5. At the same time, the target for supply cost reduction is set at 15-25 per cent over the medium term of 2-3 years. The benchmarks for cost standards are the free-on-board prices of similar products in the world market. Additionally, the demand for just-in-time procurement has led up to eight deliveries a day (instead of two previously). This is to gradually eliminate inventories altogether at the assembly line.
6. As a result, there is the constant introduction of new, differentiated, more reliable and better designed goods and services. There is also the speedy appearance of cheaper substitutes for, and imitations of, those goods and services themselves. Moreover, most of the traded products are now finely commoditized among many domestic and external enterprises, both large and SMEs.
7. That process requires speedy time to market, just-in-time delivery, lean inventories, short turn-around in transit, and low-cost clearance at border. Meanwhile, there must also be stronger inter-firm networking and alliances as well -- to facilitate greater focus on core competencies and to ensure greater supply-side efficiency among the networked and allied partners.
8. Open up a computer and you can see that the microprocessors and memory chips may come from Taiwan and South Korea; the testing and calibration of processing and memory chips, from Malaysia; the disk drives, from Singapore; the transistors, cooling and sound components, from China; the transformers and wirings, from Indonesia or Thailand; and the software and brand name, from the U.S. and/or Japan.
9. The same commoditized manufacturing process is also evident virtually across the whole range of consumer and producer goods -- such as toys, sports shoes, cell phones, motor vehicles and aircraft, to name just a few.
The Opportunities
10. But to reiterate a thread from our own Eastern wisdom: there are always opportunities in every challenge we face. Let us look at a few facts.
11. According to the WTO, firstly, a larger proportion of world production is now traded globally: 20 per cent in 2004, compared to only 12 per cent in 1980. Global exports were worth US$ 8,907 billion in 2004, an increase of almost fivefold from 1983 (in just over two decades).
12. The world market is getting larger and larger, and so are the regional market opportunities. ASEAN have had a fair share in the explosion of global trade. Regional exports went up from US$ 144 billion in 1990 to US$ 552 billion in 2004.
13. Secondly, foreign direct investment (FDI) in South, East and Southeast Asia reached US$ 107 billion a year in the early 2000s, an increase of over tenfold in two decades. It is well known, however, that China’s competitive strength has attracted a large share of this FDI. But we have also seen that China herself has become an important market for ASEAN.
14. So what are the regional responses to gain a higher stake in global trade and FDI? The ASEAN Free Trade Area, now in operation among ASEAN-6 with most import tariffs at the 0-5 per cent range, is a stimulus to regional trade and trade-driven FDI. Other opportunities in trade and investment include the ASEAN-China Free Trade Area and the future FTAs with other ASEAN Dialogue Partners.
15. Furthermore, ASEAN is becoming a single market and production base. There will be a free flow of goods and services and a freer flow of investment with the realisation of the ASEAN Economic Community by 2020, if not earlier. Meanwhile, eleven priority sectors are to be integrated in the region by 2010 or earlier.
16. The net result: lower business transaction costs, greater regional synergies, higher value creation, and more competitive and dynamic as a player in the global supply chain. According to McKinsey and Co., the savings gains are as much as 20 per cent of the production costs of consumer goods in the region.
17. Let me focus a bit more on priority integration sectors. These sectors are the bedrock of ASEAN economies. In 2004, for example, exports of the nine priority goods sectors were worth US$ 367 billion, or 70 per cent of total merchandise export earnings of ASEAN-8 (that is not including Viet Nam and the Lao PDR).
18. Studies by the ASEAN Secretariat show some noteworthy results. Four priority sectors enjoy strong external demand and comparative advantage. They have, therefore, much potential for further expansion in production and trade. These sectors are electronics, agro-processing, rubber-based goods, and automotive products.
19. Facing strong external competition and/or rapid import growth, on the other hand, are the ICT, textiles and clothing, health care, fisheries and wood-based sectors. In particular, several segments of the textiles and clothing are losing competitiveness, including to China, in the post-quota trading environment. Supply-side strengthening is needed.
20. Priority sector integration and the formation of the ASEAN Economic Community depend greatly on a critical prerequisite: the availability of a solid regional network of logistical supply services. In a sense, logistics are the grease that makes the regional economic engine run smoothly and on time.
21. But a dynamic and competitive logistics sector is also important for another reason: as a regional bridgehead to the vast global market for trade and FDI. Commoditized manufacturing, denser production networks, and the intensified focus on core competencies have greatly boosted the demand for outsourcing and competitive logistical services.
22. According to Business Week (issue dated Jan. 30, 2006, p. 55), the market for logistics was worth US$ 179 billion in 2005. It is also fast growing along with the upward trends in global trade and investment, and the related outsourcing.
