Friday, January 9, 2009

Small Businesses – The Quiet Heroes of Malaysia’s Economy

Every year, Fortune magazine celebrates big businesses’ accomplishments in the US by publishing its annual Fortune 500 rankings. Colossal companies like Exxon Mobil, are venerated as being the pinnacle of American innovation, hard work and risk-taking. We have seen how CEOs of these huge companies are being touted like rock stars – indeed, one might construed that the strength of the US economy is being driven by these corporate giants.

The true drivers of the American economy however, are the small business owners. It is often cited that US small businesses are responsible for half the US GDP, and more than three-quarters of new job creation. While the global financial crisis forced once revered CEOs to make a beeline to Washington for handouts in the billions to save their companies (and their own behinds), small businesses were toiling quietly for survival -they remain the best hopes of turning the economy around, with old fashioned hard work, agility and focus on business fundamentals.

In Malaysia, things are not that much different. Sure, we talked about the contributions of small businesses, but largely get seduced by mega-projects. The Malaysian Inc. model, first launched by Dr. Mahathir, looked good on paper since it espouses, among others, de-regulation, improvement to delivery systems, and last but not least, privatisation. The last of which, privatisation, held the highest promise. However, Malaysia Inc. soon resemble a “Big Boys Club” – as favoured business personalities are handpicked to purchase pieces of former national assets at lucrative terms. Concessions are given to the same circle of tycoons, enriching them further. Since then, big businesses and politics became entwined, with big businesses getting the lion share of the government’s largesse. The Malaysia Inc. Club did not want to let the SMEs into its party.

This is a costly mistake.

If one scrutinize the list of the largest Malaysian companies, on deeper analysis one will find that most often than not these companies has in their stable of subsidiaries a single corporate entity that acts as the group’s main (and only) cash cow. This cash-rich company – could be in the form of a toll operator; a power generator; a gaming license; a water monopoly, etc. These single entities form the bulk of the groups’ profits and cash flow – take these concessionaires away, and suddenly, these giant groups does not yield superior returns after all.

Take the example of toll concessionaires. From the limited information available, they are virtually guaranteed of a certain level of revenue, profits and even growth. Business-wise, these are manna from heaven – with the government backing you up - there is almost no risk to the venture. We know from finance studies that low risk corresponds with low returns, and vice versa. But instead, the converse is true – these toll operators enjoy disproportionate returns on their investments that outweigh the risk it is taking. In other words, they have a free lunch.

We see the phenomenon again from the power deals signed with the Independent Power Producers (IPPs). First off, they are getting subsidised gas. Secondly, prices are locked in, often much higher than what the market would dictate. Thirdly, they can sell as much as they want to TNB, who has to purchase from them regardless of actual market demand. Because of the low risk nature, financing is relatively cheap. However, the returns are super-normal. Who says you can’t have your cake and eat it too?

In a zero-sum game, someone has to lose in order for someone else to gain. In this context, the winners are the few “successful” companies that have secured these fantastic deals, while the losers are the millions of Malaysians that has to pay higher prices. In reality, most of these successful companies are little more than rent-seekers – their success are predicated on near zero competition, minimal risks and guaranteed profits which the government served to them in silver platters. Whether they can replicate their successes under real competitive conditions are questionable.

In a 2006 paper prepared by the National Statistic Department entitled “SMEs: Building Blocks of Economic Growth”; it reveals that SME’s form 99.2% of total business establishments in the three main economic sectors of manufacturing, services and agriculture. In the services sector alone, SMEs account for 86.5%. What’s more, employment generated by SMEs is approximately 65% of total employment in the three main sectors, and is the largest contributor in the services sector. The report also reveals that SMEs generally still face difficulties in accessing financing, with nearly 60% still relying on internally generated funds or borrowings from friends and families as their main source. Only 14% chose financial institutions or government loans as their first choice of funds.

It is time the Government focus more of its energies on these unsung heroes of the Malaysian economy. In the stimulus package announced in late 2008, only RM100m is specifically allocated to assist SMEs. Surely the government can do more. Take the proposal to borrow RM5bn from EPF and channel these funds to Valuecap for the purchase of shares. This stock purchase does not create jobs; it does not increase workers’ productivity; it does nothing to quickly spur domestic consumption directly. All it does is support share prices for the benefit of shareholders - mostly the big business owners themselves. Why not take this RM5bn and provide cheaper financing to SMEs, who are struggling with increased energy costs and falling demand? How about small exporters who are facing difficulties securing letters of credit (LCs) for their raw materials and others who are unable to obtain LCs from their buyers? Why not take this RM5bn and provide bridging loans at minimal costs so these small business owners have the necessary funds to run their businesses?

It is time that the Government re-model Malaysia Inc to favour small businesses. Small is beautiful. In our “Boleh” attitude to build the biggest this and the largest that, we should not forget hard-working entrepreneurs who are struggling to pay their small workforce as their products face dwindling demand. As we construct mega super-corridors to attract large overseas investors, do not neglect small business owners who are still facing hurdles in obtaining government support here at home. In an article “ The Big Deal about Small Businesses”, the US Federal Reserve stated plainly, “A healthy growing small business sector makes our economy more nimble, better able to respond to new market trends and needs, and ultimately more productive as the results of small business experimentation and innovation weave their way throughout the wider economy”. It is time for Malaysia to strongly revive SMEs and restore them to their rightful place in Malaysia’s business hierarchy, on top of the priorities of big businesses. The government must address this in its second stimulus package so that the true drivers of employment and value to Malaysia’s economy are quickly given ample assistance, particularly in the current economic malaise.