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D&B SME Cluster Series 2014: Delhi

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D&B - British Airways SME Cluster Series 2014: Delhi, captures insights on the status and scenario of SMEs operating in the Delhi cluster in terms of their credit requirements and preferences, …

D&B - British Airways SME Cluster Series 2014: Delhi, captures insights on the status and scenario of SMEs operating in the Delhi cluster in terms of their credit requirements and preferences, marketing & IT challenges and various other parameters. This report highlights the benefits of operating in the cluster and factors that can enhance the competitiveness of the businesses operating within this cluster.

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  • 1. I Key Findings Dun & Bradstreet India (D&B India), in association with British Airways, aims to reinforce its commitment towards the development of small and medium enterprises (SMEs) with the launch of its cluster based report series, “D&B - British Airways SME Cluster Series 2014: Delhi”. This report focuses on SMEs in the Delhi region and offers insights on the status and scenario of the SMEs operating in Delhi cluster, in terms of their financing requirements and preferences, marketing and IT challenges, and other parameters. Further, this report highlights the benefits of operating in the cluster and factors that can enhance the competitiveness of the businesses operating within this cluster. Some of the key findings from the study include: • Nearly 88% of SMEs operating in the Delhi cluster find it an attractive destination for doing business. • Ease of market access, import/export benefits, and export promotion emerged as the top three benefits of operating in the Delhi cluster. • Majority of the SMEs were earning income less than ` 10 mn. during FY13 and these were proprietary firms. • Access to newer markets, currency fluctuation, and excessive documentation emerged as the top three challenges while operating in export markets. • B2B, online, brochures, and pamphlets emerged as the top three marketing strategies adopted by the SMEs. However, lack of market awareness and high cost of marketing emerged as the major hurdles in promotion of products and services. • More than 40% of the SMEs take more than five domestic trips annually whereas only 10% of the SMEs take more than five international business trips annually, via airline. • More than 60% of the surveyed SMEs allocated less than 2% share from their company’s total budgeted expenditure, for their business airfare travel needs. • More than 90% of the SMEs frequently use economy class for air travel and largely depend upon travel agents for booking airline tickets. • Choice of a particular airline partner for SMEs was stated to be based on three important parameters: cost of travel, safety, and connectivity. • Using the cheapest airline emerged as the most preferred means of improving the management of business travel cost over the next year. • Increased efficiency emerged as the key benefit of implementing technology. However, high cost of technology adoption is a major hurdle in implementing technology. • Majority of the SMEs sourced finance from scheduled commercial banks (SCBs) and expect loan repayment flexibility from the financer. • Drop in client orders hit SMEs the most amidst the economic slowdown, as a result of which client retention emerged as the top priority for SMEs. • It was revealed that a majority of the SMEs expect the government’s assistance to enable businesses in the cluster become more competitive.
  • 2. 1 Delhi Cluster Insights Dun & Bradstreet (D&B) performed a primary study to capture and analyze business trends of the small and medium enterprises (SMEs) operating within the Delhi cluster. This section aims to highlight SME trends in terms of their operational structure, financing, technology, exports, their outlook on growth prospects, and major challenges faced. Companies with a total income below ` 1,000 mn in FY13 were considered for survey analysis. Our study in this cluster covers companies from various business operations such as manufacturing, exports, imports, wholesale and distribution among others. These companies operate across various sectors such as textiles, auto components, electrical and electronics, metal products, and IT and ITeS services. The key findings of the study are as under: Delhi SME Cluster - SME Perspective Nearly 88% of the SMEs in Delhi revealed that this cluster is as an attractive destination for conducting business Delhi, the capital of India, has emerged as a major commercial capital and industrial hub of India. It is home to a wide range of industries including textiles, electrical and electronics, IT and ITeS services, hotel and tourism, which have contributed immensely to economic and industrial growth of the country. Delhi has become an attractive business and tourist destination. This is driven by its improved infrastructure, good connectivity with other Asian and western regions, ease of access to market and availability of skilled labor among others. Consequently, it has emerged as one of the most preferred investment and business destinations. Our survey findings revealed that nearly 88% of the SMEs operating in the Delhi cluster find it an attractive destination for doing business. Ease of market access, import/export benefits, and export promotion emerged as the major benefits of operating in the cluster Ease of market access, import/export benefits, and export promotion emerged as the top three benefits of operating in the Delhi cluster. Ease of market access accounted for share of around 50%, followed by import/ export benefits accounting for a share of around 40%, and export promotion accounted for a share of about 10%. Major benefits of operating in Delhi cluster Source: D&B Research
