Singapore SMEs and their challenges in the second half of 2014

Small Medium Enterprises (SMEs) have started the year with greater optimism. The Ministry of Trade and Industry recently announced that Singapore economy grew 4.9% on-year in Q1 and the GDP growth forecast remain at 2-4% for 2014¹.

For SMEs, which make up 99% of enterprises in Singapore and contribute to more than 50% of GDP², this upward growth is definitely encouraging.

A more positive economic outlook is also likely with the expected recovery in the United States (U.S.), Europe, and China³. This optimism is in line with the last Singapore Business Momentum Survey that American Express conducted in late 2013, where Chief Financial Officers (CFOs) said they are generally upbeat about the outlook, with 42 percent reporting better business prospects this year.

Despite the positive vibe from the beginning of this year, business environment remains challenging as we enter the second half of 2014. So how can businesses make the best out of 2014? How can they tackle the challenges and turn them into opportunities for future growth?

According to the CFOs interviewed, industry competition, currency volatility, and labour costs remain the top three issues they would have to face in order to turn the tide in their favour. The first two have not received as much attention as the labour crunch, but are no less important.

Tackling the competition

Among the multiple challenges Singapore companies face today, industry competition seems to top the list with majority of local SMEs naming it as an important barrier to growth. With multinationals turning to Asia as economies in the West slow, and firms from emerging markets knowing their local markets better, SMEs in Singapore are facing greater competition as they make a bid to grow.

Further, given increased market penetration of SMEs across most regions, 2014 is projected to be a challenging year for Singapore companies to conduct business internationally⁴.

In such a heated environment, a positive strategy against intense industry competition is essential for companies to optimise their service and product qualities instead of resorting to a price-war which could severely compromise their profits.

Through developing innovative new products and services, for example, companies are not just able to differentiate their offerings from the competition but also strengthen customer relationships as well.

SMEs are also capitalising on social media and viral word-of-mouth to differentiate themselves from the competition while engaging their customers on a deeper level. The millennia generation is becoming more inclined to embracing social media platforms to gather information, share experiences, and make decisions.

As such, harnessing the strengths of such interactions is a win-win strategy for SMEs as customers are able to instantly access and obtain opinion about the various offerings and quality of service, while businesses are able to draw customer feedback to continue to remain relevant.

Apart from product and service differentiation through social media platforms, having the right local customisation and strong branding are essential for Singapore SMEs to be distinctive.

Take for example local SME Goh Joo Hin. By having a unique packaging of its New Moon Thai Fragrant Rice customised to meet the local preferences of Chinese consumers, Goh Joo Hin was able to capture a significant portion of the market for Thai fragrant rice in China⁵.

SMEs may also pay heed to government’s call for SMEs to grow through mergers and acquisitions to be able to compete on a bigger scale⁶. Some benefits include diversification of products or services, reducing costs and overheads through shared services, and increasing negotiation power during purchasing.

The economy of scale will be more favourable towards SMEs as they become bigger. Furthermore, the government grants tax allowance on transaction costs incurred in the process of mergers and acquisitions.

Adopting a hedging strategy

The second big area of concern for SMEs – currency volatility and fluctuation – is an issue that cannot be underestimated. It can affect the interest rate environment, in turn placing focus on trading terms and extra cost, which can result in reduced cost competitiveness.

One major source of instability is the looming reversal of the United States Federal Reserve’s expansionary monetary policy – the prospect of which has generated volatility in global financial markets and threatens to disrupt business growth due to higher interest rates and production costs.

While tighter U.S. monetary policy could intensify the global credit shortage, thereby increasing pressure on Asia’s economic and financial systems, one way for businesses with foreign exchange exposure to skirt the obstacle is through strengthening their hedging strategy.

A well thought out, documented, hedging strategy can protect SMEs against exchange rate risks and in turn protect profit margins. For businesses that are looking to expand and grow their business beyond the domestic border, hedging is the most prudent way to manage your foreign exchange risk.

More often than not, mid-sized companies hedge forecasted non-functional currency cash flows over a particular period, via a forward exchange contract. This solution aims to reduce the risk associated with foreign exchange payments and/or receivables.

Invest in your people

Finally, the perennial challenge of rising labour costs will continue to be the bane of SMEs in 2014. As competition intensifies, SMEs are finding it tougher to find and retain talent with requisite capabilities.

In our Singapore Business Momentum survey, 67 percent of CFOs polled shared that the high turnover and shortage of manpower translates to the need for high salaries to recruit and retain good staff, thus adding to business costs.

While the labour crunch is prompting local firms to take concrete steps to boost productivity with technology solutions⁷, companies can also increase talent retention by offering better training and development opportunities to existing staff.

By doing so, employees can become better equipped with additional relevant skills and knowledge to lift productivity levels further. By investing in talent development from within, staff attrition will also drop as employees see themselves growing in an organisation that offers growth opportunities⁸.

Apart from automated solutions and employee training and development, people also appreciate companies that provide employment enhancing schemes⁹. By incorporating flexible work arrangements such as pro-family leave programmes, support schemes for mothers, and infrastructure support like lactation facilities and onsite childcare, SMEs can help employees achieve a better work-life balance, thus enabling the organisation to become a more attractive employer.

By meeting the challenges to growth head-on through a heightened awareness of business landscapes, and tools they need to build a sound strategy, SMEs in Singapore can find themselves in a good stead to maximise their prospects for sustained growth in 2014.
 

¹https://www.channelnewsasia.com/news/singapore/singapore-economy-grew-4/1112956.html
²https://www.spring.gov.sg/aboutus/pi/pages/performance-indicators.aspx
³https://news.xin.msn.com/en/singapore/singapores-economy-grows-44percent-on-year-in-q4-2013-1
⁴IE Singapore Internationalisation Survey 2013
⁵Emerging 50, The Best SMEs in Singapore, NUS
⁶https://business.asiaone.com/news/smes-urged-consider-mergers-acquisitions/page/0/1
⁷SCCCI poll: 84 per cent of SMEs have put in place measure to lift output through automation of processes.
⁸Antecedents and outcomes of organizational support for development: The critical role of career opportunities.
⁹National Trade Union Congress Women’s Development Secretariat and Tripartite Alliance for Fair Employment Practices