This article first appeared in the 28th October 2011 issue of the Malaysian Reserve.
The recent budget and the implications of the budget are still being debated but what is clear is that the government is trying to help SMEs.
As part of the budget, the prime minister announced a RM100 million SME Revitalisation Fund for entrepreneurs who have tried and failed. The goal of the fund is to give those entrepreneurs the chance to get up and have another go.
SMEs are the engine room of countless economies and crucial to the development of many countries. In Malaysia the percentage contribution of SMEs to the nation’s Gross Domestic Product is 47.3%. This compares favourably to the larger economies of China (60%), Japan (55.3%) and Korea (50%).
One of the reasons Malaysian SMEs have stayed relevant is because most of them have been nimble and adaptable, making the change from primary industries such as agriculture and mining up until 1990 to an industrialized economy that saw manufacturing becoming the leading growth sector over the last 20 years.
However, many of those SMEs that made the move from commodities to manufacturing succeeded because they were able to compete on price. And with low labour and other costs, Malaysian made products were attractive and demand was constant. This also encouraged FDI.
But talk to any Malaysian manufacturing SME and you will most likely find that over the last 20 years, with few exceptions, every new contract negotiation with the companies they have supplied clothing or equipment to has resulted in their being forced to lower their price. Margins, with a few exceptions are down to less than 4%.
Despite relationships that may span as many as 20 years, loyalty is non existent and, despite vague promises of long term relationships, business is now being lost to Cambodia, China, Indonesia and Vietnam.
Hardly surprising when average factory wages in Malaysia are 250% higher than in Cambodia, 200% higher than in Vietnam, 160% higher than in Indonesia and even 40% higher than in China. Worse of all, as a contract manufacturer for a third party, Malaysian manufacturers have no knowledge of their consumers and little chance of finding new business.
As FDI and even local investment in manufacturing has dried up as brand owners seek less expensive locations, Malaysian SMEs are now fighting for their survival and whilst the SME revitalization fund is an important step to help those who have failed, Malaysian SMEs will need to develop more strategic ways to differentiate themselves.
One obvious way for SMEs to do this is to build brands. Yet the majority of Malaysian SMEs ignore the importance of branding. But competition, accentuated by AFTA and China’s entry into the WTO means that if they do not begin to brand, they will not be able to compete. The long term reliance on cost to differentiate, driven by historical experience in commodities and the fact that Malaysia was a cheap manufacturing base, will no longer suffice.
The irony is that Many Malaysian SMEs have done the hard part. Malaysian SMEs are already capable but are yet to sell their capabilities to the world. A major investment in branding will allow Malaysian SMEs to leverage substantial advances in quality manufacturing, workforce productivity, logistics and efficiency.
Malaysian SMEs already produce garments for international brands, components for the international aerospace industry, electronics for the global computer industry and numerous personal consumer goods.
In the services sector Malaysian SMEs provide support to banks, airlines, hospitality providers, medical services, insurance companies, and so on.
But these SMEs may lose out to international competition if they do not develop brands. Now is the time for SMEs to learn the importance of branding and the strategies and skills needed to create and maintain market strength through building relationships, providing personalisation and delivering value to customers.
Compounding the problem is that Malaysia is becoming a victim of its own success. As it becomes a more mature economy, global MNCs will start to take notice, as they are already doing and flood the market with international brands using international budgets to buy market share. Unless Malaysian SMEs begin to brand they will not survive this onslaught.
It’s especially important that Malaysian SME’s allocate their (and the Governments) limited resources effectively. The brand promotion grant, launched by the government about six years ago helped some companies advertise but using advertising to build a brand requires deep pockets and leaves too much to chance because it is so hard to stand out from the clutter and be heard over the noise of other advertisers and make an impact with consumers who are permanently distracted.
The good news is that branding today does not necessarily require huge investments in logos, slogans and expensive creative driven advertising campaigns pushed out across traditional mass media, which too often result in at best, a short-term sales spike but have no real long term gains for the company.
By utilizing emerging technologies and trends that are having a major impact on brands and branding and by leveraging these technologies and trends, and by integrating such trends and technologies with the social nature of Malaysian culture, Malaysian SMEs can potentially build global powerhouse brands. And not in the twenty years it has taken traditionally taken to build a brand, but possibly in as few as five to ten years.
But to do this Malaysian SMEs must focus not on price and trying to undercut rivals, both domestic, regional and international, but by identifying prospects, building relationships and understanding customer requirements for value. This will take a significant change on organizational culture but it is one that Malaysian SMEs must make.
It is great news that the government is trying to help SMEs with the SME revitalization fund but it is also important that SMEs help themselves and understand that if they are to survive and thrive, they can no longer compete on price alone.