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AseanAffairs Magazine July - August 2010

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                                                                                    THE GROWTH OF SMEs


Indian small and medium enterprises (SMEs) have traditionally been conservative. The Asean market is huge and there are a large number of SMEs that could be takeover targets. How would the new Indian owners adapt to the local culture given their limited experience outside India. These and other issues will be discussed in the following conversation that Asean Affairs had with two SME specialists.
Sudip Banerjee is Chief Executive Officer of L&T Infotech, India, is a 30-year veteran of the software industry in India. He received a management degree from the All India Management Association and graduated with a bachelor’s degree in economics from Shri Ram College of Commerce. Mr. Niraj Sharan is the Founder, Chairman and CEO of Aura Inc & Aura Energy that has operations in the U.S., India and Italy. Aura provides Manufacturing, System Integration and Technology, consulting to oil gas and power firms and the petrochemical industry.

>>For Indian SMEs in particular, it (Asean common market) creates opportunities to improve the quality of their product and servicing offerings and compete on a global scale. With technology giants like IBM making noises to use their war chest to acquire firms in India to actively participate in the SME market segment, the opportunities for at least Indian independent software vendors catering to the SME segment are very high.<<

With the launch of the Asean Common Market in 2015, what are the prospects for Indian SMEs to penetrate that market?

Banerjee:Essentially the Asean Common Market creates a market of around 4 billion consumers, making it the largest single area of economic activity in the globe. With two of the BRIC nations in this common market, it creates tremendous opportunities for SMEs not just Indian but also Chinese, Thai, Malay, Indonesian, Philipino, Singaporean and others to cater to a wider audience. For the Indian SMEs in particular, it creates opportunities to improve the quality of their product and servicing offerings and compete on a global scale. With technology giants like IBM making noises to use their war chest to acquire firms in India to actively participate in the SME market segment, the opportunities for atleast Indian ISVs catering to the SME segment are very high. But, this is not simply restricted to technology. Global companies will be using the acquisition route to actively participate and play in the Asean market.

Sharan: Customs duty barriers historically in Asean have been significantly higher than rest of the world with duties touching 50 percent plus in some cases. This has been one of the major bottlenecks in this “collaborative” environment where value addition with price performance drives the market fiercely. With the “zero” duty regime signed recently and a common market, this relatively under leveraged market will see major trade boom – both between each other as well as globally as a value added Made in “Asean” brand.

What are the major factors that an Indian SME would look at before entering the ASEAN market ?

Banerjee: Indian SMEs are usually very conservative by nature and are loath to invest ahead of the curve, except those in the high tech areas, the SME’s would look at support from the member countries in terms of an ‘ecosystem’. Taking the carpet weaver from Saharanpur’s story forward, he/she would look for introductions to ‘carpet buying groups’ within the ASEAN member nations and would look to some short cuts on understanding policies around ‘approved vendors’. In many countries, it may mean creating limited liability companies with local equity participation. In such cases, they would look at assistance from either the Big 5 (KPMG, E&Y etc) on tax, labor and repatriation issues. Largely, SMEs are good corporate citizens, so, they would not cut corners, but definitely look for fast track assistance in the form of a single window clearance, transparent tax and labor laws etc . Indian SMEs or Indian firms serving the SME segment will also be looking for active global partnerships to play in the ASEAN market, thereby minimizing some risks.

Sharan: SME will do well to start from the fact that trade and markets will increase almost exponentially in this regime. Having said that, sustained availability of soft and hard infrastructure, a safe and just environment, banking support, labor laws and work visa , would be essential for any SME to evaluate. Availability of lower cost capital should be evaluated carefully by an Indian SME as they have been bogged down with this impediment in India for decades. I say this because, Capital in India is available more freely to the large Industry and SME’s have still a hard time getting funded.

What are the advantages and disadvantages for Indian SMEs doing business in ASEAN ?

Banerjee: There are no disadvantages as such, the opportunity cost for not participating in a global market is enormous. I am assuming that this is not lost on our SMEs. Some of the more enlightened ones have already taken a leadership position in this. There is a feeling that this common market creation will separate the men from the boys.

Sharan: Advantages – this is the first step for Indian SMEs to go “global” in a controlled environment with minimal risks. It also allows a more fair play as many Indian bottlenecks of labor laws, capital scarcity and challenging infrastructure would not be there, allowing for full potential initiatives. Disadvantage- lack of global management practice, inability to work in teams with almost disdain for compliance....

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