Monday, February 18, 2013

SMEs in India Deserve a Better Deal

First published in The Hindu Business Line: ____________________________________________________________________
How often have we read that small and medium enterprises are a strategic asset for the Indian economy? We are told that they contribute nearly 8 per cent of the GDP, 45 per cent of the manufactured output and 40 per cent of exports. The sector provides employment to about 60 million people through over 26 million enterprises producing over six thousand products.
 However, what is seldom mentioned is that many of them are at the mercy of the larger corporations, with no effective relief from the existing government policies. For instance, delayed payments by large companies and the resultant crippling effects have always been the bugbear of SMEs, but at the risk of losing their large orders, they do not legally complain.
 While the government efforts have always focused on ways to ease credit restrictions, strengthen training, marketing, technological support, exit policies and cluster development, very little thought has gone into the relationship between large corporations and their sub-contractors. At the risk of being accused of bringing back the “control regime,” our policymakers could well take a look at the recent initiatives in South Korea, a country that has built its strong economy on the basis of capitalistic free market principles.
 On May 22, the nation's top conglomerate, Samsung Electronics, found itself in the national anti-trust agency's crosshairs, falling afoul of the unfair practices law for its repeated cancellation of parts' orders to small contractors.
 The Korea Fair Trade Commission (KFTC) announced that it is imposing a $1.4 million fine on the company for withdrawing orders long after payments are due. It said that among 1.5 million parts orders placed by Samsung Electronics between January 2008 and November 2011, some 2 per cent or 28,000 orders were reneged on unreasonably. This left suppliers with bursting inventories, interest payments owed and disruptions to their production schedules. Although the company has strongly refuted the claims, this just goes to show that SMEs in South Korea which have been unfairly treated by their larger counterparts can always bank on help from government agencies. The same may not be true for Indian SMEs.
 The anti-trust agency's proactive steps can be traced to the ‘shared growth' policy of the present government under President Lee Myung-bak, a former high-profile businessman. He has been pursuing co-prosperity between conglomerates and SMEs since last year as a means of addressing economic polarity.
As a response to concerns that big companies were thriving while small ones weren't under his administration, a ‘‘Presidential Commission on Shared Growth for Large and Small Companies'' was launched in December 2010, as a private institution, which is formally independent from, but actually supported by, the government.
Since its formation, the commission has announced many policy instruments to promote shared or mutual growth of large companies and SMEs through what it calls “cooperation profit distribution.” Representatives from both SMEs and large companies agreed to introduce the system and a number of proposals were then announced, including a list of business areas restricted only to SMEs.
 The commission recently announced a list of 79 products that it believes should be produced by SMEs rather than big ones, an attempt to prevent big companies from driving smaller ones out of promising markets. The conglomerates have reluctantly accepted this proposal.
 ‘Name and Shame' is another tool used by the Commission. It released a ‘‘shared growth index'' earlier in May, tracking how large businesses have made efforts to realise shared growth.
 Of the 56 large conglomerates subject to the index calculation, seven companies received the lowest grade of “improvement needed”, while six companies, including Samsung Electronics, POSCO, and Hyundai Motor Company, received the highest grade of “superior”. Twenty companies were ranked as “good” and 23 others were listed as “average”. The index has been calculated by combining the performance assessment of the conglomerates by KFTC, plus a personal survey of 5,200 contractors of the 56 companies.
Large companies that received the lowest mark in the assessment will not face any disadvantages. However, 26 companies with the satisfactory grade or above will be given various incentives from government agencies, including tax breaks and subsidies.
 It is the first time that the shared growth index has been calculated. Although some conglomerates may not be content with the index, it is desirable for them to acknowledge the commission's effort to improve the environment for achieving co-prosperity between conglomerates and SMEs.
 In fact, following its active involvement in the ‘‘shared growth'' agenda, many large enterprises have recently reached mutual agreements with subcontracting SMEs for fair trade and shared growth. Two prominent examples of such arrangements are Samsung and Hyundai's agreements with their respective subcontractors.
 Nine Samsung group affiliates, including Samsung Electronics, made cooperative agreements for shared growth with 5,200 subcontractors. The package of financial assistance amounted to $5.7 billion, among which R&D support comprised $1.7 billion.
 Samsung agreed to induce its subcontractors to make cooperative agreements with lower-level sub-subcontractors, and provide them with incentives. Similarly, six Hyundai group affiliates, including Hyundai Motors, made cooperative agreements for shared growth with roughly 1,600 subcontractors. The package of financial assistance amounted to $3.9 billion, with R&D and capacity investments making up $2.3 billion.
Hyundai promised to provide 300 R&D support manpower for its subcontractors. This is just the beginning, and many more large companies have announced similar initiatives.
With a small push from the government, the Korean companies have realised that they need to share the burden of their sub-contractors.
 That is what is lacking in India. Any number of laws can be enacted but effective implementation is crucial. It also requires a concerted effort by the government; so that the large corporations in India automatically devise their own ways to help their sub-contractors survive and share their growth.
Many companies may still be doing it on their own initiative, but if there is a government push, it will make a world of difference.