SMEs ho-hum about 2019 outlook; more look to Asean for opportunities

Singapore

CAUTION appears to be the pervading sentiment among Singapore businesses as external uncertainties such as the US-China trade war, rising interest rates and slowing global growth weigh on their outlook for the coming year.

But on a more optimistic note, industry watchers observed that more small and medium-sized enterprises (SMEs) are planning to move ahead with their overseas expansion plans in 2019, with a renewed focus on Southeast Asia.

This comes after SMEs dialled back their growth appetite in 2018 as they adopted a wait-and-see approach, on account of the sudden escalation of the trade conflict in the second half of the year that threw a spanner in the works.

Findings in this year's SME Development Survey by DP Info showed that businesses made less headway in their overseas activities this year, with the proportion of SMEs with engagements abroad dipping from 47 per cent in 2017 to 45 per cent in 2018.

But next year could be different. Alan Turner, head of commercial banking, HSBC Singapore, told The Business Times that entering new markets in Asean is "on the agenda" for local businesses.

"We are seeing increased interest by Singapore SMEs looking to branch out in Asean, including Myanmar and the Philippines, where policy changes are liberalising retail sectors by allowing full foreign ownership," he said.

"Vietnam has also been busy this year, but we expect our closest neighbours, Indonesia and Malaysia, to continue to be the most active Asean destinations."

The US-China trade war may have cast a pall on global growth, but it also ironically offers opportunities for Asean, thanks to a possible supply chain diversion, which Singapore SMEs look to capitalise on, he added.

A spokesman from the Singapore Chinese Chamber of Commerce and Industry (SCCCI) concurred that the trade tensions have thrust Southeast Asia into the limelight.

"It has made Asean an attractive alternative, or a supplementary manufacturing base to Singapore," said SCCCI.

"Singapore, being a logistics, shipping and financial hub that serves this region, can potentially stand to benefit from positive spin-offs from this development... This trade war may impact some existing business opportunities, but other new ones may emerge."

Wilson Chew, entrepreneurial & private clients partner, PwC Singapore, notes that the trade war is "not the end of the world" for SMEs.

He said SMEs that serve the US or Chinese markets are evolving accordingly by establishing alternative sources of supply. "In this context, Southeast Asia presents a positive outlook over the medium term," he added.

But that said, industry watchers caution that challenges still abound for SMEs eager to leverage the trade war to spread their wings in the region.

For one thing, not all businesses will reap gains from this shift to Asean as a result of the trade spat, as there are several other influencing factors including the sectors they are in, where they feature in their respective value chains, and which dominant markets they serve.

According to Mr Chew, the impact of the trade war on SMEs is broadly dependent on two things: exposure to the trade flow, and the ability to redirect trade flows within supply chains.

"SMEs that manufacture intermediate products used as inputs in the production of China's exports to the US and vice versa could see a drop in business activity given their lower level of flexibility in making production shifts," he said.

The struggle to find demand for their products and services is likely to be the top issue that SMEs will face, given the "rise of regressive global and regional issues alongside digital disruption to global supply chains", added Mr Chew.

Juliana Lee, Asia chief economist of Deutsche Bank, projected that among the various SME sectors, exporters remain "heavily exposed to risks" surrounding the trade war and growing risks to growth in Europe.

In addition, firms in the tech sector are also "highly vulnerable" as the trade war increasingly shifts its focus to the sector, Ms Lee said.

But not all is doom and gloom - domestic-oriented SMEs are likely to fare "relatively better" than those reliant on exports, she added.

Trade war issues are, however, not the only obstacles that firms are likely to face in their quest to expand in Asean.

HSBC's Mr Turner said: "While growth opportunities exist, SMEs should be mindful of the challenges associated with these newly opened markets...regulatory frameworks and physical infrastructure are to be navigated carefully."

Choo Eng Chuan, EY Asean growth markets leader, said that those keen on Asean should note that developing countries in the region "may require more patience and a longer term play".

But there are plenty of resources and help available to ease the path for SMEs to venture abroad, observers said.

Ho Meng Kit, CEO of the Singapore Business Federation, flagged that local firms should make use of the 23 free trade agreements signed to better compete internationally, as they offer certainty in their trade and investments amid today's climate of rising tensions and protectionism.

The outlook in the coming year remains clouded, but SMEs must still take steps to drive transformation from within to adapt to the changing environment, he pointed out.

"SMEs should look to innovation and technology to drive productivity and growth in order to overcome challenges of a tighter labour market and uncertain business climate," added Mr Ho.

Even with the more subdued business sentiment of late, Mr Choo noted that progressive SMEs are still committed to their original growth plans, regardless of the volatility in the external backdrop.

"What SMEs can do is to continue to focus and drive their growth agenda, and monitor their own overall balance sheet strength, especially cash flow," he said.

"The drive to either improve internal processes or adopt disruptive changes to their business should continue regardless, given that disruptions brought about by new technology will remain whether the industry grows or falters."