As Asia grows, SMEs must venture out, or miss out

Albert Chan says SMEs must tap the opportunities in emerging markets

PUBLISHED : Thursday, 24 January, 2013, 12:00am
UPDATED : Thursday, 24 January, 2013, 5:24am

Entrepreneurs face what initially appears to be a dilemma. They can maintain the status quo, striving to build their business in the traditional markets that they know and trust, or they can venture into new territory, tackling the host of logistical, financial and cultural challenges that entails.

Stop to think for a moment and you'll realise that there's no dilemma here at all. The time to be brave is now.

The shape of global demand is undergoing a profound transformation. Manufacturers used to be able to rely on domestic demand and, if they were more ambitious, exports to consumers in Europe and North America.

But that has changed. In Western markets, consumers are using any extra cash they might have to pay down their debt rather than go shopping. For the ambitious entrepreneur, the outlook in the developed world is flat. The future lies in the emerging markets; almost five billion people with cash in their pockets, more than ready to buy into the consumer experience.

By 2050, HSBC research forecasts that the collective size of the economies we today call "emerging" will have increased fivefold to eclipse those we now call "developed". What this means for the emerging world is real-wage increases and an expanding middle class. For small and medium-sized enterprises, it means new challenges, and opportunities.

The shift to emerging markets as the primary driver of global consumption may still have a long way to go, but it has already had an effect on the patterns of global business. The Asia-Pacific region accounted for 7 per cent of Apple's net sales in 2009, for example, but in 2011 this share climbed to 21 per cent.

The reach of global behemoths like Apple is unsurprising. What is more surprising, and is likely to be a defining trend of our age, is that smaller companies are using advances in financing tools, logistics and technology to make a bold push into new markets.

It is a trend that is probably clearest in Asia, a business environment that is still dominated by family-owned enterprises. So-called "south-south" exchanges - trade in goods and skills between emerging markets - are already starting to grow.

The Asian Development Bank predicts that developing Asia's share of global gross domestic product will double to 22 per cent by 2030, and that its share of global exports will increase by 90 per cent, and that of imports by 50 per cent, over the same period.

Evidence for the benefits international SMEs enjoy is mounting. A report by the European Commission's enterprise and industry division found that being active across borders correlates with higher turnover growth. Between 2007 and 2009, more than half of European SMEs that invested or took on subcontracting work abroad reported increased turnover, compared to 35 per cent for all SMEs. Those that are internationally active also reported higher employment growth, while the study found a close link between internationalisation and innovation.

Moving into new markets carries risks, particularly for small companies. Distance makes financial discipline harder to maintain; cultural misunderstandings can have commercial costs; and new legal and regulatory environments need careful navigation. But these challenges are frequently less daunting than they seem.

Improvements in logistics have made supply chains cheaper to run, more reliable and more efficient. Free trade agreements and simplified customs procedures have reduced barriers to multinational production and marketing. And technology has put cross-border management within reach of all but the smallest enterprises.

Given the current rapid pace of change in the global economy, the option of standing still is no option at all. Moving into any overseas market for the first time takes meticulous planning and a leap of faith, but the mechanics have never been easier, or the business case more compelling.

Albert Chan is HSBC's head of commercial banking in Hong Kong