Things are definitely looking up for Malaysia’s small and medium-sized enterprises (SMEs). Sure, many face volatile exchange rates and commodity prices, but some industries such as in the oil and gas sector are doing very nicely. They can also look forward to further largesse from the Malaysian authorities who have launched an ambitious plan for the next decade to improve the sector’s somewhat lagging productivity and increase its contribution to GDP.
“SMEs have to contend with fluctuating commodity prices and foreign exchange rates which, if not managed properly, will adversely impact their business,” said James Lim Cheng Poh, managing director, business banking, AmBank. “However, for those customers in sectors such as construction, infrastructure, agriculture and the oil and gas support industry in the country, they have been experiencing a fairly good run, notwithstanding having to address these just-mentioned issues.”
Between 2004 and 2009, growth of the country’s SME sector averaged 6.3%, consistently outperforming Malaysia’s overall economic growth of 4.5%. The sector’s expected growth for 2010 is 8% to 8.5% compared to overall economic growth of 7%. But having launched the first phase of its development plan in April, the government now wants to increase SME contribution to GDP from 31% in 2010 to between 35% and 40% by 2020.
This is dependent upon an increase in SME productivity of 75%. There is certainly room for improvement on this front. A pilot study by the World Bank on Malaysian SMEs found their productivity level was only M$44,300 ($14,700) per worker, or one-third large companies’ rate of M$143,000 per worker. It also lagged behind productivity rates in other countries.
One factor favouring SMEs is the changing strategies among multinational corporations (MNCs) since the global financial crisis. “There is no doubt that following the global financial crisis, many MNCs are further intensifying efforts to trim non-core activities, focusing on their core businesses,” said Linus Goh, global head enterprise banking and financial institutions at OCBC. “This has resulted in Asian companies and SMEs picking up more supporting activities and becoming more important partners to the global companies for their activities within the region. We are seeing this across industries in manufacturing, distribution, logistics, as well as in oil and gas and commodities.”
However, SMEs will have to invest and upgrade if they are to take advantage of this, said Beh Wee Kee, head of a commercial banking division at UOB Malaysia. “We agree that SMEs are and will continue to be part of the crucial production chain to the MNCs, and this reflects huge growth opportunities for SMEs. However, SMEs will need to capitalise on this by continuously upgrading their production and delivery capabilities to meet the demanding needs of the MNCs.”
The implications for banks are clear as SMEs opt for more sophisticated financial solutions such as foreign exchange, trade financing and cash management services, said Wong Chee Seng, head of emerging business, OCBC Malaysia. “In this new development stage, SMEs are looking to banks not only for products and services, but also for advice on how to optimise the usage of these products and services as they expand their businesses.”
Local SME banks have been talking up the growing business opportunities of SME banking in Malaysia and the region for some time now. They won’t be changing their tune any time soon.
This story was first published in the June 2011 issue of FinanceAsia magazine.