SMEs in Manufacturing: Meeting the Globalization Challenges

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SMEs in Manufacturing Meeting the
Globalization Challenges

• Rafaelita M. Aldaba
• Philippine Institute for Development Studies
• 26 August 2009, SUNSTAR FORUM 2009

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Presentation Outline

• Preliminaries
• Review of government promotion policies and
  programs for SMEs
• Mfg SMEs Structure, performance growth
  constraints
• Networking activities linkages creation of
  SMEs SMEs with other SMEs, with large domestic
  foreign firms, with government
• - Survey electronics, automotive, garments
• V. How to increase competitiveness deepen
  networking linkages creation

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I. PreliminariesSME Definition
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SME Distribution by Economic Sector
5
Employment Contribution by Sector
6
Number of Manufacturing Firms
7
Manufacturing Employment
8
Framework
External Environment Globalization trade and
investment liberalization, increasing economic
integration through bilateral regional trading
arrangements, regional/global production networks
Government SME plans, incentives, SME rules
regulations, policies on finance, marketing,
technology, labor HRD, trade, linkages
creation Firm characteristics cost, Quality,
delivery, engineering
SME Competitiveness
Creation of linkages among SMEs, domestic large
corporations, MNCs
Internal Environment macro conditions political
situation existing resources plans, policies,
programs, rules regulations
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II. Government Policies Programs

• Department of Trade Industry 14 offices, 20
  line bureaus
• Bureau of Small and Medium Enterprise
  Development one-stop-shop to guide SMEs
  policies and strategies for SME development
• Center for International Trade Expositions and
  Missions (CITEM) marketing SME exports
• Product Development and Design Center product
  quality and competitiveness
• Philippine Trade Training Center export/import
  management, entrepreneurial development and trade
  exhibition management
• Bureau of Export Trade Promotion suppliers of
  quality goods
• Department of Science and Technology (DOST)
  technology support
• Small Enterprises Technology Upgrading Program

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Major SME Policies Programs

• 2004-2010 Medium Term Philippine Development
  Plan
• Credit, technology and marketing support for
  three million MSMEs
• SME Development Plan credit provision and
  product development
• One Town-One Product (OTOP) Program
• 2002-2004 Philippine Export Development Plan
  industry clustering
• electronics, auto parts components, wearables,
  coconut products, marine aquatic products, food
  products, home furnishings, holiday décor
  giftwares

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SME Legislations

• Magna Carta for Small Enterprises (1991)
• consolidate all government programs for the
  promotion and development of SMEs into a unified
  institutional framework
• creation of the Small Business Guarantee and
  Finance Corporation for SME financing needs
  (Small Business Corporation)
• mandating all lending institutions to set aside
  8 of their total loan portfolio to SMEs (6 for
  small and 2 for medium)

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III. Structure, performance development
constraints
Distribution of Manufacturing Value Added 2003
Food 20, Chemicals19, Machinery 9.3,
Transport 4.5, Garments 4.4
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Labor Productivity value added per worker
(constant prices)
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Major Constraints to development

• Lack of access to finance
• not supply of funds but reluctance of private
  banks to lend to SMEs government lending
  programs directed mainly to micro-enterprises
  livelihood programs
• Lack of access to technology skills
• many are not knowledgeable on technology most
  employ low level of technology lack of common
  support facilities like testing centers
• Availability of inputs supply chain problems
• high cost to access raw materials and inputs due
  to the general problem of sourcing and
  transporting raw materials (general
  infrastructure and communication problems)

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IV. Backward Linkage Network Creation
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Subcontracting in Philippine Manufacturing
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Philippine Exports

• 75 total exports electronics,
  machineries/transport equipment/parts, garments
• Phils a small exporter by regional standards, but
  exports of high-technology goods have grown
  rapidly

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Linkages issues. electronics

• Limited backward linkages subcontracting
  activities are minimal
• Limited participation in GPN not gone beyond
  labor-intensive assembly testing, electronics
  exports highly concentrated in semi-conductors,
  exports are import-dependent, low value added
• Few local suppliers unavailability/high cost of
  raw materials, unreliability of local suppliers,
  failure to meet required quality standards

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What the Industry is doing

• SEIPI provides networking and linkage
  development maintains a supplier-member database
  for matchmaking purposes
• Reverse trade fairs started by TI Philips
• Advanced Research and Competency Development
  Institute make Philippine high-technology
  companies more competitive by providing
  world-class professional training, advanced
  research, development and engineering new
  venture incubation
• BayanTrade supply chain management services,
  e-procurement helps in strategic sourcing
  creating linkages across industries

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Linkages issues garments

• lack of locally sourced quality raw materials
• dependency on imported raw materials fabrics,
  accessories
• no integrated textile industry to support
  garments
• textile millers difficulties sourcing raw
  materials importing 80 of input requirements
  (polyester fiber, cotton, rayon, acrylic)
• high cost of labor Phils US1.10/hr (double of
  what Vietnam Bangladesh offer)
• slow productivity growth lack (decline) of
  investments
• garments industry needs to move up the value
  chain and work towards becoming OEM and OBM
• lack of design capabilities and minimal linkages
  between local designers and manufacturers

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Linkages issues .. automotive