  • 3. 2 Characteristics of Delhi Cluster Majority of the SMEs surveyed in the Delhi cluster were proprietary firms and earning income below ` 10 mn Majority of the overall SMEs surveyed (around 68%) were earning income below ` 10 mn. However, only about 3% of the SMEs were part of the highest income bracket between ` 500 mn to ` 1,000 mn. Further, around 63% of the SMEs surveyed in the Delhi cluster were proprietary firms, out of which majority at more than 85% were earning income up to ` 10 mn. Further, around 22% of the SMEs surveyed were private limited, out of which over 50% were earning incomes between ` 10 mn to ` 100 mn. Similarly, 15% of the surveyed SMEs were partnership firms and majority of them at around 67% were earning income up to ` 10 mn. Only around 2% of the SMEs were public limited and 100% of them were earning income between ` 10 mn to ` 100 mn. Ownership pattern – Income wise Source: D&B Research Exports Related Trends Majority of the SMEs were earning export revenues up to 20% of their total revenue Around 80% of the respondent SMEs were earning export revenues in the range of 0% to 20% of the total revenue during FY13. However, only around 3% of the respondent SMEs were earning export revenues in the range of 80% to 100%. Export revenue share: % of companies Source: D&B Research
  • 4. 3 Access to newer markets, currency fluctuation and excessive documentation emerged as the top three challenges while operating in exports markets Our survey findings revealed that, access to newer was the topmost challenge for the SMEs operating in the Delhi cluster, accounting for around 50% share in the export related challenges. This was followed by managing currency fluctuation accounting for 25% share and excessive documentation accounting for about 21% share. Lack of information on buyer’s credibility and delayed payments from international buyers was not a significant challenge for the SMEs operating in the Delhi cluster. Marketing Strategies and Related Trends B2B, online, brochures and pamphlets emerged as the top three marketing strategies adopted by the SMEs B2B (business-to-business) emerged as the topmost marketing strategy adopted by the SMEs operating in the Delhi cluster, accounting for around 60% share in various marketing strategies adopted. Online marketing followed this as the next best-preferred mode for marketing, accounting for about 21% share. Similarly, around 8% of the SMEs used brochures and pamphlets as their medium for business promotion. However, exhibitions, media and journals, and online B2B portals emerged as the least preferred marketing medium employed by the SMEs operating in the Delhi cluster. Income-wise marketing strategies adopted Source: D&B Research Lack of market awareness and high cost of marketing emerged as the major hurdles in promoting their products and services Inadequate awareness about the market and high cost associated with marketing emerged as the major barrier for SMEs operating in the Delhi cluster in promoting their products and services. The other major bottlenecks were lack of branding awareness and inadequate skilled resources.
  • 5. 4 Marketing Challenges: % of companies Source: D&B Research Note: On cumulative basis SMEs need to acquire knowledge about their market, employ the right marketing strategy as per their nature of business, and maintain visibility amongst their customers to overcome these challenges. Use of the Internet and social media can be a more cost-effective alternative for marketing their product and services. SME Business Travel Trends More than 40% of the SMEs take more than five domestic trips annually whereas only 10% of the SMEs take more than five international business trips annually via airline Our survey findings revealed that around 42% of the SMEs take more than five domestic business trips annually through airways whereas only 10% of the SMEs surveyed take more than five international business trips through airways. Similarly, about 31% of the surveyed SMEs make between 2-5 domestic business trips and nearly 25% of the SMEs take between 2-5 international business trips via airlines. The research also revealed that more than 50% of the SMEs did not make even a single international business trip via airlines. Similarly, around 17% of the SMEs did not make even a single domestic business trip through airways. Frequency of domestic and international trips Source: D&B Research
  • 6. 5 More than 60% of the surveyed SMEs allocated less than 2% share from their company’s total budgeted expenditure, for their business airfare travel needs Our survey study showed that, more than 60% of the respondents allocated less than 2% share from their company’s total budgeted expenditure for their business airfare travel needs. This was followed by around 19% of the surveyed respondents, who allocated between 3%-5% share from their company’s total budgeted expenditure, for their business airfare travel needs. Only around 2% of the surveyed respondents allocated between 11%-15% for the same. Budgeted allocation for business airfare travel needs Source: D&B Research Around 74% of the SMEs, earning income up to ` 10 mn allocated less than 2% share from their company’s total budgeted expenditure, for their business airfare travel needs. However, 100% of the SMEs earning income between ` 500 mn to ` 1,000 mn allocated in the range of 11% to 15% from their company’s total budgeted expenditure, for their business airfare travel needs. More than 90% of the SMEs frequently use economy class for air travel and largely depend upon travel agents for booking air tickets Our survey study revealed that, around 92% of the SMEs travel through economy class, while around 6% travel through business class, and rest 2% travel through first class. The research also revealed that around 52% of the SMEs surveyed depend on travel agents to book their flight tickets. This was followed by 26% using airlines website and 16% booking through travel websites. Asia and Europe emerged as the most frequent travel destinations Asia (excluding Middle East) emerged as the most frequent business travel destinations, accounting for around 30% share in various frequently traveled destinations. Europe (excluding UK), US, and the UK accounting for 26%, 8%, and 6% share respectively in most frequent business travel destinations followed this.
