SME Capacity Utilization – innovative solutions required!

Several survey-based estimates suggest that, if we ignore the thousands of sick and closed units, the capacity utilization in Indian SMEs may be around 70%. This, by itself, is commendable when one looks at the counterpart figures for some advanced economies such as the UK (74%), USA (79%), Germany (81%), China (76%).

Many economic policy analysts have commented on why an excessive focus on improving the unit capacity utilization factor in SMEs may not be ideal to plan strategies for their overall growth and development. But there is also a broad agreement that this is one area that needs concerted action by all the stakeholders, given that this sector’s performance is critical for the planned economic growth of the country.

So, is this problem intractable, or does it present a unique opportunity for some jugaad?

To answer this, we need to get some broad clarity on two aspects – (a) what are the “known-knowns” – the contributing factors and the impacts from poor capacity utilization in our SMEs and (b) what “unknown-knowns” continue to be ignored – because of a wrong or misplaced understanding, or even ignorance of some good policy and industry initiatives?

Firstly, the known-knowns.

For an SME, under-utilized capacity is a precursor to several other problems. It disturbs production planning and control, disturbs the flow of inventory, creates cash flow issues and leads to probable tax defaults. It seriously hampers investment capability of the company for improving the productivity of its other non-production departments.

The usual contributing factors for the under-utilization of unit capacities in SMEs are many – like access to timely finance, production-related machine downtimes, mismatch between marketing and production planning, market demand fluctuations, power cuts, labor shortages. Other less-discussed factors that can inhibit capacity utilization are product design limitations, lack of training and motivation amongst staff.

And now, for the unknown-knowns. These relate to aspects that have often become lost in the clutter of debates on problems and solutions. Two of them have a link with capacity utilization, and are worth mentioning.

Firstly, the logic behind the cluster-approach.

Most entrepreneurs and the industry / trade associations that they look up to for support, are unaware that clustering and the supply chain are vital components that can help to shape competitiveness among entrepreneurs. Competitiveness in the market place does not come from the production capacity of a single company, but the interaction of the entire system, which creates a stronger competitive advantage. As a matter of fact, this logic behind the government’s initiative for a cluster-based approach to MSME growth is often forgotten even by the administrators and bankers who administer the projects!

The experience of Taiwan SMEs can give a clue as to what our Indian SMEs may be missing out on.

Due to the constraints of scale and funding, Taiwan SMEs form a meticulous synergystic network in which they organize themselves into playing significant roles in competition through “reciprocal complementarity” in their overall development processes. The biggest feature of Taiwan’s manufacturing industry is that the clusters form a complete center–satellite system. Each system functions like a mutually beneficial symbiotic business ecosystem. Enterprises are no longer pure opponents, but are competitors in ecological systems. The key operative word is symbiotic ecosystem.

The second in the list of unknown-knowns is the need for our SMEs to become part of the wider business networks so that the SMEs can innovatively resolve common challenges and grow up the value chain.

Take the example of what some small architectural and furniture design-cum-manufacturing entities have done in the UK in the late nineties and early years of this century. They had three challenges – (a) protecting their intellectual property (designs) in the global marketplace, especially when they had to exhibit at trade events, (b) overcoming competitive and regulatory entry barriers from entrenched big local players in some markets, and (c) high costs of branding and marketing for global growth. The solution that they designed for themselves was a cooperative movement called ACID (Anti-Copying in Design). ACID was an umbrella organization that helped its subscribing members on any matter concerning the litigation against infringements of copyrights and patents, marketing and branding, and lobbying initiatives for new markets penetration. The SMEs were able to access wider market opportunities with greater confidence under the common industry-wide (ACID-member) brand, even if they were competing amongst themselves. The synergies from being a part of the cooperative far outweighed the tangible and the intangible costs. Many reported better order-book positions from jointly taking up larger orders, partnerships within previously inaccessible sales channels because of help in contractual negotiations and an overall improved confidence to grow market share in new markets.

The known-knowns and the unknown-knowns reveal two useful pointers.

Pointer 1 – The future success of the Indian SMEs will critically depend on understanding the need to re-design the symbiotic cluster ecosystem so that there is greater impetus to the reciprocal complementarity between producers, vendors, designers, technology suppliers, bankers, market intelligence intermediaries, contract-negotiators, brand consultants, tax planners, academic institutes, and skills training organizations. SMEs will need to lobby hard with their associations to ensure they have afunctional ecosystem on these lines.

Pointer 2 – Industry associations need to reinvent themselves and go further- far beyond the short-term interventions pertaining to tax-lobbying, conferences, and some others (all of which are important!). Efforts to compile a capability statement (installed and operable capacities, technologies, quality and environmental certifications, production skills, and more) of SMEs in different clusters or regions followed by marketing the SME clusters as a cohesive umbrella ecosystem in export markets can be a game-changer.

Yes, we desperately need some ‘jugaad’ (informal Hindi term, loosely meaning – a resourceful approach to problem solving) that can transform our SMEs from being standalone entities burdened with (singly and with hands-tied) contributing to the 2047 Viksit Bharat economic goals to an agile player who can confidently ride on the synergies from other players and conquer the markets.

Don’t you agree that it’s time for our SMEs to try out such jugaad tricks on an industry-wide scale?

About the Author :

T R Giridhar (aka Giri) is a Partner at Just Bespoke Advisory LLP, which is a strategic business advisory firm focused on mentoring SME CEOs and entrepreneurial start-ups in understanding and navigating emerging business contexts so that they can continue to succeed and grow.