D&B - British Airways SME Cluster Series 2014_Mumbai

I

Key FindingsDun & Bradstreet India (D&B India), in association with British Airways reinforces its commitment towards the development of small and medium enterprises (SMEs) with the launch of its cluster-based report series, “D&B - British Airways SME Cluster Series 2014: Mumbai”. This report focuses on SMEs in the Mumbai region and offers insights on the status and scenario of the SMEs operating in the Mumbai cluster, in terms of their credit requirements and preferences, marketing and IT challenges, and various other parameters. Further, this report highlights the benefits of operating in the cluster and factors that can enhance the competitiveness of the businesses operating within this cluster.

Following are some of the key findings from the study:About 55% of the respondents from this cluster are proprietary entities with majority in • manufacturing operations.The respondent stated tax benefits, import/export benefits, and ease to market access as the three • major benefits of operating in the Mumbai cluster. An analysis of the enterprises based on their revenues showed that more than half of the SMEs • (60%) operating in the Mumbai cluster earned annual revenues below ` 10 mn.Around 85% of the respondents reported that their exports revenue contributed upto 40% of their • total income, while the remaining 15% reported that their share of exports in the total income was above 40%. Access to newer markets (36%) emerged as the biggest barrier while operating in the export markets.Respondent stated B2B, online, and email as the top three marketing strategies adopted by • the SMEs operating in the Mumbai cluster. However, lack of market and branding awareness associated with it emerged as the major blockage in promoting their products and services. Increased efficiency and quality improvement were the two main factors driving SMEs to undertake • technology upgradation. Simultaneously, the survey showed that high cost of implementation and poor consultancy support services were the two major deterrents for companies in adopting information technology tools. Banking institutions are the most preferred sources of funding for companies of the Mumbai • cluster. Around 50% of the respondents preferred finance from scheduled commercial banks – public and private banks followed by private equity and venture capitalist, accounting for 18% share.The availability of accurate and updated information regarding the industry and target market • is the key service that SMEs look for in a financier. Availability of adequate industry/market information accounted around 35% share, followed by 22% respondents who expected assistance on effective management of working capital.Amidst the current economic slowdown, around 31% of the enterprises are seeing a drop in • client orders, followed by around 13% of the enterprises having funding problems.Around 42% of the enterprises are focussing on client retention to sustain their business growth • amidst the current economic slowdown, followed by around 26% of the enterprises strategizing on offering value added services.Nearly 70% of the surveyed SMEs in Mumbai are moderately confident on their business growth • prospects.

1

Mumbai Cluster InsightsMumbai, the financial hub of India, is one of the most eminent commercial and entertainment centres in the country. The city houses the headquarters of major financial institutions, large corporates, MNCs, insurance companies, mutual fund houses, and two premier stock exchanges.

Dun & Bradstreet has conducted a comprehensive study of the small and medium enterprises (SME) sector, based on primary research gathered from companies from the SME-oriented sectors. Approximately 70 companies from SME-oriented sectors were considered for the study. The analysis covers various business dynamics pertaining to operational structure, financial performance, export performance, financing preferences, and marketing strategies. Companies with a turnover of below ` 1,000 mn in FY13 were considered for the analysis. The key findings of the primary survey are elucidated in this section.

Mumbai SME Cluster - SME Perspective

Tax benefits and import/export turned out to be the key benefits of operating in a clusterMumbai has been in the forefront in sustaining industrial growth and in creating a conducive environment to industrial development. Investment friendly industrial policies and good infrastructure have made it a favored destination for manufacturing, export, and financial service sectors. According to the survey, around 90% of the SMEs find this cluster the most attractive destination for running business.

Benefits of operating in a cluster

Source: D&B Research

The Mumbai cluster appeals to investors for a number of interesting factors, which includes incentives such as tax benefits, import/export benefits, export promotion, and ease of market access. Tax benefits emerged as the most significant benefit of operating in the Mumbai cluster, followed by import/export promotion. Interestingly, the least cited benefits of operating in the cluster were less bureaucratic hurdles, export promotion and ease of access to testing facilities/standardized labs/R&D centres.

