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Ramesh Jude Thomas, President & CKO
EQUiTOR Management Consulting Pvt. Ltd.
A group of us were sitting at a friend’s backyard on the Palms last week pondering on how bad the current situation could get.
The lady of the house, herself a very senior HR executive with a kind heart asked me “But what do you think will be the human cost of all this. So many small people will lose their jobs and businesses”.
At one level she was absolutely right. In a downturn as severe as this, the first people to get affected are the marginal ones. The dispensable ones. The ones that live at the periphery of the economy. The converse is that the strength of an economy really is reflected in the well-being of its marginal members. And what riles me the most is that the thugs that created this situation have all landed safely in their Golden Parachutes, while the rest of the landscape gets annihilated by the bombs that they themselves dropped.
But what about the lady’s question?
I was yearning to say “Nothing dear. They will all survive and do well” But that would have sounded heartless even to her very successful CEO husband who heads a Wealth Fund. Besides sounding completely incredulous at a time like this.
But believe it or not, this is the truth. Let me explain:
In 1991 when India decided to finally relieve the economy from the yoke of Command and Control system, the Left and the Literatti voiced a number of fears. Amongst them was the collateral damage in terms of the hundreds of thousands of small businesses that would go belly up. And why would they die? Because without the protection and reservation that the government had been according them all these years, they would have to fend for themselves against the big boys and the multinational wolves, and the poor things wouldn’t stand a chance.
But guess what?
Earlier this year EQUiTOR was trying to make a case for a private bank to focus on the SME sector in India. During this effort we came across some startling insights on how these poor children of Liberalization had actually evolved. The SME is defined by the Ministry of Commerce as a business that has under USD 250,000 in Capex investments.
The Ministry’s 2007 report on the sector had this to report: Of the Foreign Direct Investment (FDI) going out of India in the current fiscal, 26% of the manufacturing sector’s contribution came from the SMEs . And this figure climbs to 41% for the services sector. A Ripley’s case??
So while the Corus’ and the JLRs make the headlines (and make us proud) it is a guy like Daawat Rice who makes the numbers. LT Overseas (the owners of the Daawat brand) is a family run rice exporter who did a leveraged buy out to acquire a USD 50 mn firm in the US. And here’s the kicker: the debt was partly securitized by the intangibles in the business. They did this to get a “US footprint for expanding their branded business”.
Clearly, the poor little guys we wrote off have now become the pillars of industry. There are a vast number of Daawats out there. They have built their businesses with confidence, backed by a strong fundamentals and resilient assets. Some of them have gone on to become Sensex blue chips (Bharti) and many are waiting in the wings.
I say don’t pity them. Just create an enabling environment and they will be the toast of the economy. What say, gentle hostess?
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What will happen to the small guy..
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19 comments:
The small guy will grow. With low overheads has better cash reserves. And ofcourse has huge drive for the business performance. The small guy is in much advantageous position. Actually if you see the small business enterprises are growing. They are cash rich and have not big stakes to worry about so are able to go in expansion mode during this period of economic downturn if we so call. The small guy in a small market is even better off. The consumption is huge in this country despite all the inflation people are eating out, travelling and making merry. A small guy always has a better chance to sruvive and remain in good shape than the fuddy daddy.
Small guy will start lean and will be faster and flexible that the big ones.Perhaps this is to a large extent a man made disaster, finacial products, selling the same products over and over again !
Small guy will come out stronger..can't say that for the big ones!
I don't think you can make a universal judgment on this.
All small guys are not alike!
Those sme's who are involved for example in export will have serious issues. Garments will be a case in point. Even smaller IT cos. will have both volume and margin pressures. Many sme's cater to the domestic market. They may have better protection on volumes, but the liquidity pressures are already crippling them. If they are mid- stream suppliers to larger enterprises as many of them are, they are already hit by payment delays from their customers. Ask any auto component maker and he will probably burst into tears!
No, i don't agree. Just because there are many more small fish in the water, does not ensure survival if all the water gets polluted!
India is a complex organisation. While in high times, some people would have lamented that because we are conservative in some aspects of our globalisation we would not have got the full benefits of the upside. Now, this has a positive side too... in the down times they act like safety nets. I think India in general will have a soft landing. While some sectors will be hard hit and that would include some of the SMEs in Textiles, garments, handicrafts, export orieted foods etc, there are others who will manage to see thru. Some sectors like Telecom will continue to post strong growth. Infrastructure will see investments coming in from Govt due to elections and 2010 games. Public sector will continue to balance and SMEs dependent on them will manage. In fact I see the small guys will have more tenacity due to their aglity and nimbleness. Our large domestic sector will come handy. Inflation is low and hopefully that will not put additional pressure on the small guy. Yes, it will impact some significantly and others marginally and some will in fact grow. As such the impact will be mixed. lets hope for the best.
