High cost of technology, small business size and skill shortage found as key deterrents

The SME sector in India faces a series of challenges such as the absence of adequate and timely institutional credit facilities, limited capital and knowledge, lack of access to technology and skilled manpower, competition from large enterprises and globalisation. These issues need to be addressed to tap the full potential of the sector, which brings about social and economic development of the country.

The study below enumerates the challenges faced by Indian SMEs towards technology adoption, with evidence drawn from Dun & Bradstreet?s study of Ludhiana and Vadodara clusters.

Technology adoption

Thanks to globalisation, there is growing competition amongst entrepreneurs to deliver goods that are cost competitive and of better quality. Technology adoption has helped them in inventory management, better planning, productivity improvement, process structuring and improved efficiency. However, only SMEs that have access to technology can maximise the business opportunities.

According to D&B Research, IT adoption among Indian SMEs is extremely low. For instance, around 50% of SMEs spend less than 1% of their revenue on IT adoption in the technology-driven engineering sector of Ludhiana. In the various surveys conducted by D&B, the major challenges that had emerged towards technology adoption of SMEs were the high cost of IT adoption and the small size of business. Besides, the non-availability of skilled labour to utilise technology, and technology obsolescence from continuous innovations also discouraged technology adoption.

Ludhiana engineering sector

Around 91% of the surveyed firms utilise technology in their business in the form of hardware or software. However, around 50% of them spend less than 1% of their revenue on IT, while around 37% spend 1-2.5%. This shows, the engineering industries in Ludhiana spend a very low percentage of revenue on technology adoption.

Ludhiana textile sector

According to the survey, nearly 98% respondents in the textile sector in Ludhiana use technology in the form of desktops, printers, servers, notebooks, scanners, modems etc. IT applications were mainly used for payroll and accounts. According to the respondents, the benefits of IT adoption to them ranged from better inventory management, better planning to improvement in productivity.

The key challenges faced by the sector towards IT adoption were the small business size, which makes it difficult for them to adopt high-end applications, and the unavailability of skilled labour to adapt to technology. With enterprises applying IT only at the basic level, around 48% SMEs in the textiles sector of the cluster spend less than 1% of revenue on technology adoption, while around 36% spend around 1-2.5% of their revenue.

Vadodara electrical equipment industry

According to D&B?s survey, 90% firms in Vadodara?s electrical equipment industry utilised IT products in their operations. Technology adoption in the sector was driven by client demand along with the need for efficiency, streamlining production and improved product quality. However, challenges like the small size of operations, high cost of implementation and unavailability of skilled labour were limiting IT adoption in the sector.

The survey revealed that although 90% respondents utilised some IT products in their operations, expenditure on IT as a percentage of total expenditure did not exceed 5%. About 38% companies have an IT budget of less than 1% of their total expenditure.

Vadodara pharmaceutical industry

Expenditure on IT by companies in the pharmaceutical sector was low, with 40% of the respondents having a budget of less than 1%. The primary reason cited for IT adoption was demand from clients, while the need for improving efficiency, streamlining production and increasing productivity also figured among reasons. Here also, the small business size and high cost of implementation hindered IT adoption.

Human resource and IT adoption

Human capital is a critical asset for an SME, as the performance of its machines depends on skilled manpower. But the SME sector faces a shortage of skilled man power because of inadequate vocational education and training institutes in the country. Also, the skilled labour does not opt for employment in SMEs, preferring bigger companies. Similarly, retention of trained manpower also is a challenge in the face of lucrative offers from bigger players. The shortage of skilled manpower remains a major handicap in IT adoption.

Going forward, spreading awareness about the benefits of IT adoption will encourage SMEs to upgrade technology. Increased government intervention, with aids and grants to finance technological equipment, is required. Setting up more polytechnic colleges and government-funded institutes will augment supply of skilled labour to the sector.

The author is senior economist, Dun & Bradstreet India