• Weak backward linkages parts and components
  remain underdeveloped with only 10-15 of parts
  locally sourced by assemblers
• SMEs lack of access to capital and technology,
  low productivity, unskilled workers,
  unavailability of raw materials
• Toyota, Mitsubishi, Honda, Isuzu, Ford only
  the latter has made Philippines its export
  platform for passenger cars
• Toyotas GPN manual transmission hub

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ECOP-Big Enterprise Small Enterprise (EBESE)
Toyota

• a partnership among the Employers Confederation
  of the Philippines (ECOP), Department of Science
  Technology (DOST), and Department of Trade
  Industry (DTI)
• Toyota Cluster Development Program improve SME
  productivity competitiveness down to the
  suppliers belonging to the lowest tier of the
  auto industry
• - basic 5S or good housekeeping, process flow,
  plant layout and human values related to
  productivity improvement.
• - advance Just-in-Time (JIT) concept
• 52 SMEs trained 2005-2007

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Firm 1 Plastic parts manufacturer Pilot
Process1 Bracket Turn
RESULT
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Firm 1 Pilot Process 2 Case Turn Signal
RESULT
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Firm 2 Tool die maker
Pilot Area 5S Stockroom
AFTER
BEFORE

• No designated racks and cabinets for the
  materials

• Provision of staging racks and cabinets

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Firm 2
Pilot Area 5S Stockroom
AFTER
BEFORE
Some of the non moving materials were sold
Funds were used for the repainting of the room
and cabinets
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Firm 2
5S - Production Area
AFTER
BEFORE
Provision of demarcation lines to enclose
exclusive areas for machines, walkways and
location of safety devices
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Firm 2
5S - Production Area
AFTER
BEFORE
Provision of machine enclosure and safety goggles
for operators.
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Firm 2
16
15
14
16
12
12
14
14
10
8
8
8
7
7
10
8
6
5
5
5
4
4
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EXCELLENT REVENUE!
Firm 2
1.5M
1.4M
1.4M
1M
800k
600k
500k
500k
500k
400k
400k
1 Toolset P100,000
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V. Linkages Survey

• SME networking with MNCs large domestic
  corporations
• SME networking with government
• Networking among SMEs

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Metro Manila, Bulacan CALABARZONSurvey Area
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Company Profile
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Company profile garments
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Subcontractor Profile
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(1) Networking with MNCs large domestic
corporations

• Main reasons for engaging in subcontracting
• Long term growth and profitability
• Partnership with MNC  
• Network of subcontractors  
• Participate in government programs  
• Knowledge of foreign market
• Critical factors in maintaining good
  subcontracting relationship
• Cost
• Product quality  
• Delivery  

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SME Networking with MNCs large domestic
corporations (contd)

• Support expected from contractors
• design support
• technology
• product development and innovation
• management production techniques
• improved networking
• garments financial assistance

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(2) SME networking with government

• Support received from the government
• participation in trade fairs
• workers training (auto electronics)
• one-stop shops providing information on export
  market opportunities raw materials
• access to credit, financing
• technical assistance
• Effectiveness of government assistance
• electronics auto satisfied
• Garments not effective

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Government linkage programs auto electronics

• Ways to improve government SME programs
• New department or bureau to coordinate the
  programs for export-oriented manufacturing SMEs
• Inviting more MNCs and making SMEs more visible
• Creation of a database of buyers
• One stop shop providing information on export
  market opportunities, raw materials, new
  technology
• Clear and consistent government requirements,
  including fees and other business documents
• Protection from cheap imports

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Government linkage creation programs garments

• Ways to improve government SME programs
• coordinate trade fairs with local government
  units
• easy access to credits
• formulate subcontracting laws to protect workers
  wages
• organizing venues where subcontractors can come
  together to discuss their concerns/problems and
  practical solutions
• link subcontractors with buyers
• create database which will be readily available
  to buyers
• accreditation of subcontractors

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(3) Networking among SMEs

• Cooperation program in auto EBESE (limited to
  suppliers of Toyota Motor Phils)
• Benefits from participation
• exchange of information with other SMEs on access
  to market and best practices
• SME visibility to MNCs
• link with other SMEs and in some cases establish
  production agreements with them
• Cooperation programs in electronics garments
  weak

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Summing up voices from the ground

• Current networking linkages program are weak
  limited
• auto EBESE Program (only among TMP suppliers)
• electronics garments strong networking mostly
  among large firms, not SMEs
• SMEs not aware of government linkage programs,
  linkages creation based on own referral system
• Other government assistance programs
• lack of information among SMEs particularly
  garments
• upgrade training programs (auto electronics)
• Absence of SME database
• Need for a central government office to assist
  export-oriented SMEs in manufacturing
• Firms perception
• subcontractors not a priority of the government
  assistance
• government focus is more on cottage industries

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VI. What can government do

• Develop local suppliers/parts increase value
  added of MNCs
• Losing competitiveness in mass produced products
• Move up the value added chain, SMEs need
  government support
• Design complete package for technical assistance,
  training, access to availability of finance
• Promote outsourcing/subcontracting arrangements
• Increase government subsidies on clustering
  activities other public-private partnerships
  like EBESE in automotive including technology
  upgrading HRD programs
• Improve all aspects of competitiveness crucial to
  create linkages, higher value added
• Create maintain SME database
• Government priority on SMEs that have GPN
  industries, separate cottage industry
  microenterprises from SMEs, designate one agency
  for SME promotion

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Daghang salamat!