I totally agree with Ramesh, and would like to reinforce his revelation.
Having defined the premise - recessionary environment - what surfaces to my mind is a common denominator across all the “guys”; be it the small, medium, or big guy. According to me, there isn't only one category called upon to be the saviour; all of us are collectively responsible. In fact, the strength of an economy really is effected by the synergy across this whole spectrum of categories. This is the reason I am holistically holding them all accountable, because at some point in time we need to collectively retrospect and have a strategy for climbing out of the recessionary pit we created for ourselves. And all three categories will need to have learnt some lessons from this downturn; in fact, from how they collectively and individually contribute to it. As such, I would like to suggest some points that all of us could benefit from:
Today, humility is a dangerous word in times when success is the prevalent religion and celebrities are its gods. The converse would help rectify this mess, this self inflected downturn.
The need to know one's place in this economy, to chart out one's trajectory - if one is planing to scale-up - and to be aware of one's core-competence and its need to be genuine, effective, in-step and in-sync with what a sustainable economy needs.
We need to be original enough to create our own strong fundamentals, resilient intangible assets, and stop the common practice of hypocrisy.
This, I feel, would end the cliché, “Enough is enough...???“; this inconclusive mantra chanted by the media ad nauseam. The points for reflection that I have suggested would in fact create an endearing environment; as Ramesh rightly says to toast the economy.
John D. Lazaro
Founder
Lazaro Advertising
Bangalore
www.lazaro.in
Wonderfully articulated. The small guy always pays the price and it is for the government and all of us who can afford it, to reach out and lend a helping hand.
Allen Mendonca
Ah! It is amazing how the human mind is conditioned to cognise only for the environment that it chooses to recognise at the exclusion of all else. Who, for heavens sake, is the small guy? Is it an SME / SSI or is it some NGO or, god forbid the blasphemy, the Reliance & Tatas (as compared to the GEs and the Indian Railways)?
In my view - let me hasten to add that I do not suffer from any delusion about said or other views of mine as being gods own truth(s) - the small guy is the landless/jobless labourer, the rickshaw puller, the shoeshine boy - people whose futures (and the present) are about as bright as a fused zero watt bulb in a power cut zone (I am given to understand that there is a school of thought that this is still brighter than life under CPM's governance)- who are the marginalised and the have nots. But never fear, like the super rich set (who could not care less one way or the other) my small guys will not fall further thanks to the greed of the "profit wallahs". This is mainly on account of two reasons. First, I do not think it is humanly possible to fall further and second, they do not give a damm!
I suspect that my views are squarely in the realm of the minority and by now most of you would have skipped this post. For those of you with a persevering nature I say that the small guy per your definition - the SMEs of the world, will face hard times but will bounce back and come out stronger. Their innate financial prudence and lack of profligacy will save the day. What I am worried about is the fate of the behemoths - the auto industry, the investment banks (if any more are left) and the real estate wallahs (not to forget the infrastructure and fmcg guys). These people will find it the most difficult to slow down the juggernaut of vain spends and useless costs that have been nurtured over years of economic boom and governmental generosity (a very polite term for the dole handed out to Detroit and Wall Street, the lifeline given to UTI some years ago by GoI, etc.)that can best be explained on a logic platform of insanity and mental retard (isn't there an old jungle saying about the futility of chucking in good moolah after bad ?). You see, the poor have never had problems in finding ways and means of cutting costs - it is a problem faced only by those who can afford it!
I have a lot of faith on the "small guys" of the world - they will survive, as they have over cenuries. If I were you I would be worried about the big guys - they are used to cake in a world where even bread crumbs are scarce nowadays.
On a completely different subject, is it not funny that the 1993 Bombay (yes, it will forever remain Bombay to me) blasts, the attack on the Indian Parliament, the serial bombing of Indian cities, etc. were not "enough" for the glitterati and the Barkha Dutts of the world. Not surprising since only the "small guys" got impacted. But good heavens, the Taj and the Oberoi are under terrorist attack ! Where will we now go to flaunt our baubles? This is too much !! Enough is enough!!
Throw out the politicians (jokers whom we have put in government in the first place by giving up our right to vote), give the Late Braveheart Unnikrishnan's family an award of Rs. 5 lakh (so what if Abhinav Bindra received a government award of Rs. 3 crore), save our world (read "super rich hangouts"). It really makes me sick!!
