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Business Times, Singapore 1000/SME 500 - 19 Jan 2007

Reassessing fundamentals

With competition and high operating costs squeezing profits, SMEs need to rethink their business strategies

SINGAPORE'S top 500 small and medium enterprises chalked up a respectable growth in turnover in the past two years, as the economy gained momentum. Total turnover grew 7 per cent in 2004, and 12.6 per cent in 2005, according to numbers from DP Information Group, which conducts the annual SME500 rankings.

And this year, the SME500 generated a combined turnover of $13.49 billion as a group.

Eleven companies did so well that they graduated to the S1000 list this year, having each generated revenues in excess of $80 million, Together, they generated a total turnover of $1.1 billion in 2006.

Going by performance across the 10 business sectors, those in construction, hotels/food establishment, retail and services posted over 20 per cent growth in total turnover. Those in the hotels/food establishment sector saw the strongest growth with total turnover surging 146 per cent to $140.59 million, from $57.22 million in the previous year.

In terms of absolute turnover, the SME500 companies in the wholesale sector continued to lead, with a turnover of $5.35 billion. This was followed by the manufacturing sector with $2.09 billion and the communications/transport/storage sector with $1.18 billion.

The number of profitable SME500 companies ranked by turnover grew 3.56 per cent to 436, for a higher combined net profit of $634.16 million, against $582.19 million the previous year. But despite the strong turnover posted by the SME500 companies, their average profit margin remained low at under 10 per cent across all sectors except finance and property. In fact, the top 500 SMEs ranked by profit reported a combined profit of only $753.7 million (a margin of 7.77 per cent) despite a combined turnover of $9.7 billion.

The low profitability of SMEs was also highlighted in DP Info's SME Development Survey. According to the survey, 60 per cent of SMEs reported a profit of $1 million or under. In fact, only 4 per cent posted a profit higher than $5 million.

It is difficult for SMEs to improve profit margins by pursuing competitive advantages based on cost due to their lack of economies of scale. Their margins are constantly squeezed by higher input costs such as rental, wages, electricity and transport.

Competition, both local and foreign, has also made it more challenging for local SMEs. According to the survey findings, 69 per cent of SMEs face local competition in the Singapore market while more than a third (37 per cent) were also affected by foreign competition for the Singapore market.

Competition and high business costs are the two main obstacles to growth cited by SMEs in the survey. Although competition and high operating costs are part and parcel of every business, the Singapore government has over the years devoted much attention to creating a more conducive environment for SMEs. Yet, despite initiatives to nurture their growth locally and encourage them to spread their wings abroad, many SMEs continue to struggle in their quest for better profit margins.

It might be time for SMEs to take another look at the fundamentals, ie, the capabilities of SME bosses which are vital to the success of the firms.

The importance of executive education was also highlighted by Philip Yeo, soon to take the reins of Spring Singapore. Mr Yeo is making it a priority to train a new breed of bosses and offer the current bosses a primer in modern management.

The recently launched SMU-Spring Executive Management Programme is one such initiative that CEOs and senior executives of SMEs should seize as it offers them the opportunity to learn how to enhance their business models by focusing on finance, marketing and strategy.

As more SMEs heed the government's call to exploit opportunities overseas, to move up the value chain, and be more innovative, the call to SMEs to equip themselves with the necessary skills set in planning, operating and managing a business could not be more timely.

Article contributed by DP Information Group