  • 7. 6 Most frequent travel destinations Source: D&B Research Value-added services emerged as the most significant benefit, which SMEs derived from choosing a particular airline Value-added services emerged as the most significant benefit, accounting for around 39% share in various benefits that SMEs derived by choosing a particular airline partner. Interestingly, a significant majority of the share in various benefits derived from choosing a particular airline i.e. around 37% pointed out that they do not derive any benefit from choosing a particular airline. Free travel insurance, reward points/corporate discounts, and free access to lounge were the other benefits derived by choosing a particular airline partner. Benefits of choosing a particular airline Source: D&B Research Note: On cumulative basis Cost of travel, safety, and connectivity emerged as the three important parameters for SMEs for choosing a particular airline Cost of travel emerged as the topmost factor for SMEs while choosing a particular airline, accounting for around 53% share in the parameters, which SMEs consider while choosing a particular airline. This was followed by safety and direct connectivity, accounting for around 17% and 16% share respectively in factors for choosing a particular airline.
  • 8. 7 Parameters for choosing a particular airline Source: D&B Research Note: On cumulative basis Using the cheapest airline emerged as the most preferred means of managing business travel cost better over the next year Majority of the surveyed respondents i.e. around 62% of the respondents expect their business travel cost to rise in 2014. In line with this expectation, with an aim to control the business travel cost using the cheapest airline emerged as the most preferred means among the various factors for managing business travel costs. This was followed by using a travel agency to achieve deals and controlling the number of staff travel. However, lowering the class of travel and reducing conference/ exhibition travel emerged as the least preferred factors for managing business travel cost during the next year. Factors for managing business travel costs Source: D&B Research Note: Rank: 1 being the most preferred & 5 being the least preferred
  • 9. 8 Technology Related Trends Increased efficiency emerged as the key benefit of implementing technology To sustain in the ever-increasing competition, it is important for SMEs to embrace modern business practices, including adoption of technology. SMEs are gradually gaining awareness about its various benefits, however, high cost of execution and smaller size of business acts as a major hurdle in implementing technology. Our survey findings revealed that, around 33% of the SMEs rated improved efficiency as the major advantage, followed by improvement in quality and cost savings as the next major advantage, rated by around 30% and 22% of the SMEs surveyed. Benefits of technology implementation: % of companies Source: D&B Research High cost of technology adoption is a major hurdle in implementing technology According to our survey findings, around 39% of the SMEs rated high cost of technology implementation as the major hurdle, followed by their smaller business size, budgetary issues, and poor consultancy support services as the next major hurdles accounting for around 23%, 20%, and 18% of the SMEs surveyed in the Delhi cluster. Our survey results revealed that for SMEs across all income brackets regarded high cost of technology implementation as the major hurdle. Further, for SMEs earning income up to ` 10 mn, smaller business size emerged as the next major barrier rated by around 29% of the SMEs in this income bracket. Similarly, for SMEs earning income between ` 10 mn and ` 100 mn and between ` 100 mn and ` 500 mn, poor consultancy support services was the next major constraining factor in IT adoption. Moreover, for SMEs falling in the highest income bracket between ` 500 mn and ` 1,000 mn poor consultancy support services and high implementation cost both were ranked equally as the second major hurdle in technology adoption. Income-wise: Technology related challenges Source: D&B Research
  • 10. 9 In order to adopt the right technology for their nature of business, SMEs need to properly evaluate the available solutions, identify and prioritize areas of business operations that require IT investment and can lead to process improvement and cost savings. Few SMEs are aware about government’s assistance programs for IT implementation, which can aid them in adopting technology. Financing Trends Majority of the SMEs sourced funds from scheduled commercial banks (SCBs) SMEs are traditionally dependent on banks for obtaining finance for expansion purpose and meeting their working capital requirements. Even though there are various other funding institutions existing such as Private Equity (PE) and venture capital funds (VCF), they either lack awareness about the same or are not comfortable in availing finance from such institutions. There is resistance from SMEs to avail financing from such institutions, as they do not want PE firms to take control of their owned/family-run business. Our survey results revealed that, more than 80% of the SMEs operating in Delhi cluster obtained finance from scheduled commercial banks including public and private. Government institutions such as SIDBI (Small Industries Development Bank of India) emerged as the second major source of obtaining finance, followed by regional co-operative banks. Other sources of obtaining finance such as PE, VCF, and NBFCs (Non-banking Financing Companies) were not popular among the SMEs operating in Delhi Cluster. Further, around 47% of the SME’s surveyed revealed low chances of changing their funding institution in the next two years whereas 35% expressed moderate chances of changing their financing source. The remaining 18% conveyed high chances of changing their funding institution in the next two years. Majority of the SMEs expect loan repayment flexibility from financer Loan repayment flexibility garnered around 38% share in various additional services expected by SMEs from their financer. This was followed by SMEs expecting their lender to provide them information update on their industry and target market, accounting for around 30% share in various additional services expected from financer. Similarly, around 14% share was accounted by assistance from their lender on effective working management and rest 18% share was accounted by expecting tips from their lender to avoid loan defaults and on effective cash flow management. Additional services expected from financer Source: D&B Research Note: On cumulative basis