Believe me, I have no angst against the rich. In fact I have always wished that I had enough money to buy a Concorde (before you ask me what I would do with one - even though the answer should be obvious - let me hasten to add that I have never harboured any wishes to acquire a Concorde, I just wish I had enough money to be able to afford one). I think the rich deserve every penny that they have managed to make. No moralistic value judgments on my part. But somewhere deep inside - particularly on a dark and sleepless night - the Charlie Brown in me asks - is this really what this is all about? For heavens sake, why all the fuss then?
The heartless middle class intellectuals (?) like us will say that servival of the fittest. The small time businesses which were backed by good fundamentals survived the storm, others collapsed. The socialist gurus will say that the bottom of the pyramid holds the pyramid of the social structure, this storm will shake the bottom. The large sum of unsecured loans as well as the secured ones against the vaporware assets have definitely created this storm, the big question is who paid for this vaporware and burn out - the common man as an investor - so I do not think the question needs to be answered - who gets burnt at the end of the day. The small guy will grow and a large number of dwarfs(simple salary earning individuals) will die.
Quite well-put and adequately substantiated. Contrary to popular belief however, there are regions in the pond that are sheltered from the large ripples: probably behind rocks sticking out of the surface that absorb (and usually nullify) the energy of the ripples. And behind these rocks thrive a bunch of businesses- small and medium (maybe a couple of large ones too)- the survivors.
in good times, the big guys grow bigger. if there's a category leader with 40% market share, four out of every ten new entrants will naturally accrue to this leader
in bad times the same rule usually applies. the big guys, the large market share players too will find their share draining speedily.
one of the fallouts of such times is that the best and most nimble among the small players come to their own and make the transition to the next level of growth
in that manner it will separate the men and the boys among the sme's
this is a good write up and thought provoker. i am putting together my discussions and observations over the past couple of months with many people in a cross section including NGOs and small time local business people. My thoughts:
there are a few things that will really impact the common person. I am thinking of the lower class small shop owner, the kirana stores, the labourers, the farmers, the workers who work in small establishments (almost all of which are not unionised), the teachers, etc.
these people will be hit in the foll way:
1. their cash flows will get hit. most shop owners live on credit - i think all credit limits will come down. this will in turn have a cascading effect and people lower in the pecking chain. this has already started happening.
2. payments will get frozen - no increases. thus while inflation is still high (around 8.5% - down from 11% 1 month back), it not get reflected in increments or higher wages. thus money in hand gets eroded. while this is common sense, many people employed in the retail sector as shop assistants etc are reporting that money for jobs is coming down.
3. with banks unlikely to extend cash credits or overdrafts (also because of point 1 above), people will be forced to take loans from the underground market where interest rates are much higher). just in an era where the overground economy was emerging out of the underground, it will have a reverse effect). I have this first-hand from a friend who loans money at a 'low rate' of 3% per month (interest collected monthly or cumulated)in a small town in MP. he says many people are forfeiting their mobikes or homes for which they have taken loans and are unable to pay back.on the contrary, his money lending business has increased!!
4. many will lose jobs or work. this will hurt the most. these people have low savings and will be forced to borrow from friends and family (it is unlikley that people will go to moneylenders for school fees or buying rice or vegetables). again, i am not referring to IT or BPO workers, but workers in the hard services sector like retail, logistics, transport, peripheral services.
5. some of the more adventurous people would be hit because they put their money into suspicious money schemes of financial cos (like chit funds). i know most of these funds are having problems because of cash flows and many have just close down/disappeared.
the people will be saved because of the foll:
1. most families have no investments in stocks or other risky asset classes.
2. almost all families will have bank savings as their primary mode of investments. while this may not be high in absolute terms, it will be advantageous in this tough time because as a percentage of salary it will be high.
in a slowing/recessionary economy, the SME sector will have an advantage of being agile; will have an advantage of not having too much money sunk in areas other than critical. In this sector, companies will quickly put their people into frontal customer facing roles involving selling or building relationships. I am working with a couple of such outfits and am amazed that one of them have completely changed their role orientation as a result of 1 meeting. they have put out 100 proposals (for recrafted products/services) in 1 week as compared to 100 they put out in the last full year.
the SME sector will also be hit badly because they will never be able to compete with offering discounts as large houses will do. their ability to collect cash from larger sized clients is already being called into question (ex: large houses decide that they will pay after 90 days instead of 45 days as earlier).
land as a collateral is getting less money. many small time businessmen most often pledge pieces of land or their house property. in small townships there are reports that banks are moving very, very slowly in accepting any such collateral.
already many SMEs report that sales have been hit because of deferred decisions (very few are outright cancellations!). it is very unlikely that these decisions will be positive - they will slide into the grey unknown.
the poor will not be affected at all in a direct way. the booming economy did not help them; nor will the slowing economy hit them. they live in a parallel economy, truly. many labourers are at the mercy of contracters who anyway pay them a part of what they are supposed to get. over the last year, there was increasing govt and social oversight emerging. i fear that will die down over different priorities that the Govt now has (ie. the larger economy and terrorism)
one of the signs i am seeing is of corporates slowing their 'giving' in CSR activities. some govt schemes will be cut because of the economy (and also i suspect with money being funneled into secuirty because the mumbai attacks). we will have to wait until march to see the real impact of this because anyway govt release moneys only at that time.....