23. Scale and alliances are important in logistics. Deregulation and privatization have facilitated greater private-sector participation, including in joint ventures, in the logistics industries in the region. ASEAN has also cooperated actively to further develop the logistics sector and integrate its extensive regional networks.
24. ASEAN has only a limited number of regional and global logistics players, with several in Singapore. By and large, many segments of this sector remain fragmented and many logistics suppliers are SMEs in the region.
25. More generally, there is a wide gap in efficiency and capabilities between the regional SMEs and their American or European counterparts.
26. For example, small businesses in America (those with 500 employees or less) account for more than half of the inventions and innovations, and for almost three-quarter of new employment creation there. SMEs in the EU-15 (with 250 workers or less) are the source of about one-half of the total value added and two-thirds of the domestic workforce.
27. SMEs in ASEAN make up more than 90 per cent of all domestic firms and employ 75-90 per cent of the non-agriculture domestic workforce. However, their output and direct exports are disproportionately low: output in the range of 20-30 per cent of gross sales value or manufacturing value added; and direct exports, 10-20 per cent of regional export earnings.
The Catalysts
28. How can ASEAN SMEs be empowered to reap the vast opportunities in development and internationalization? The catalysts for this have to come from both the private and government sectors.
29. Firstly, large businesses (whether locally owned or transnational) remain an important player because of their resources, market access and expertise. As such, they continue to serve as a production and export platform for their competitive SME subcontractors in manufacturing and logistics, and in other lines of production, too.
30. That has, in fact, been the business model in most parts of ASEAN. Many large firms in manufacturing, agro-processing or services (especially travel and tourism) depend on their numerous SMEs for goods and services for both the domestic and export markets. Directly, therefore, SMEs have been an important source of higher production and, indirectly, of export earnings in ASEAN.
31 The learning opportunities in the subcontracting process will enable small enterprises to capture more and more of the created value in ASEAN. Many SMEs will develop over time into innovative suppliers and compete globally in their own right. In fact, most of the large regional firms or ASEAN transnational corporations at present had a humble start as SMEs several decades ago.
32. Many others will evolve into clusters of competent and flexible suppliers of high-value components, parts and services in support of the industrial mainstream. Nevertheless, business failures are also inevitable: the SME sector tends to have a high turnover (or, pardon the term, mortality) rate.
33. That brings us to the second catalyst -- namely a more level playing field has to be prepared for small businesses.
34. Adequate access to affordable financing is arguably the number one problem facing the regional SMEs: between 75 per cent and 90 per cent of SME entrepreneurs in ASEAN economies rely on non-formal sources of finance to meet working capital and long-term investment needs.
35. The problems and constraints are well known. New and innovative financial products and services, and the capital markets themselves need to be developed. Such development is a leaning process as well as it is a function of economic growth: there is unlikely to be enough finance and credit to meet all business financing needs.
36. In that context, there is certainly scope for more timely and transparent disclosure of information on financial accounts and governance structure on the part of large and small businesses. In fact, good financial and governance information is an integral part of a bankable business plan. Such a plan can be used as a partial substitute for fixed-asset collateral requirements by financial institutions or as the bridgehead for venture capital negotiations and funding.
37. Other areas for policy attention include the formation of cross-border alliances. Many regional SMEs have limited management and financial resources to search for and establish collaborative linkages with overseas SMEs and other firms.
38. The key role of government facilitation is well illustrated by many successful examples of support to, and upgrading of, local SMEs as subcontractors to, among others, Hewlett Packard in Singapore (under the Local Industry Upgrading Program), Intel in Malaysia (under the “Pioneer” scheme and Vendor Development Program), and Motorola in China (in collaboration with the State Development and Planning Commission)
39. Meanwhile, there is a shift in FDI of Japanese SMEs from China to ASEAN, especially Viet Nam. This is partly to avoid excessive concentration on China and other problems. Among other key attractions for such FDI are competitive costs (wages, materials, utilities, land and housing), dedicated and quality-conscious workers, suitable technical qualifications, and good tax incentives.
40. There is one last point. The regional businesses, both large and small, are well known for their manufacturing prowess. They are not as well known for their technological creativity and inventions, however. That stands as a sharp contrast to the experiences in enterprise development in the developed countries and, closer to home, in South Korea, Taiwan and India as well.
41. Long-term measures are needed to build up ASEAN technological infrastructure and human resources, to foster inventive entrepreneurship and technologically-driven SMEs, and to synergize them with the evolving industrial fabrics and competitiveness of the region.
Conclusion
42. There are vast global opportunities for both large firms and SMEs in the next stage of development and internationalization in ASEAN. A further impetus comes from the on-going efforts at regional integration and harmonization into a single market and production base.
43. SMEs have an exciting role to play in the wake of these developments in ASEAN and the global economy. But bold changes in business mindset and a supportive policy environment are needed to bring performance of the regional SMEs closer to their potential. The process is far from easy. But it is far from insurmountable either.