Features of the Mumbai cluster

Proprietary firms fall in the lower income bracket and private entities in the middle income bracketThe Mumbai cluster is primarily dominated by proprietary companies with more than half of the firm’s surveyed being proprietary, while around 31% are private limited companies. Partnership firms constitute the balance 14% of the firms surveyed.

A second finding on income levels, showed that 60% of the SMEs were in the income level below ` 10 mn. Around 4% of the SMEs fell in the highest income bracket of ` 500 mn to ` 1,000 mn while a major part of the proprietary and private

2

companies occupied the middle income bracket of ̀ 10 mn to ̀ 500 mn. Furthermore, nearly 7% private companies recorded the highest income bracket of ` 500 mn to ` 1,000 mn.

Ownership Pattern - Income wise Segmentation by nature of operation


Further, of the total respondents, some firms have diversified operations. Nearly more than half are sole manufacturers whereas exporters constitute around 10%. Around 6% of the total surveyed companies act as service providers while 4% work as distributors.

Exports Scenario

Major SMEs were earning export revenues below 20% of their total incomeAmong the surveyed companies, 46% of the respondents reported that their exports revenues contributed 20-40% of their total income, while 39% respondents earned exports in the lower income level of below 20%.

Share of export income


The survey results also revealed that merely 8% of the companies with income bracket between ` 500 mn and ` 1,000 mn had export income of less than 20% of their total income. About 75% of the respondents with income up to ` 10 mn had export income in the range of 40-60% and 40% of the respondents with income between ` 10 mn and ` 500 mn recorded export income in the range of 20-40%. Majority of the respondents falling in the income bracket of upto ` 10 mn, stated that exports accounted for 80-100% of their revenues.

Access to newer markets emerged as the top barrier while operating in exports marketsAccess to newer markets emerged as the biggest challenge while operating in the export markets for the Mumbai cluster, accounting for around 36% share in the export related challenges. About more than 60% of the respondents with income less than ` 10 mn and 36% of respondents with income between ` 10 mn and ` 500 mn ranked access to newer market to

3

be the major challenge, while not many of the respondents cited delayed payments from international buyers as a concern. Managing currency fluctuation accounting for 23% share and excessive documentation and lack of information on buyer’s creditability accounting for about 19% share each were the other important challenges faced by the SMEs in this cluster.

Challenges in export markets (%)

Source: D&B ResearchNote: On cumulative basis

Marketing Strategies

Majority of the SMEs stated B2B and online marketing as the topmost marketing strategiesAround 45% of the surveyed SMEs across all income brackets adopted the B2B (business-to-business) strategy, making it the top marketing strategy. Furthermore, several SMEs were dependent on the online marketing medium, as it helped reached across geographies, with around 14% survey respondents using this medium for business promotion. Similarly, around 11% survey respondents preferred the mode of email marketing. However, exhibitions, media, and journals emerged as the least popular marketing choices used by the SMEs operating in the Mumbai cluster.

Income wise, online marketing emerged as the major marketing strategy used specially by smaller firms in the less than ̀ 10 mn income bracket. B2B (Business to Business) emerged as the top marketing strategy for companies in the middle income group (` 10 mn to ` 500 mn) while in the higher income group (` 500 mn to ` 1000 mn) online B2B portals and various exhibitions were more commonly used strategies.

Marketing Strategies - Income wise


Mumbai SMEs major roadblock was the lack of market awareness in products and services offeredThe companies operating in this segment face many challenges and issues while undertaking their daily business activities. In this regard, many companies have cited lack of market awareness and branding awareness as the major challenge that hampers production and business activities. The second major challenge is cost incurred on marketing and branding and shortage of skilled workforce.

4

Marketing challenges: % of companies


According to our survey findings, around 72% of the SMEs earning income up to ` 10 mn experienced the major issue of lack of awareness. However, for SMEs from the both middle and higher income bracket, budget was not a major issue. Lack of skilled workforce turned out to be the major problem for these SMEs. This was mainly owed to shortage of full-fledged marketing and sales teams.

Technology Scenario

Improved efficiency is the key benefit of technology, but high implementation cost a deterrentTechnological innovation is a key factor in a firm’s competitiveness. Among firms of different sizes, SMEs are generally more flexible, adapt themselves better, and are better placed to develop and implement new ideas. As per the findings, increased efficiency was stated as the biggest benefit with nearly 40% of the overall respondents, followed by around 24% of the SMEs that ranked quality improvement as the second best advantage.

Further, for SMEs earning income less than ` 10 mn and between ` 500 mn to ` 1,000 mn, process improvement in technology emerged as the next major benefit rated by around 67% and 11% respectively by the respondents. Similarly, for SMEs earning income between ` 10 mn and ` 500 mn, increased efficiency was the next advantage factor in IT adoption. Moreover, for SMEs falling in the highest income bracket between ` 500 mn and ` 1,000 mn increase in efficiency and cost reduction were ranked equally as the second major benefit in technology adoption.

Benefits of Technology - Income wise


However, high cost associated with technology implementation is a major challenge for Mumbai SMEs. As per the study, around 38% of the SMEs revealed that high implementation cost, especially for SMEs, acts as a major warning factor in implementing/upgrading technology. This was followed by nearly 21% of the SMEs, who felt that lack of consultancy support services regarding technology is one of the key hurdles.

5

Hurdles in implementation of technology: % of companies


Moreover, to overcome these hurdles, the government is expected to play a major role in facilitating technology implementation among SMEs. Although, the government has come out with the ‘Capital subsidy for adopting new Technology (CLCSS)’ scheme, few SMEs are aware about that and realize their optimum benefit. The survey findings revealed that more than half of the SMEs were unaware of the various government schemes for upgrading/modernizing technology.

SME financing preferences

SCBs and PE/VC are the most preferred source of funding for SMEsSMEs are traditionally dependent on banks for obtaining finance for expansion purpose and meeting their working capital. Today, private equity (PE) and venture capital (VC) are also emerging as an important source of finance for SMEs, especially for starting business and business expansion requirements.

Our survey findings showed that around 50% SMEs are dependent on private/public banks for their financing requirements. SCB’s were popular among companies in the lower income range. Private equity/venture capital funds and regional rural banks emerged as the second and third preferred options for sourcing finance among SMEs. However, SMEs in the Mumbai cluster least preferred NBFCs and other financial institutions as a source of finance.

Major source of funds


Our study revealed that, merely around 4% of the SMEs surveyed in the Mumbai cluster opted for a credit rating. Further, around 67% of the respondents revealed moderate chances of changing their funding institution in the next two years whereas 25% expressed low chances of changing their financing source. The remaining 8% conveyed high chances of changing their funding institution in the coming two years.

6

SMEs expect information update on the industry and target markets from lendersThe availability of accurate and updated information regarding the industry and market is the key service that SMEs look for in a financier so that they will not be jeopardized by incorrect or obsolete information. Availability of adequate industry/market information gained around 35% share in various additional services expected by SMEs. This was followed by 22% respondents expected assistance from their lender on effective management of working capital.

Further, 19% expected loan repayment flexibility, followed by 17% who were seeking information on cashflow management. Lastly, around 8% of the SMEs expect information tips from lender to avoid loan defaults.

Business Travel Trends

Majority of the SMEs did not make any single international and domestic business tripInterestingly, the survey revealed that more than 60% of the SMEs did not make even a single international business trip. Similarly, around 44% of the SMEs did not make even a single domestic business trip through airways.

On the other hand, around 35% and 15% made around 2-5 domestic and international trips annually. Moreover, more than 13% and 15% respondents made more than five international and domestic trips through airways.

Frequency of domestic and international trips


Similarly, almost 70% of the surveyed respondents plan and book their flight tickets through a travel agent. Interestingly, none of the surveyed respondents used mobile phones for booking their flight tickets. Further, our survey showed that more than 88% of the surveyed respondents do not have a centralized travel booking plan for their travel needs across all locations including overseas.

Moreover, around 69% of the SMEs travel through economy class, while around 29% travel through business class, and rest 3% travel through first class.

Asian regions emerged as the most frequent business travel destination by SMEsAsia (excluding Middle East) emerged as the most frequent travel destination for business purpose by SMEs accounting for more than 41% share. This was followed by US with 13% share, further followed by Canada and Middle East with 8% share each. Europe emerged as the least travel destination for SMEs accounting for around 5% share.

Around 45% of the respondents allocated less than 2% share from their company’s total budgeted expenditure for business travelOur survey findings showed that, around 45% of the respondents allocated less than 2% share from their company’s total budgeted expenditure for their business travel needs, followed by around 38% of the surveyed respondents who allocated between 3% to 5% share. Only around 2% of the surveyed respondents allocated more than 15% for the same.

7

Budget allocated for business travel


Travelling cost and safety emerged as the top criteria for choosing a particular airlineAccording to the survey, travelling cost emerged as the most significant criteria for SMEs while choosing a particular airline, with a majority share of around 33% while choosing a particular airline. This was followed by safety and direct connectivity with around 31% and 17% respectively.

Criteria for choosing an airline


More than 25% preferred value added services and corporate discounts/reward point as the key factor that SMEs derive from a particular airlineAs per the survey, value added services such as assistance in hotel booking and car rentals emerged as the most important factor for SMEs while choosing a particular airline, with a share of around 27% in the parameters, which SMEs look at while choosing a particular airline. This was closely followed by reward points/corporate discounts on particular airlines accounting for 25% share.

8

Benefit of choosing a particular airlines


Free travel insurance and access to lounge area were the other key parameters for choosing a particular airline. Surprising, around 21% respondent citied that they derived no benefits from choosing a particular airline for business travel needs.

Key challenges and rebuilding business strategies during economic slowdown

Decline in client orders emerged as the most significant effect of the economic slowdownIn the current economic slowdown, several SMEs are seeing a decline in client orders, increase of receivable cycles, drop in exports, and increased funding woes. The analysis showed that around 31% SMEs are seeing a fall in client orders, followed by around 22% facing funding problems and around 17% considering putting expansion plans on hold. Further, around 13% share was accounted by increase in receivables cycles in various impacts of economic slowdown.

Effects of economic slowdown: % of companies


Client retention appeared to be the topmost priority to sustain business growthTo sustain and overcome the challenges existing in the current economic slowdown, SMEs are strategizing on focusing and retaining existing clients, offering them value added services, and collaborating with other businesses and associations.

Around 42% of the companies are focusing on client retention by offering various value added services to their clients, out of which majority were falling in the income bracket of below ` 10 mn. Further, around 26% of the companies focused on offering gamut of value added services. Nearly 15% focused on collaborating with other businesses and associations. However, diversifying into newer geographies and foraying into allied business lines was at the bottom of priority list. Of the above, majority of the SMEs were in the lower income bracket of less than ` 10 mn.

9

Thus, by following the above strategies, majority of the companies are confident about business growth in the future. The study revealed that around 22% of the companies were highly confident about business growth in the economic slowdown whereas about 70% of the companies were moderately confident about sustained business growth in the future.

Strategies to sustain business growth: % of companies


Conclusion

35% SMEs rated access to modern technology as the key factor that can enable businesses to become more competitiveMore than 90% of the companies felt that Mumbai is an attractive destination for doing business. To make it more competitive, modern technology emerged as one of the most significant factors with around 35% of companies considering access to modern technology as the key factor supporting businesses in the cluster to become more competitive. Government assistance emerged to be the next significant factor ranked by the respondents in enhancing competitiveness.

Factors enhancing competitiveness - Income wise

Source: D&B research

In the above chart, assistance in obtaining patents and IRPs was considered the top factor for boosting cluster competitiveness for SMEs in the lower income bracket while updates on market was the key in the income falling in the ` 10.1 mn to ` 500 mn range.

D&B - British Airways SME Cluster Series 2014_Mumbai

Services

Transcript of D&B - British Airways SME Cluster Series 2014_Mumbai