  • 11. 10 Merely 5% of the SMEs had a credit rating SMEs face problem in availing adequate finance from their lender, as banks turn apprehensive about their business credibility in the absence of a credit rating. This acts as a hurdle in their business growth. This is primarily because they do not want to expose their business operations details to a third party and attract more tax liability. Getting a credit rating can support the SMEs in negotiating the borrowing rates, gaining flexibility in repayment and strengthen their relationship with their lender. Further, they can utilize the ratings to boost their credibility with their business associates such as vendors, clients and consultancy or support services providers. Our survey study revealed that, merely around 5% of the SMEs surveyed in Delhi cluster had a credit rating. Impact assessment amid economic slowdown - Key challenges and re-de- signed business strategies Drop in client orders hit SMEs the most because of economic slowdown Our survey findings revealed decline in client orders as the major impact of the economic slowdown, as revealed by around 38% share in various impacts of economic slowdown. This was followed by around 29% share accounted by SMEs facing funding problems and around 19% share was accounted by SMEs considering putting expansion plans on hold in various effects of economic slowdown. Further, around 14% share was accounted by reduction in work force in various impacts of economic slowdown. Effects of economic slowdown Source: D&B Research Note: On cumulative basis Client retention emerged as the top priority for SMEs amidst economic slowdown SMEs are increasingly focusing on retaining existing clients by offering them a host of value added services to sustain in the economic slowdown. Our survey findings revealed that majority of the SMEs surveyed (around 49%) are considering client retention as their topmost priority. This was followed by around 28% of the SMEs surveyed are focusing on offering value-added services to their clients. Further, collaborating with other businesses and associations and diversifying into newer geographies emerged as the other important focus areas for SMEs.
  • 12. 11 Strategies to sustain business growth Source: D&B Research However, foraying into allied business lines was at the bottom of their priority list. More than half of the SMEs surveyed are moderately confident about their business growth prospects Majority of the SMEs surveyed i.e. around 52% revealed that they are moderately confident about their business growth amidst the economic slowdown by employing the business strategies as mentioned above. Further, in fact, around one- third of the SMEs are highly confident and optimistic about their business growth prospects. Optimism level of SMEs on growth prospects Source: D&B Research Conclusion More than 40% of the SMEs rated government’s assistance as the key factor that can enable businesses in the cluster to become more competitive As mentioned earlier, around 88% of the SMEs operating in Delhi cluster rated it as an attractive destination for conducting business. However, to enhance the competitiveness of the cluster, they expect more government support to enable their businesses to become more competitive, as rated by around 44% of the SMEs surveyed. This was followed by gaining access to latest technology as the next significant factor as ranked by around 40% of the SMEs, which can enhance the cluster competitiveness. As highlighted in the chart below, access to latest technology emerged as the key factor for enhancing cluster competitiveness for SMEs in the lowest income category earning up to ` 10 mn. For SMEs earning income in the range of ` 10 mn to ` 100 mn, government’s assistance was stated as the significant factor to enable them to become more competitive. Similarly, for SMEs in the income range of ` 100 mn to ` 500 mn access to latest technology was the single factor, which can enhance their competitiveness as rated by 100% of the SMEs falling in this income bracket. Further, for SMEs falling in the highest income
  • 13. 12 bracket between ` 500 mn and ` 1,000 mn, access to latest technology and government support both got equal weightages and emerged as key factors for improving the cluster competitiveness. Income-wise: Factors for enhancing cluster competitiveness Source: D&B Research Thus, majority of the SMEs in the Delhi cluster find it as an attractive destination for conducting business, primarily backed by ease of access to market and import-export benefits. However, high cost associated with marketing and implementation of technology emerged as the major bottlenecks in their business growth. Our survey findings, also revealed that majority of the SMEs are not even aware of the various prevailing government’s assistance programs for supporting SMEs in India. Thus, gaining knowledge about these programs and utilizing them can enable their business to become more competitive. The government is expected to play a significant role in increasing the awareness about its various schemes and facilitating the growth of SMEs in the Delhi cluster.