First China Ripples of Global Financial Crisis Come Ashore – Part 3 – SMEs

Monday, November 3, 2008 20:58
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Perhaps a bit out of order after the discussing the impacts of the global realignment on Trade and Real Estate, I wanted to spend a little bit of time on the impact of SMEs.

When we watch the global stock markets get hammered, we are essentially watching the  valuation of world’s largest firms be reduced, but it is behind the scenes that the real devostation for China may lie.

Keeping in mind this is a blog, and not the economist, there are a few themes that I have been discussing over the past few weeks that leads me to believe that China’s SMEs are in rough water… and why that is important, is that the vast majority of firms in China are SME.

Entrepreneurial… local… niche… family run… and understanding what will happen to these firms I believe is actually more interesting/ critical than knowing what will happen to the over-inflated state owned enterprises.

The first angle from which I wish to tackle this is financial.  this is a financial crisis, and for SMEs, this will mean that managing their cash flow will become ever more important.  On the one hand, for SME firms who came to rely on debt instruments to finance their operations, or had large clients whose orders were L/C back, they have the highest level of exposure.  Investments in equipment will need to be delayed, and potential customers may be lost.

The second angle is from the management of payables and receivable.  through my first job, I learned the golden rule of finance. Never pay until you are paid, and the larger you are, the sooner you get paid.. and the later you pay.  For SMEs, this could spell trouble as large clients look to extend their terms at a time when their access to debt is most difficult. At the same time, as many of these firms will not have much power over their payables, they will find themselves in a much shorter cash cycle.

The final angle that I wish to cover (for free), is that for those firms who were making progress, seeing increased sales, and looking to finance the next jump through an exit (IPO or VC investment), they are going to have a hard time over the next 12-18 months as the market for IPOs wil dry up… and investors will sit on cash until the markets improve.

Aside from the financial side of this crisis, there are some other areas that I believe SMEs will find the next period difficult:

1) Inventory management – in times of crisis, supply chains go lean, and for the low man on the totem pole, that means their clients will push the responsibility of managing inventory levels down  to them… often without payment.

2) Order management – Aside from holding extra inventory, the other major issue related to SMEs in manufacturing simply comes from not knowing what is going to happen, and what orders will be placed in that time.  Not just a profit thing… it is an raw material and WIP management issue as well

3) Pricing – In the times of gluttony, over inflated prices are tolerated on a wider level, but when your customers are getting squeezed on your end and your competitors are willing to meet any price.. the reality of thinner margins sets in.

Further to these issues though, there is some upside:

1) For SMEs looking to take the next step, partnerships and mergers become easier as relationships built on survival become necessary for all

2) In times of crisis, labor stays put.

So, with that, I will wrap up part 3.  For an SME, the landscape is never an easy one, and we are sure to see many SMEs fail to survive a sever economic downturn (something the government is worried about).

For some, this will be a learning experience that guides the development of cash, inventory, and labor management policies.. and for others, it will be a time where they forge relationships that will create larger/ stronger entities.

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