Traditionally small enterprises are viewed as significant players in the economy, especially in job generation. They are also key players in exports. But in exports, they receive similar incentives as those given to big firms. But the extend of benefits reaped by them is not the same as those of large firms, owing to various constraints.
Small firms tend to export either through mediators or directly to customers. Middlemen arrangement has both advantages and drawbacks. Small firms prefer to deal with credible middlemen because they ensure a regular flow of orders and payments. These middlemen, however, charge a handsome margin that range from 15 to 30% of the consignment value, depending on the volume. Margins are low for job orders that are regular, like auto components, but are high for one-time orders such as making parts for special purpose machinery.
Payment is often a problem while dealing through middlemen. It is not the substantial delay in receiving payment but non-receipt of it that ruins small firms. Mediators conveniently cite any reason for withholding payment, such as consignment rejection for non-compliance with original specification, delay in receiving goods etc. These are delicate situations to deal with, as it requires travelling to the export destination and cross-checking the authenticity of the mediator’s claim. It is also costly to bring back rejects.
If, on the other hand, small firms decide to deal directly with customers, they would still face problems with payment. Orders are normally executed on the basis of letter of credit (LC). The issuing bank of an LC could be fictitious, and the terms & conditions of LC might have jargons that owners of small firms cannot fathom. They either decide to deal with the foreign customer without fully assessing its credibility or decide not to deal at all.
The credibility of an export customer can be checked by visiting its websites or by examining its quality certificates. But dealing with a credible customer is not an easy task, thanks to facilities and inspection requirements.
For instance, small firms find it near impossible to meet customers? insistence on quality measuring instruments. The cost of coordinate measuring instruments (CMM) varies between Rs 40 lakh and Rs 50 lakh. Similarly surface measuring equipment cost around Rs 4-5 lakh. There are instruments necessary for checking the characteristics of surface and other parameters specified in drawings. If these measuring/checking instruments are not there, the probability of receiving direct orders from a customer is remote. It is not the original investment on such instruments alone that matters. Customers also insist that these instruments get calibrated once in a year by external agencies, who are certified either by government or other certifying agencies.
Small enterprises may not be able to directly earn money on such investments but only indirectly. And if an investment of such order is made, their size would not be small any longer.
When a job order involves multiple processes such as machining, plating and powder coating, customers often demand grouping of all processes in a single place in order to save cost. A small firm may specialize in one such function rather than in all these activities. Facilities for carrying out all the processes may not, therefore, be available with a small player. Here, the machining vendor takes the lead role as main contact. Moving parts from one unit to another for completing all the processes only add to their cost.
Often small players are unable to execute orders involving heavy components. Normally orders vary from 100 gm to 50 kg. Such inability puts small players at a disadvantage?they cannot become preferred partners of export customers, who look for long-term working relationships.
More important, export customers? insistence on quality certification is a hindrance. To begin with, ISO 9001 may be a level one, basic requirement. For automobile component manufacturers, TS16949 certification becomes indispensable after a year of obtaining ISO 9001 certification. A unit needs to be TS 16949-certified to supply to a TS 16949-certified original equipment manufacturer (OEM). For specialized job orders from aerospace customers, more stringent AS901 certification is mandatory. Some OEMs provide initial handholding.
Quality certification is ecstasy on receiving but is an agony process to go through. It requires considerable documentation that calls for employing experts. Fees and consultancy charges are extra costs to be borne by small firms. For these reasons, small units often consciously pass on viable business opportunities that come through quality certification.
No doubt, export is a viable proposition for small firms. But they are very often constrained. Given the thrust on the orderly growth of small firms, government could make meaningful intervention hand-in-hand with commercial banks.
Firstly, there are technical issues involved in the LC, and expecting small firms to tackle them would only place an additional burden on them. Confirming banks could check the terms & conditions of an LC and the financial standing of the issuing banks. Assuring the genuineness of an LC would spare small firms payment related tensions.
In order to incentivise quality certification, the government could subsidise small firms to cover a substantial portion of the expenses incurred by them. This can be in the form of tax concessions extended to firms obtaining quality certification.
For ensuring prompt payment by the mediator, their registration with the ministry of commerce should be made mandatory, if they wish to procure from Indian firms. While granting registration, the government could seek information to establish their credibility. On their part, small firms should deal only with registered mediators, which in turn would reduce incentives for non-registration.
The government could also have stand-alone officials in major export destinations. These officials could cross-check rejection cases and ensure their shipment back home. Small firms have to pay minor charges for such services.
?The writer is a faculty at IBS Bangalore. He can be reached at dennisraja@hotmail.com