.
Nicholas Koh is majoring in economics and political science at the National University of Singapore. He recently completed his internship with the Economics & Business research cluster at IPS.
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