11 October 2004	Monday	25 Shaban 1425

Of late, small and medium industry has been in the news in the print media. Apparently the government of Pakistan has got convinced that without appropriate initiatives on her part this sector can not be expected to play its due role in the advancement of industrialization of the country.

Reportedly the Asian Development Bank and some other international agencies are prepared to offer meaningful help to pave the way for SME of Pakistan to come out of its hole.

The history of SMEs of other Asian countries has shown that small scale units cannot compete with the large size companies for reasons of meagre resources i.e. technology, finance, skills, management. Even when confined to work as subcontractors they have to undercut each other to secure access to business opportunities, compromising thereby their viability abinitio.

Japan took the lead to organize its SME through a series of legislations and regulations designed to foster improved productivity and assurance of business opportunity for the SME to survive and eventually thrive in the reformed business environment.

Other Asian economics have learnt from the Japanese success, followed suit and registered significant improvement in their industries which are predominantly small and medium enterprises.

Pakistan is presently on the look out for remedial measures for its SME sector. A summary of the state of affairs in some of the Asian SME is presented hereunder:

In India, small scale unit is defined as one where investment in plant + machinery does not exceed Rs6 million, whereas an ancillary unit is defined as one where investment in plant and machinery does not exceed Rs8 million. This definition keeps in view the socio economic situation prevailing in India where capital is scarce and labour is in abundance.

India's the small scale industrial sector manufactures about 7500 products and accounts for about 40 per cent of the total output of the manufacturing sector, and it contributes about 35 per cent of the direct export of the country. The state is supporting small industries sector through various fiscal, monetary and institutional mechanisms, some of which are mentioned hereunder:

i) Reservation of 836 items for exclusive production by this sector.

ii) Market support by reserving 409 items for exclusive purchase by the Government from this sector with up to 15 per cent price preference.

iii) Turnover-based exemption or rebates in excise duty.

iv) Institutional support from banks, tool rooms, district industries centres and with preferential allotment of industrial warehouses, sheds, plots and utilities.

v) Advisory and managerial support through the Small Industries Development Organization (SIDO).

Ancillarization symbolizes a new form of production organization in the Indian economy on the lines of the Japanese system of outsourcing from long term small scale associates.

Dynamic ancillaries often serve more than one parent plant. There exist about 2.5 million small scale and about 0.1 million ancillary industrial units in India. Ancillarization has been instrumental in a big way towards accelerating the industrialization of India.

Bicycle industry, sewing machine industry, hosiery industry, sports goods industry, tractor industry, electronic industry all owes their growth to their linkages with the ancillaries.

The SIDO of India has set up 16 subcontracting exchanges to facilitate interaction between the small and large units. The SIDO organizes the Vendor development programmes and promotes ancillaristation.

Some of the ancillary units manufacture goods under the brand name of some large scale units and marketing of these products is the responsibility of the large unit. Bata is a case in point.

Similarly in the footwear industry a few large companies lift the entire production of the small units and sell it under their own brand name. Again, thanks to similar linkages small engineering enterprises flourish under the umbrella of the big steel giants. Problems and constraints were experienced as under in the ancillary development programme.

* The parent units upgraded their own technology, modernized and diversified their product line without taking the ancillaries into confidence. This posed problems of quality and delivery at the ancillary end.

* Vertical and horizontal linkage sometimes turned into master and servant relationship, which affected synergy of the relationship.

* The linkages suffered sometimes with changes in top managements of the parent organizations.

* Due to weak coordination public sector lost interest in the development of ancillaries.

* In many cases, the ancillaries found their money blocked in the parent units due to delays in payments resulting in cash flow problems leading to discontinuation of linkage.

The Japan's small and medium enterprises have contributed enormously in the development of the national economy in all fields such as mining manufacturing, distribution of commodities and exportation of goods etc.

There exist about 800000 firms in the Japanese manufacturing sector with about 15 million people employed in these enterprises. In comparison, the number of manufacturing companies in U.S. is about 400000 employing around 25 million people. This illustrates the structural difference of the companies in the two highly industrialized countries.

Actually in Japan the companies are much less integrated and rely heavily on subcontracting for obtaining their supplies from the small and medium industries, which constitute 99.5 per cent of the total manufacturing sector of Japanese industry. Around 58 per cent of the SME work as subcontractors of the large parent companies. The scope of small and medium companies in Japan is defined as under:

* Any company whose amount of capital is 100 million Yen or less, as well as any company or individual whose regular payroll employees are 300 persons or less and whose principal business belongs to industry.

* Any company whose amount of capital is 10 million Yen or less, as well as any company or individual whose regular pay roll employees are 50 or less and whose principal business belongs to retail sales or services.

* Any company whose amount of capital is 30 million Yen or less as well as any company or individual whose regular pay roll employees are 100 persons or less, and whose principal business belongs to wholesale.

Existence of enormous number of subcontracting small units was once considered an indication of Japan's lag in industrial development. It was strongly viewed as an obstacle to modernization of Japanese industry until 1960. But now because of the sophisticated subcontracted production system and its high share in the market the small business is regarded as the source of dynamism and competitive power in the Japanese industry.

Small businesses have their own efficient behavioral and organizational features. Quick decision making processes, focused product development and good incentives for workers lead to higher efficiency. The same combination is seldom found in highly integrated large companies.

Japanese manufacturers deal with a significantly smaller number of suppliers directly, and pursue long term business relationships with them. The U.S. International Trade Commission's report stated that European and US auto producers have tended to adopt Japanese practices in recent years.

The resulting trend to limit the number of supplier has accelerated dramatically. Manufacturers have switched their purchases of parts from multiple to dual or single sources.

