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Having endured plummeting earnings and a financing squeeze, it is not surprising that many of Asia’s small and medium-sized enterprises (SMEs) are focusing on costs and quality control. But many export-oriented SMEs are also altering their strategies to focus on markets closer to home, as they expect demand from Western economies to stay weak. This strategic shift takes advantage of two new interlocking trends across the region: a push to rebalance economies away from reliance on exports and towards domestic demand, and the increasing importance of intra-regional trade. These are the main conclusions of "Towards the recovery: Challenges and opportunities facing Asia’s SMEs," a new report from the Economist Intelligence Unit.

Based on interviews with corporate officers at SMEs and regional experts, and a review of recent studies published by authorities, such as the IMF, the Asian Development Bank (ADB) and national governments, the report assesses the challenges and opportunities facing SMEs in Asia, and China in particular, as the world emerges from a catastrophic recession. The fate of SMEs is particularly crucial since they account for the bulk of employment in many of the region’s economies and are the cornerstone of Asia’s entrepreneurial dynamism. They have been hit disproportionately hard by the global recession, particularly those companies reliant on exports, but they have shown a resilience and flexibility that bodes well for their ability to capitalise on the region’s unexpectedly rapid recovery.

The report’s key findings include:

• The times are tough, but Asia’s SMEs are tougher—and they are in the right region to take advantage of the upturn. Asia’s SMEs have faced a multitude of problems in recent months: a severe squeeze in financing, tumbling orders, diminishing cashflow and rising inventory costs. But some think the severe competition (at least among Chinese export-oriented manufacturers) and a “cost-control culture” have helped them develop resilience in adversity. On a macroeconomic level, they are well positioned to take advantage of the region’s surprisingly rapid growth.

• Cost control and inventory management are still crucial to survival. Although the region is recovering quickly, many SMEs are still in crisis mode and are focusing on cash-flow protection and strategic reassessment. Cost control, always important for small companies, has become crucial, as has inventory management (for example shifting to make-to-order production from stockpiling). The prompt collection of accounts receivable is also a priority—while quality control is gaining increased scrutiny to ensure clients have no excuse to delay or avoid payment.

• SMEs could benefit from a rebalancing of Asia’s largest economies. Given the weakness of Western markets, Asian SMEs, many of which are cogs in a global supply chain, would benefit from a new source of final demand within the region. There are signs that China may be able to provide this, as its middle class becomes richer and policymakers seek to rebalance its economy away from a reliance on exports and towards domestic demand. If this trend is sustainable (rather than just a result of massive fiscal stimulus in recent months) it could create a virtuous circle benefiting Asian exporters. Indeed, with Western consumers unlikely to return swiftly to pre-crisis levels of spending, some larger export-oriented SMEs are asking whether a strategy focusing on domestic markets—or at least reducing their reliance on consumers in the US and Europe—is preferable.

• A new intra-regional trade dynamic could help SMEs. If Asia’s larger economies do become sources of final demand, this will help drive intra-regional trade. It is already happening to some extent: the proportion of Asia’s trade within the region has been steadily rising over past two decades. The proliferation of free-trade agreements (FTAs) in Asia is testament to policymakers’ commitment to this goal. SMEs that already have cross-border business within Asia generally regard such agreements positively—and are hopeful that the China-ASEAN FTA, which came into effect in 2010, will be beneficial. Nevertheless, better official guidance and information is necessary if SMEs are to take advantages of Asia’s evolving trade dynamics.

“SMEs are the entrepreneurial lifeblood of the Asian economies, and those that have shown the toughness and flexibility to survive the financial crisis may well be tomorrow’s corporate stars,” says David Line, editor of the report.
 

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