History has proved that free market economies do better than "Command and Control" ones. We only need to reflect what happened in East Germany and West Germany or North Korea and South Korea-just to cite a few examples.
However, in the bottom-up system it is the fittest who survive. This is more so during tough times.
So what will happen to the small guys this time around?
To some extent the outcome will vary according to the sectors they are in; in other words on the external factors beyond their control. The fitter ones, however, will find opportunity in adversity as there are a whole lot of initiatives within their own control too.
To sum up, this game is all about survival of the fittest.
J K Chandna
small guys have to create an "attitude to survive" and need to offer more ( value ) to the clients than what they are getting from the big guys, ..get in to depth & width strategy...work more ....
what i feel that please bring in equity partners for sustainence if necessary
As a small entreprenure of 2 years in the space of brand Communciation I have to look for equity partners ...not for fund but to sleep better for next 1-2 years and retain the good TEAM
venu sharma, Founder & CEO
Ideanow.co.in
venu@ideano.co.in
I concur with you Ramesh that the small guy will grow. Given the size of people who can be qualified as 'small guy' am pretty sure that there will be some individuals who will have enough fire in their belly to overcome the odds on their own, but can we build an ecosystem which can facilitate their growth, so that not only the ones who are pre-ordained to make it big, but also those who had aspirations and couldn't make it big for the want of resources also gets a chance? If yes what role can each of us as an individual can ply? Looking forward to hear back.
Saurabh Laddha
I entirely agree. The Small guy (a very socialist era term) is actually a niche guy. The Indian "small guy" runs a tight ship (miserly even) and is a genius at turning five bucks into ten anywhere in the world. He understands the value of his brand more than any one else (remember Ramesh Chauhan when he was a small guy ?). The last thing we need to worry about is for the small guy. I have worked with a garment exporter whom nobody has heard off, yet has a Rs 800 crore topline, employs 15000 staff, provides them with good lunch and transport, has 8 manuf locations and no debt ! He is a "small guy"...he also has a temple in his factory premises - he relies on divine help instead of the world bank!
Once we move away from subsidized ego trips (which is what the corporate world is all about), the SME is actually the person who drives the economy !
I have learnt my lessons the hard way in the last 3 years. MNCs are no better than the the socialist / leftist economies or governments we have witnessed. I have felt that the current MNC culture is to stifle creativity, productivity, business development, client development ... they believe that a group of finance / accounts people can make sufficient noise to get the numbers right. No wonder they are called "bean counters". On their own they are incapable of getting even a cent worth of revenue. Yet, they have scant respect for those who do.
No wonder there has been such strong criticism of the chief honchos of GM, Ford and Chrysler comning to Washington in their private jets to ask the governemt for a bailout. What happened to laissez faire ? You mess up in a capitalist economy and then ask the stae to bail out. So, what was wrong with the Soviet or Indian system in the fifties to the seventies ?
Given this, any small enterprise, as long as they stay away from the MNC culture by a long pole, should thrive. Yes, there will be times when cash crunch will hit them. Cash is tight and is king these days. That amount of staying power is necessary. To do that, overheads must be kept low, resort to outsourcing of the necessary evils e.g. admin, IT, finance. Must be lean and mean machines. Keep costs to a minimum. Then, these will survive the present crisis, and will thrive in the future.
Tilak
There are 4 mistakes in my previous comment
a. Entrepreneur
b. Sustenance
c. Communication
d. venu@ideanow.co.in
Please make the required corrections
The poor children of liberlization have surely come a long way.As you rightly said,armed with a die hard focus,crystal clear targets ,scars of past downswings and a never say die spirit he chugs along steadily.
He is also totally in control of any situation ,without red tape and complex heirarchy problems.His decesion making is swift and fast too.
As far as the big guy is concerned,The higher you climb,the harder you fall seems fit for him.
Too many loose ends nails him like the present scenario.
A very insightful article by Mr Ramesh.
Jai hind to the small guy!!
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