Japanese subcontracting system is hierarchical in structure, in that it comprises primary, secondary and tertiary layers of subcontractors. For example in automobile industry an auto maker deals directly with only about 250 primary subcontractors under whom there are about 4000 secondary subcontractors.

These secondary subcontractors are in turn related to about 30000 tertiary subcontractors. This pyramid type of production system, into which the production work is divided, makes it possible for many small businesses to participate.

This is the reason for the existence of the huge number of small and very small (micro) firms in Japan. It is not unusual for subcontractors to deal with more than one contractor.

The state has played a key role in the development of the SMEs in Japan. The SMEs basic Law was enacted in 1963 for the enforcement of the following stated objectives in respect of the SMEs.

* To stimulate modernization of their facilities. * To elevate their technology by promoting training of technicians and skilled workers. * To promote rationalization of their management and administration. * To stimulate scale of operations by encouraging collective working.

* To prevent excessive competition.

* To encourage subcontracting.

* To promote exportation.

* To secure opportunities for business.

* To ensure smooth industrial relations.

Law for prevention of delay in the payment of subcontracting charges and related matters had earlier been enacted in 1956. Enforcement of these laws provides special relaxations and help to small scale enterprises whose regular pay roll is generally 20 or less persons.

Micro enterprises comprising maximum five persons in manufacturing and two in commerce and services are entitled to the following facilities. Credit limit for equipment Y6 million, and for operations Y6 million. Loan period for equipment five years and for operations three years. Interest rate 3.75 per cent per annum. Security or guarantor for the loan none.

SINGAPORE: Foreign direct investment has played a key role in the industrial development of Singapore. Today with some 3000 MNCs Singapore has the largest concentration of MNCs in the world.

Over 700 of them are in manufacturing and related industries. These MNCs have contributed substantially to Singapore by bringing in technology, management know how, skills and markets. Their presence has created opportunities for local small scale industries to flourish in a supporting role.

The Singapore government recognizes the importance of SMEs. The development of SMEs forms are integral part of the national economic strategy. Master Plan for the development of SMEs was released in 1989. this charted the direction and paths for SME to upgrade and grow.

This plan envisaged a multi agency approach to assist SME. This multi-agency network has expanded to include banks, financial institutions, consulting firms, chambers of commerce & industry and trade associations. Close links have been established between universities and industry.

There are several financing schemes assigned to help SMEs. Local enterprise financing scheme provides finances for machinery and equipment. These comprise term loan, hire purchase or a financial lease.

Since the inception of the scheme in 1976 S$ 6.0 billion worth of loans have been made available to about 20,000 companies, particularly those in die & mould, tool & gauge, precision machinery and equipment.

Engineering Development Board also promotes a local venture capital industry for equity financing of SMEs. To date the industry has funded about 200 local enterprises many of which are now publicly listed. A Singapore Venture Capital Association was formed in may 1993 to strengthen the networking among venture capitalists.

The product development scheme is aimed at encouraging local companies to undertake product and process design and development activities by defraying part of the cost incurred. To date some 300 companies have benefited from this scheme.

The local enterprises technical assistance scheme helps the companies to engage consultants with grants up to 80 per cent of the consultancy fee. The skill development fund (SDF) provides for training to workers in SME. Grants come from a levy collected from all employers in Singapore. Currently the levy is 1% of the salaries of all employees earning less than $ 750 per month.

The introductory voucher scheme targets SMEs which have never before applied for SDF grants. Under this scheme, the SDF subsidizes 90 per cent of the course fees for the new comer. The management development scheme subsidizes selected basic management skills for owners and managers of small firms.

The National Productivity Board has trained on job training instructors to be assigned at SME for setting up training systems for the SMEs. Service quality centre was developed in Singapore Air Lines with the aim of promoting quality of service in Singapore.

Total quality process was developed with the Singapore Manufacturers Association to help a quality mind set cum culture among employees at all levels with the aim of manufacturing products with zero defect.

Industrial strategy has been developed to create clusters of SMEs. An industry cluster represents horizontally linked enterprises having compatible technologies, skills and systems which are then provided with vertical linkages with suppliers and customers, so as to derive greater economy of scale than can be achievable by individual industries.

Thirteen clusters spanning the manufacturing and services were identified to begin with, which have shown steady increase over the years. A multi-agency approach was adopted in developing the plans. $1 billion cluster development fund was set up for this purpose. Made in Singapore label has become synonymous with the best quality in the world.

In Taiwan, SME means an enterprise in manufacturing, industry, processing or handicraft industry with invested capital under T $ 40 million and asset value under T $ 120 million.

* In the manufacturing sector SMEs comprise 95 per cent of the total industry, contribute 45 per cent of the GNP and hire 55% of the total labour force. After the world recession of 1980 SMEs lost their usual competitiveness in the global market. Policy makers introduced a mergence programme to make the SME competitive once again by the economy of scale. The mergence programme was not a success.

* Centre Satellite (CS) system, on the Japanese lines, was subsequently introduced. Centre-Satellite System Programme (CSP) was founded by the Industrial Development Bureau on July 01, 1984.

Goal of the CS System is to effectively network the up-mid and down stream industries for a reciprocal and complementary performance for all concerned. This system was later designated as CSD System i.e. Corporate Synergy Development System (CSDS).

The CS System works as under:

Type 1: The centre factory receives components from the satellite factories for further assembling. The material flows convergently.

Type 2: The centre factory provides its products to its satellite factories for further processing. The material flows divergently.

Type 3: The centre factory is the professional trading company which receives products from the satellite factories who produce specific products according to the orders placed by the centre factory.