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Tapping opportunities amidst a crisis

N Madhavan | Updated on May 22, 2020 Published on May 21, 2020

Stitch in time Quick measures could pull MSMEs out of dire straits   -  paulprescott72

MSMEs have to overcome the Covid-related crisis quickly to grab new business that China-allergic buyers are offering. Can they?

Select Micro Small and Medium Enterprises (MSMEs) in India have come to understand the true purport of Albert Einstein’s statement — “In the middle of difficulty lies opportunity”.

Even as they struggle to restart their operations after a debilitating two-month long lockdown, opportunities that could catapult them to a much faster pace of growth are fast opening up. But the catch is that this window of opportunity is short and only those who are nimble will be able grab it. Present circumstances and limited government support will mean only a few will succeed.

The talk of a possible realignment of manufacturing capacity from China to elsewhere in the world started soon after the trade war that broke out between US and China. American companies realised that a fundamental change was beginning to happen in the US-China relationship.

The two countries were no longer ‘co-operating rivals’ with a win-win economic relationship but ‘competing rivals’. Covid-19 and the anger that ensued against China for its alleged mishandling of the pandemic added fuel to the fire. Not just companies from the US but those from Europe, Australia and elsewhere are actively looking to source products outside of China. Indian companies have started RFQs (request for quotations).

So far the enquiries for supply have been restricted to sectors such as auto components, textiles and leather where India can to an extent, if not entirely, match China’s cost.

These sectors typically have three attributes — strong domestic market, well established local supply chain and significant export presence. While bigger companies have the wherewithal to respond to the RFQs, MSMEs may not be able to do so quickly enough.

Speed is critical to grab this once-in-a-life-time opportunity as there is strong competition from companies in countries such as Vietnam, Thailand, Bangladesh and Sri Lanka.

That apart, China, which has set up huge capacities to manufacture for the world, is not about to let go of these orders easily. If they drop prices substantially, business sense could well smother the emotional anger that is presently driving the anti-China sourcing decision.

Income shrinks

But the eight-week lockdown has destroyed MSMEs’ cash flow. They have had virtually no income but had to pay salaries and other costs. Even if they manage to respond to the RFQs, they need to follow it up by investing in necessary tooling for designing the new product and get it validated by the buyer for specification and quality. This needs to be completed in about eight weeks. Once approved, machinery needs to be put in place quickly to start manufacturing in three to six months. All this needs urgent and significant cash infusion.

The stimulus that the government has offered will help but not immediately. The automatic collateral-free loan will take weeks for the orders to percolate to the branch level and for the loan to be released.

Other measures such as Fund of Funds (will work for high growth MSMEs such as these but will take months to fructify), Subordinate Debt (will be of use only for stressed MSME accounts) and payment of provident fund contribution (very few MSMEs will qualify as most of them have more than 10 per cent of workers earning above ₹15,000 per month) aren’t helpful either.

Apart from cash, MSMEs also face challenges in restarting their operations and that of their supply chain as significant restrictions remain.

Labour is, particularly, proving to be a thorn in their flesh. Having mishandled the migrant labour issue, uncertainty is high as to whether they will return and, if so, when. Most MSME entrepreneurs worry that they may have to train new workers. This is both costly and time consuming.

Even those who employ local labour are finding it difficult to get them back to work as they have left for their home-towns and inter-district travel is still restricted in most States. You need your best staff at hand to design a sample if you are serious about tapping new export opportunities.

There is also confusion over costs. The lockdown has vitiated the cost structure — be it labour, logistics and even supplies. It is not clear when they will stabilise and whether it will drop to pre-Covid levels. MSMEs will have to take a calculated risk while quoting a rate. Unlike their big brothers, they do not have the capacity to sustain an unremunerative quote.

Govt must chip in

The government, too, needs to play its part as a facilitator. It took Coimbatore District Small Industries Association (Codissia) eight years to set up two industrial parks spanning 360 acres. Such delays won’t help. It should also ease regulatory bottlenecks and bureaucratic hurdles. Agile decision-making is critical.

In March, the government banned export of all masks (including cloth masks which are fast becoming a fashion statement). In the last six weeks, players in Vietnam and Sri Lanka have bagged orders for 65 crore masks. India has reversed its decision now but the opportunity has been lost.

There is a need for policy support too. Take the case of the textile sector. India’s policy, traditionally, favoured cotton. But the trend across the world has shifted to man-made fibres (MMF) where India is a minor player. An inverted GST tariff structure is in place for MMF; raw material suffering higher tax than the end-product ensures this.

A bulk of China’s $240 billion worth of exports of MMF textiles is up for grabs. Also, some trade agreements will help. India by signing an FTA or a preferential trade agreement with the UK, for instance, will open up a $3 billion market at nil import duty (now 15 per cent).

It is said that every additional $1 billion in export will create 1.5 lakh jobs, apart from boosting the revenue of thousands of MSME textile units. If true, it is certainly worth the effort.

More immediately, the government should identify MSMEs that have the chance to grab a share of China’s manufacturing pie and infuse cash into them so that they do not lose the opportunity.

Published on May 21, 2020

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