Small and medium businesses (SMBs) which don’t take making a profit seriously will not survive the current global economic downturn, according to Raju Chellam, vice president, Asia Pacific of Access Markets International (AMI) Partners, the world’s largest research firm on SMBs www.ami-partners.com.

“SMB’s across all geographies will have to either increase their sales or reduce their costs to make profits to be able to pull through and emerge from this recession stronger,” Raju told the Cisco SMB Connections Seminar at Sunway Lagoon Resort in Petaling Jaya on 15 January.

“The key issue in 2009 is whether they can stay alive by adopting technology, which is the only differentiator, the costs of which SMBs can control, while other costs, such as those of labour, materials, power, energy, transport and so on are beyond their control,” he added.

However, small businesses worldwide are not known to be open to embracing technology and one of the reasons is because technology has previously meant increased costs for them but today, it can help them cut costs and survive, which is why there is a growing interest in technology among this sector.

Fifty five percent of IT spending goes on software and applications, the costs of which are rising, while the costs of storage and system redundancy comprises 30% and is also rising, while the cost of hardware and bandwidth comprise 10% and 5% respectively and are falling.

“Even SMBs directly involved in technology tend to buy everything, when all SMBs should look at software-as-a-service (SaaS) solutions to reduce costs, while they can should outsource their security solutions, lease rather than buy their PCs, software and applications to further cut costs,” said Raju.

Also, while SMBs may be able to make money in their own home market, they won’t grow unless they extend their reach overseas.

Raju cited the case of the Salim Group in Indonesia which went from a US$10 million company when only addressed its home market to a US$400 million company after it expanded overseas and the use of technologies such as the Internet enables them their reach overseas.

However, a good broadband connection of at least 512Kbps is a definite must for SaaS to work and despite the availability of free SaaS, such Google Apps, few SMBs use it or are even aware of it.

“This is where SMB associations must help raise an awareness in SaaS among their members,” said Raju.

Small but big IT spenders

An SMB has from 1 to 999 employees and broken down, a medium business has from 100 to 999 employees, while a small business has from 1 to 99 employees.

There’re about half a million SMBs in Malaysia and 66 small businesses worldwide.

In 2008, small businesses spent a total of US$359 billion on IT, compared to US$216 billion by small businesses and US$440 billion by companies with over 1,000 employees.

Within the Asia Pacific including Japan, small businesses accounted for the largest share of 38% of the US$217 billion in total spent on IT across the region in 2008, followed closely by large businesses with 36% and medium businesses with 26%.

This represents an increase on overall IT spending across the region from US$196 billion in 2007, with small businesses tying with large businesses each accounting for 36% of this spending respectively, while medium businesses accounted for 28%.

“The trend in IT spending will be down worldwide in 2009 for large enterprises, which will spend between 2% and 3% less than in 2008, while medium businesses will spend between 2% and 5% more, while small businesses will spend between 3% and 6% more,” said Raju.

Don’t lump all SMBs together!

Wayne Lim, chief executive officer of Empire Publishing Sdn Bhd which publishes the MALAYSIA SME newspaper (www.malaysiasme.com.my) believes that while it is true that certain segments of Malaysian SMEs do not extensively adopt ICT, most SMEs in one way or another embraces ICT in their operations.

“The fact is that most if not all SME operators have invested or engaged in some forms of ICT, even if that means only a desktop computer of even the simple of use of mobile phone communication constitutes an IT tool,” said Lim.

The publisher explains that it is important to clearly categorise the different segments of SMEs when discussing ICT adoption due to the sector’s diversified business environment. 

“Firstly, even advertising and promotions, as well as the use of mobile phones are usage of IT,” said Lim.

“Too often, industry analysts tend to lump all SMBs together but miss the point that 80% of Malaysia’s SMBs are micro-SMBs, such as a food hawkers and small boutique owners who do not need to use IT in their business, while the remaining 20% of SMBs do use IT or are directly involved in IT.

