Mitigating risks in Overseas Expansion amongst Singapore SMEs

In September 2007, DP Information Group (DP Info Group) successfully completed its annual nationwide SME Development Survey. Moving into its fifth year, the SME Development Survey 2007 delves deeper to examine the fundamentals that contribute to SMEs’ success.

With the growing emphasis on strengthening SMEs’ fundamentals in Operations, Human Resources and Information Technology, the SME Development Survey 2007 explores further on domestic cost competitiveness and detailing issues related to process automation adoption, human resource concerns, and external financing.

Besides the exploration on SMEs’ fundamentals, this year’s survey continues to assess the degree of internationalisation amongst our SMEs today.

The concerted efforts made by our Government to encourage local SMEs in embracing internationalisation as a growth strategy have paid off. This year, we saw more SMEs making inroads in overseas markets, with 70% having turnover generated from overseas market, as compared to 59% in the previous year.

Chart 1: Percentage of turnover generated from overseas

By region, Asia remains a more popular destination for overseas operations for our SMEs. Malaysia, Indonesia and China were listed as the top 3 overseas countries which our local SMEs have a presence in.

Vietnam (36%) emerged as the top new destination for overseas expansion in the next 12 months. This is followed by India (28%) and China (26%). In fact, Vietnam presents many opportunities for our Singapore SMEs to explore its fastest growing sectors such as tourism, telecommunications, logistics, construction, manufacturing, oil & gas, and power generation.

Chart 2: Top 10 overseas countries

Indeed, internationalisation is one of the most difficult choices to make because it implies numerous risks for the SMEs, which are already very limited in their resources.

More than half (58%) of our SMEs venturing abroad are affected by Strong overseas competition. In fact, Strong overseas competition has been highlighted as the key impediment to SMEs’ growth in overseas markets over the last few years. In addition, SMEs venturing overseas are also challenged by Manpower issues (50%), Lack of overseas business contacts (38%), and Lack of overseas business knowledge (33%).

Constrained by their limited physical and financial resources, it is often costly for the SMEs to establish physical presence in overseas markets. The establishment of physical overseas presence also commonly resulted in overseas manpower issues where 41% of our SMEs are questioning the Reliability of overseas managers, and 32% of our SMEs with overseas branches/offices are unable to Deploy local managers to work overseas.

Putting forth, strategic partnerships / alliances with right local partner in overseas markets can be one effective way for our SMEs to internationalise. In fact, 61% of our SMEs have attributed their overseas success to Finding the right overseas partners. Other critical factors contributing to overseas success amongst our SMEs include Having overseas market knowledge (57%) and Being adaptive to local business practices / customs (56%).

Having the right overseas partner is paramount for overseas expansion, as it allows our SMEs to gain immediate local access, leverage on the host country knowledge from the local partners, and understand and adapt to the local culture and business practices. Yet, finding the right overseas partner is the challenge that many SMEs face.

Overseas expansion offers abundant opportunities for growth and expansion, but can SMEs undertake such expansion with minimal risks? The answer is yes.

To mitigate risks involved with foreign collaborations, it is important for our SMEs to perform due diligences before entering into foreign partnerships / alliances. Due diligences come in many forms. Performing credit check on your shortlisted foreign partners is a good approach to understand and assess the 5 “Cs” of a company – Character, Conditions, Capital, Capacity, and Collaterals.

It is also advisable for credit checks to be extended beyond overseas partners, and to assess overseas suppliers and customers who can potentially impact the long-term sustainability of SMEs in overseas markets.

In a nutshell, pre-screening is an essential for identifying the right overseas partners / suppliers whom SMEs can leverage for successful internationalisation.