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Not a Small Shift

Not a Small Shift

MSME guide to survival has several drastic measures such as lower leverage and diversification into newer areas

Illustration by Raj Verma Illustration by Raj Verma

In January this year, US forces killed top Iranian general Qasem Soleimani in an air strike. The incident roiled global markets, but for Jaipur-based Adarsh Mahipal Gupta, who sells auto components under the Autopal brand, it came as a shock. Gupta had appointed a local agent in Iran to sell auto components there and shipped the consignment. The episode led to his payment getting stuck.

Just as the situation was improving in Iran came news about coronavirus outbreak in China. Gupta, who is Director (Finance and Marketing) in the family-run Autopal-MPG Group, recalled two of the company's Indian staffers and laid off two out of four local employees in his Shanghai office. The group, which imports components worth Rs 15 crore annually from China, has suspended trade. The lockdown has resulted in almost all its payments getting stuck. It is struggling to pay salaries to 1,100 employees.

Gupta has made up his mind to get into essential items and emerging areas - medical equipment and artificial intelligence - so that cash continues to flow even during a tough business environment. "We plan to enter artificial intelligence and medical equipment. We already have a software firm. We are talking to possible joint venture partners. Regarding making medical equipment, it is easier for us, given that we are already into auto component manufacturing," he says.

There are thousands of micro, small and business enterprises (MSMEs) like Gupta's which are thinking about de-risking their business and making their organisations leaner to tide over both current and future economic crises. "Many MSMEs are looking at optimising existing facilities to maximise revenue. While they will stick to their core business, they are planning to add some products that can be supported by existing facilities," says K. Vinod Narayanan, Managing Director, PVN Industries. Kerala-based PVN is exploring the possibility of making hospital equipment and furniture.

Muzaffarnagar-based Chakradhar Chemicals is reluctant to enter a new area altogether but is exploring the option of collaborating with a foreign company to produce pesticides and weedicides, a natural extension of its fertiliser and agriculture equipment business.

That is not all. Apart from entering newer areas, the survival instinct of MSMEs is making them take several drastic steps such as entering into foreign tie-ups and reducing debt as well as staff strength.

Cash Crunch

To be sure, not all small firms can afford to diversify as they are facing an unprecedented cash crunch and are awaiting financial support from the government for survival. For many, even paying salaries has become a challenge. A survey carried out by industry body The Federation of Indian Micro and Small & Medium Enterprises (FISME) and Skoch Group in April-end found that almost 30 per cent MSMEs would prefer to cut staff strength by half.

A large section of MSMEs has not benefited from government move to provide moratorium on loans and extension of higher cash credit limit. More than 80 per cent MSMEs are self-financed and only 7 per cent borrow from formal credit institutions. But even those availing bank credit for growth and working capital are reducing borrowings. The reason: the earlier loans are resulting in a higher fixed cash outgo while cash flows have dried up.

The total credit from scheduled commercial banks to MSMEs stood at Rs 15.16 lakh crore in FY 20 (up to September 2019). Credit by Non Banking Finance Companies to the sector was Rs 1.65 lakh crore as on December 2019. Bad loans rose to 12.2 per cent in September 2019 from 11.7 per cent a year ago, according to credit information company TransUnion CIBIL, suggesting rising stress in the sector.

"Business principle says that if you want to grow, you have to have debt. If you want to be on a growth path, you have to take debt, but MSMEs will now be more conservative than in the past," says Amit Sethi, Joint Managing Director at NCR-based Orient Fashions. With bulk of export orders cancelled and no hope of revival in the apparel sector, Sethi has added a production line to manufacture PPEs and three ply face masks to cater to the huge demand in the wake of the Covid pandemic.

Demand Worsens

Even before Covid-19 hit India, consumption was shrinking in many sectors such as electricity, commercial vehicles and passenger cars. The virus has aggravated this. MSMEs make bulk of ancillary items and so are bearing the brunt of the plummeting demand.

During the ongoing lockdown, sales of essential items such as footwear, utensils and garments, primarily manufactured by MSMEs, have dropped sharply, giving a body blow to the smaller firms. The government has permitted some neighbourhood shops to open but buyers are much less eager to spend than before.

MSMEs are facing a major slump in export markets too as most countries have imposed a lockdown to contain coronavirus. With local demand at an all-time low, export orders are far and few between, liquidity crunch and migrant workers leaving for their homes, for MSME promoters, it is like starting the venture afresh.

Foreign Tie-Ups Hold Promise

Animesh Saxena, President, FISME, sees a new opportunity for smaller firms as soon as coronavirus settles down and companies exit China and look for alternative manufacturing destinations. "We see a lot of technology tie-ups and collaboration happening between Indian firms and companies from Japan, South Korea and Taiwan, because right now India does not have technology, which is the biggest challenge it faces in import substitution. A few months back, we had signed an MoU with the Korean Small & Medium Enterprises Association to work together. Korean MSMEs see a golden opportunity in collaborating with Indian firms," he says.

"They are looking at joint ventures outside Korea. Their problem is that they are small and, hence, cannot come on their own and get approvals and permissions. They need some reliable Indian partners," he says. But it will not be easy for India to attract companies from China. In the past, during the height of the trade war between the US and China, many companies moving out of China preferred countries such as Taiwan, Thailand and Vietnam. Orient Fashions' Sethi says there will be big exits from China once coronavirus settles down. "But there is no replacement to China. In apparel, they hold 29 per cent market share while India holds 4 per cent. Vietnam holds 12 per cent and Bangladesh 8 per cent. India is not truly a manufacturing hub," he says. While entry of foreign manufacturers will be an added advantage, MSMEs also need to improve efficiency and rationalise cost structure. "If foreign manufacturers come to India, it indicates growth of the ancillary sector. MSMEs are predominantly in the ancillary sector, so they can capitalise on this opportunity," says K.R. Sekar, partner in Deloitte.

The government is set to help the sector but it will have to fight its own battle in the end.