“A good example is banking services, as most banks have different products that cater for different types of SMEs – large, medium, or micro. This reflects that they recognise the varying needs and requirements of our SMEs,” stated Lim.

“Take N2N Connect for example. It grew from an IT startup with a handful of staff to a public listed company within a few years by being involved in IT,” said Lim.

N2N Connect www.n2nconnect.com provides e-commerce and mobile-commerce applications for the financial services industry, such as web-based stock tracking and trading applications on PCs, PDAs and mobile phones.

Besides being a publisher of newspapers, trade directories and so on for SMBs, MALAYSIA SME also provides legal advisory, organises seminars and events, as well as other corporate incentives and support services support to over 18,000 of its MALAYSIA SME members who pay RM888 per annum.

“We’re not an association but rather a sort of club for SMBs designed to strengthen the nation’s growing SME community,” Lim explained.

MALAYSIA SME also works closely with SMB-related government agencies such as the Small to Medium Industries Development Corporation (SMIDEC), the Malaysian Industrial Development Authority (MIDA), the Malaysian External Trade Development Corporation (MATRADE) ), and as well as non-governmental SME-related organisations.

The acronym SMI used in Malaysia means small and medium industries and refers to small and medium businesses which are involved in manufacturing, while the acronym SME means small and medium enterprise, which covers all industries and is more or less synonymous with SMBs.

On whether manufacturing is a “sunset industry” as is claimed by futurologists such as John Naisbitt and others, Lim said that those SMBs which depend on original equipment manufacturing (OEM) for their corporate customers indeed are sunset industries since they have to compete with their peers to offer the lowest price to their customers.

However, the second generation of SMBs run by the children of their founders have new strategies.

“Globalisation lets people source their supplies from anywhere, so our SMBs must be original brand manufacturers of their own branded products,” said Lim.

“While we may lose out to lower wage countries in terms of pure manufacturing, we are a bit behind in terms of high technology and must develop our own quality brands,” he added.

Catering to SMBs

Networking and communications equipment provider Cisco Systems recently formed a sales organisation aimed at small businesses. These include a Small Business Council and as of 5 August, 2008 it began moving some product categories from its Linksys range of consumer networking products to an entry-level range for SMBs which it names as Linksys by Cisco and which are handled by its Connected Office Business Organisation (COBO), while its consumer products remain branded as Linksys.

“This is to provide affordable, end-to-end solutions for SMBs,” said Stanley Lim, Cisco director of Commercial SMBs.

“SMBs require one solution, one service and we’re talking with the biggest player and a WiMAX operator – not to mention any names – which could bundle Cisco products with their broadband connections to businesses, and Cisco could also link up with PC retailers to be channel partners which provide Linksys by Cisco products as a solution to their small business customers,” he added.

Well, no prizes for guessing who that “biggest player” is. Also, the chief executive officer of that WiMAX operator told Comm & Tech Asia that if after they had finally concluded a deal with Cisco, they would not only provide Cisco equipment with their WiMAX connections to their business customers but also provide them with value-added services, such as SaaS over them as well.

Such services could be provided by the operators themselves or by a third-party partner.

Cisco will conduct similar seminars in selected state.

Editor's endnote:-

What Wayne Lim says about the importance of own-branded products ties in with what Eamonn Fingleton, an Irish author based in Japan since 1985 said about the importance, especially of high-tech manufacturing in his book, In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Boston: Houghton Mifflin, 1999).

A former editor for Forbes and the Financial Times, Fingleton has been monitoring East Asian economics since he met China's supreme leader Deng Xiaoping in 1986 as a member of a top U.S. financial delegation.

In Praise of Hard Industries was first published at the height of the United States' late 1990s New Economy stock market boom and it presents a trenchant rebuttal of the exaggerated claims then being made for an all-digital postindustrial future.

In it, Fingleton argues that unlike what postindustrial pundits and futurologists have said about manufacturing being a “low-end, screwdriver assembly,” in fact the manufacturing industry embodies decades of accumulated proprietary know-how embedded in each company’s products, which unlike a software CD or a DVD is impossible to clone right down to the original’s quality and reliability.

