A time for revival

Economic Times "SME Buzz" supplement (India)
By David Wei, CEO of Alibaba.com
29 June 2009

Not since the financial crisis of 1997-98 have Indian and Chinese companies faced such a harsh business environment. That's particularly true for these countries' small- and medium-sized enterprises (SMEs). Tens of thousands of factories in China have closed. Entrepreneurs in both countries are having trouble getting access to working capital. And suppliers everywhere are under pressure to cut prices and accept slower customer payments.

But don't rule out a strong revival for SMEs. The business owners in India and China are highly inventive and adaptable, and quick to seize new market opportunities. And they operate in what are arguably the world's two healthiest economies, each of which boast giant domestic markets. Some analysts now predict over 8 percent GDP growth in 2009 for China and nearly 6 percent for India.

One reason for optimism is the problem-solving approach of many Chinese and Indian businesses. In India, companies have proven nimble in response to cost pressure, despite the country's often restrictive labor rules. To take one example, car-and-truck maker Mahindra&Mahindra, reacting to rising value of the rupee early last year, developed its own US$200 four-wheel drive transmission rather than continue to import US$800 transmissions from the U.S. Its engineers did this in just three months.

China has its own roster of entrepreneurs who quickly and creatively respond to the market. One is Sunway, an SME that has seen demand for its high-end decorative fans fall in the U.S. and Europe. The company's CEO, Eden Lai, ordered a quick repositioning—in just a few months, the company developed and launched a new product, a 360-degree swivel mop. The mop set costs just US$12 compared with as much as US$75 for similar sets in America. The company has already sold hundreds of thousands of sets to customers in Asia, Australia and Europe.

A second cause for hope is that many SMEs are adept at finding opportunity in crisis. A survey of entrepreneurs in eight emerging markets, conducted last November, found that while 88 percent thought the worst of the crisis was yet to come, the respondents predicted that their own revenues would still grow 31 percent on average and their workforces would expand 12 percent. Indeed, downturns can open doors for small competitors—good employees are easier to find, office space is cheaper, and as bigger businesses pull back, gaps open in the market.

China's automotive sector provides an example of such ambition. The country's thousands of car parts makers are benefiting from China's still-vibrant auto sector. Now, many see a chance to displace overseas competitors. One is Wonder Auto Technology, a maker of components such as alternators and starters. The company has said it will begin supplying to North American car companies this summer—its first major contract outside of Asia, and a major change for the global automakers, who until now have rarely used Chinese suppliers.

There is a third reason why Chinese and Indian SMEs may be able to rebound more quickly: increasing bilateral trade between the countries, now valued at about $38 billion. China is India's second largest trade partner after the U.S., but on Alibaba.com, China is already the top trade partner for Indian SMEs conducting business online . With the collapse of demand from the West, Chinese companies see a chance to supply to India's growing domestic market. Figures gathered from Alibaba.com's online platform, where buyers and sellers meet and negotiate prices, show that in the first few months of this year, buyer inquiries from India to China more than doubled, compared with the same period in 2008.

But the trade is not one-way. There is also a vast opportunity for Indian companies to sell to China. Goldman Sachs estimates that by 2020 India could export up to $157 billion worth of goods and services to China. Already, Indian companies are shifting the focus of their exports from West to East. According to our data, online inquiries to Indian buyers from Asian customers have risen 10 percent since January 2008 (China accounts for the greatest portion of those queries), while inquiries from the U.S. and Europe have dropped around 4 percent. India's IT sector, for one, is looking more closely at the China market. Tata Consultancy Services (TCS), which has been operating in China since 2006, first served multinational clients such as GE and Motorola. The company now sees strong demand from local firms. TCS forecasts that Asia will account for up to17 percent of its revenues in 5 years, up from 12 percent today.

Of course, trade between China and India is unlikely to make up for lost orders from the West anytime soon. But companies' moves to seize the opportunity reaffirms our faith in the region's SMEs and bodes well for the future of both nations. Entrepreneurial creativity helped drive the expansion of each country's private sector. The same spirit will help these economies pull through the crisis.