Sure, people have made counterfeit Rolex watches which sell for a fraction of the price but they embody neither the quality nor the durability of the original.

Despite all the hype and hullabaloo about the information & services economy being the next great thing since sliced bread, while manufacturing is a “sunset” industry, manufacturing in fact is a well established industry which has been built up over the past 200 years or more and it will require much effort and expense for newcomers to catch up, hence the interest in startup entrepreneurs to join the "gold rush" and venture into the emerging information and services economy with the hope that they will pull through to become a giant like Microsoft or IBM, while most of the rest fall by the wayside, since the attrition rate is very high.

Fingleton cites as an example Japan’s expertise in making glass for high-precision lenses used in the photolithographic steppers used in semiconductor wafer fabrication and which enable the manufacture of integrated circuits of progressively finer dimensions and one of those steppers from optics companies such as Nikon costs millions of US dollars, so to know what nn nanometre technology your PCs processor manufacturer will be touting next, just do a Google search on the state-of-the-art resolutions of photolithographic stepper technology and you won't be very far off.

He also cites Japan’s steel making technology, which enables it to make pipes used in oil pipelines which are highly resistant to corrosion and hence preferred by the oil & gas industry over US-made pipes.

Fingleton also argues that manufacturing remains a provider of decently-paying jobs for people, most of whom have average levels of education, while the much touted information economy employs highly qualified people and is thus not a provider of mass employment, while with fewer and fewer employment opportunities in the United States’ dwindling manufacturing sector, the rest have to contend with much lower paying jobs with poorer work conditions in the services industry, which is now believed to have contributed significantly to the United States’ economic problems and massive indebtedness to countries with vibrant manufacturing economies.

This writer can testify to that. For example, during an interview for an article on unemployment among IT graduates published in another publication around 2004, a very senior executive in a well-known online employment portal said that IT graduates were being too choosy and should be willing to serve coffee in chain cafes, such as Starbucks.

To this writer, that’s a terrible waste of talent qualified human resources.

Anyway using our brains -- which most IT writers apparently either don’t or simply suppress - the sun actually never sets but is always shining somewhere on one half of Earth’s surface at any one time.

Since we after all are three-dimensional beings in need of a roof over hour heads, food to eat, clothes to wear, cars, buses, trains and planes to travel in; someone, somewhere will have to produce these and we will never be without the need for manufactured goods, agricultural products and mined resources and this is something which those brainless IT writers often ignore or chose to ignore.

That an IT equipment company such as Cisco finds it important enough to cater to small businesses, including small manufacturers also is a testament to the importance of manufacturing and Cisco’s own switches, routers and other networking equipment also are high-tech manufactured products, containing a high degree of intellectual content.

We should also pause to ponder that while Malaysia has been trying to make IT and services its engine of growth for over 10 years, the value of our merchandise exports – ie of all movable goods – was worth over RM600 billion in the first 11 months of 2008, which is about 100 times the value of exports of MSC Malaysia-status companies.

So it hardly looks like IT and services will our engine of growth for many more years to come - if ever it does come.

IT, including the latest fad about Web 2.0, is just an enabler and while a Google search on “Web 2.0 bust” pulls up many suggestions that there may be a dotcom bust 2.0 pretty soon, since many of those much-touted social networking sites aren’t making money.

Also, with an Internet culture which is averse to paying even a toke sum to use and enjoy such facilities, let alone the RM888 subscription like each of the 18,000 SMBs pay to Malaysia SME.

Still Web 2.0 technology can and will be used by other industries, including manufacturing to enhance their operations.

In Praise of Hard Industries was named one of the ten best business books of 1999 by Amazon.com Business Editor Harry C. Edwards. It was also named one of the Ten Books that Matter by the Industry Standard, a now defunct magazine for Internet professionals.

More information on In Praise of Hard Industries is available on Fingleton’s website, www.unsustainable.org/index.asp?navID=6, while Eamonn Fingleton can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .