SMEs in Manufacturing: Meeting the Globalization Challenges

Rafaelita M. Aldaba Philippine Institute for Development Studies

26 August 2009, SUNSTAR FORUM 2009

Presentation Outline I. PreliminariesII. Review of government promotion policies

and programs for SMEsIII. Mfg SMEs: Structure, performance & growth

constraints IV. Networking activities & linkages creation of

SMEs: SMEs with other SMEs, with large domestic & foreign firms, with government - Survey: electronics, automotive, garments

V. How to increase competitiveness & deepen networking & linkages creation

I. PreliminariesSME Definition

Size Category

Employment-based

Asset-based

Micro 1-9 workers P3 million or less

Small 10-99 workers P3 -15 million

Medium 100-199 workers P15-100 million

Large 200 or more workers

P100 million & up

SME Distribution by Economic Sector

Employment Contribution by Sector

Number of Manufacturing Firms

Year MICRO % SMALL % MEDIUM % LARGE % TOTAL

1995 86,900 89 8,928 9 1,027 1 982 1 97,837

1999 113,861 87 14,611 11 1,137 1 1,322 1 130,931

2000 108,998 87 14,121 11 1,110 1 1,238 1 125,467

2001 108,986 88 12,627 10 988 1 1,194 1 123,795

2002 108,847 89 12,128 10 1,020 1 982 1 122,977

2003 112,458 87 14,448 11 1,256 1 1,687 1 129,849

2006 105,083 90 10,274 9 1,004 1 985 1 117,346

Manufacturing Employment

Year MICRO % SMALL % MEDIUM % LARGE % TOTAL

1995 271,699 22 227,949 18 137,384 11 615,874 49 1,252,906

1999 366,689 22 361,514 22 154,992 9 791,277 47 1,674,472

2000 354,025 22 354,328 22 150,734 9 730,127 46 1,589,214

2001 353,415 23 309,952 20 136,648 9 734,088 48 1,534,103

2002 353,255 24 294,487 20 143,003 10 676,443 46 1,467,188

2003 366,210 19 363,756 19 175,212 9 1,053,956 54 1,959,134

2006 259,664 19 252,931 18 132,322 10 727,984 53 1,372,911

Framework External Environment: Globalization – trade and investment liberalization, increasing

economic integration through bilateral & regional trading arrangements, regional/global production networks

Internal Environment: macro conditions; political situation; existing resources; plans, policies, programs, rules & regulations

Government SME plans, incentives, SME rules & regulations, policies on finance, marketing, technology, labor & HRD, trade, linkages creation

Firm characteristics: cost,Quality, delivery, engineering

SME Competitiveness

Creation of linkages among SMEs, domestic large corporations, MNCs

II. Government Policies & Programs

Department of Trade & Industry: 14 offices, 20 line bureaus

• Bureau of Small and Medium Enterprise Development: one-stop-shop to guide SMEs & policies and strategies for SME development

• Center for International Trade Expositions and Missions (CITEM): marketing SME exports

• Product Development and Design Center: product quality and competitiveness

• Philippine Trade Training Center: export/import management, entrepreneurial development and trade exhibition management

• Bureau of Export Trade Promotion: suppliers of quality goods

Department of Science and Technology (DOST): technology support

• Small Enterprises Technology Upgrading Program

Major SME Policies & Programs• 2004-2010 Medium Term Philippine Development

Plan: Credit, technology and marketing support for three million MSMEs

• SME Development Plan: credit provision and product development One Town-One Product (OTOP) Program

• 2002-2004 Philippine Export Development Plan: industry clustering electronics, auto parts & components, wearables,

coconut products, marine & aquatic products, food products, home furnishings, holiday décor & giftwares

SME Legislations• Magna Carta for Small Enterprises (1991) consolidate all government programs for the

promotion and development of SMEs into a unified institutional framework

creation of the Small Business Guarantee and Finance Corporation for SME financing needs (Small Business Corporation)

mandating all lending institutions to set aside 8% of their total loan portfolio to SMEs (6% for small and 2% for medium)

III. Structure, performance & development constraints

Mfg Subsectors Micro SMEs Large TotalFood Processing & Mfg 29.2 19.6 13.9 15.5Beverages 5.9 5.3 6.0 5.8Textiles 0.4 2.5 1.3 1.5Wearing Apparel ex footwr 15.6 4.4 2.8 3.5Industrial Chemicals 0.6 12.1 1.3 3.5Other Chemicals 1.0 6.9 5.3 5.5Machinery except Electrical 3.5 2.6 7.4 6.3Electrical Machinery 0.5 6.7 20.1 16.8Transport Equipment 2.1 4.5 5.4 5.1

Distribution of Manufacturing Value Added: 2003

Food: 20%, Chemicals:19%, Machinery: 9.3%, Transport: 4.5%, Garments: 4.4%

Labor Productivity: value added per worker (constant prices)

  SMEs Large  1998 2003 1998 2003Mfg 138518 96642 227484 210518Food Processing 301837 123584 280387 263167Food Manufacturing 339534 88777 190644 184526Beverages 229506 302242 572530 534620Textiles 53632 70061 70259 73736Wearing Apparel ex footwear 66332 39704 60506 45615Leather & Leather Products 49645 88294 32007 137220Furniture except Metal 47015 67225 65197 62127Industrial Chemicals 213573 326891 363740 419592Other Chemicals 225641 177398 734192 579624Nonferrous Metal Products 138169 164184 308695 481084Fabricated Metal Products 71582 108354 104123 82503Machinery except Electrical 75621 61009 229307 198292Electrical Machinery 143939 121099 215727 140728Transport Equipment 137312 153171 220591 374823Prof’l & Scientific Eqpt 98868 91245 54286 110198

Major Constraints to development• Lack of access to finance

not supply of funds but reluctance of private banks to lend to SMEs; government lending programs directed mainly to micro-enterprises & livelihood programs

• Lack of access to technology & skills many are not knowledgeable on technology & most

employ low level of technology; lack of common support facilities like testing centers

• Availability of inputs & supply chain problemshigh cost to access raw materials and inputs due to the

general problem of sourcing and transporting raw materials (general infrastructure and communication problems)

IV. Backward Linkage & Network Creation

Number Of

Subcontractors 

1994 1998 2003

M SME L Total M SME L Total M SME L Total

Manufacturing 384 1551 105 2040 544 1810 153 2507 7684 278 45 8006

Textiles 11 58 16 85 1 221 22 244 57 7 2 67

Apparel 179 586 34 800 85 347 37 469 2469 30 8 2507

Fabricated Metal 9 87 1 97 40 157 5 202 2433 20 1 2454

Elect'l Machinery 46 262 308 127 172 1 300 335 22 357

Transport Equip't 1 23 8 32 10 32 14 56 2 20 5 27

Subcontracting in Philippine Manufacturing

Manufacturing Sector

MSME sub- contracted work as % of SME value of output sold

MSME sub-contracted work as % of industry value of output sold

Total sub-contracted work as % of industry value of output sold

  1994 1998 2003 1994 1998 2003 1994 1998 2003

Manufacturing 3.57 1.79 0.72 0.81 0.49 0.16 1.81 1.58 0.72

Textiles 3.26 6.74 1.21 0.87 2.29 0.5 1.48 4.85 0.61

Wearing Apparel ex Footwr 29.67 6.91 1.29 10.74 3.15 0.52 18.56 10.52 0.89

Electrical Machinery 3.66 1.67 0.44 0.29 0.15 0.03 0.81 2.09 0.07

Transport Equipment 3.83 3.08 2.13 0.48 0.75 0.25 0.61 1.99 0.53

Paper and Paper Products 2.26 0.76 2.28 0.63 0.37 1.09 0.66 1.24 1.87

Other Chemicals 1.08 0.47 1.77 0.26 0.13 0.59 1.35 0.42 7.94

Other Nonmetallic Mineral Prods 1.82 2.39 1.05 0.94 1.21 0.68 0.95 4.47 1.41

Nonferrous Metal Products 4.23 0.07 1.44 0.1 0.01 0.16 15.97 19.46 7.85

Philippine Exports

• 75% total exports: electronics, machineries/transport equipment/parts, garments

• Phils a small exporter by regional standards, but exports of high-technology goods have grown rapidly

Linkages issues…. electronics• Limited backward linkages: subcontracting

activities are minimal• Limited participation in GPN: not gone beyond

labor-intensive assembly & testing, electronics exports highly concentrated in semi-conductors, exports are import-dependent, low value added

• Few local suppliers: unavailability/high cost of raw materials, unreliability of local suppliers, failure to meet required quality standards

What the Industry is doing• SEIPI: provides networking and linkage

development; maintains a supplier-member database for matchmaking purposes

• Reverse trade fairs: started by TI & Philips• Advanced Research and Competency

Development Institute: make Philippine high-technology companies more competitive by providing world-class professional training, advanced research, development and engineering & new venture incubation

• BayanTrade: supply chain management services, e-procurement helps in strategic sourcing & creating linkages across industries

Linkages issues … garments• lack of locally sourced quality raw materials • dependency on imported raw materials: fabrics, accessories• no integrated textile industry to support garments • textile millers: difficulties sourcing raw materials importing

80% of input requirements (polyester fiber, cotton, rayon, & acrylic)

• high cost of labor: Phils US$1.10/hr (double of what Vietnam & Bangladesh offer)

• slow productivity growth lack (decline) of investments• garments industry needs to move up the value chain and

work towards becoming OEM and OBM • lack of design capabilities and minimal linkages between

local designers and manufacturers

Linkages issues ….. automotive • Weak backward linkages: parts and components

remain underdeveloped with only 10-15% of parts locally sourced by assemblers

• SMEs lack of access to capital and technology, low productivity, unskilled workers, unavailability of raw materials

• Toyota, Mitsubishi, Honda, Isuzu, & Ford: only the latter has made Philippines its export platform for passenger cars

• Toyota’s GPN: manual transmission hub

ECOP-Big Enterprise Small Enterprise (EBESE) & Toyota

• a partnership among the Employers Confederation of the Philippines (ECOP), Department of Science & Technology (DOST), and Department of Trade & Industry (DTI)

• Toyota Cluster Development Program: improve SME productivity & competitiveness down to the suppliers belonging to the lowest tier of the auto industry - basic: 5S or good housekeeping, process flow, plant layout and human values related to productivity improvement. - advance: Just-in-Time (JIT) concept

• 52 SMEs trained 2005-2007

Firm 1: Plastic parts manufacturer Pilot Process1: Bracket Turn

RESU

LT

TRAVEL TIME: 24 sec./case TRAVEL TIME: 4 sec./case -> 86%

EXCESS PARTS: 276 pcs/shift EXCESS PARTS: 0 pcs/shift

Firm 1 Pilot Process 2: Case Turn Signal

RESU

LT

TRAVEL TIME: 26 sec./case TRAVEL TIME: 5 sec./case -> 83%

OUTPUT/HR: 109 pcs/manhour OUTPUT/HR: 126 pcs/manhour -> 16%

EXCESS PARTS: 218 pcs/shift EXCESS PARTS: 0 pcs/shift

BEFORE AFTER

• No designated racks and cabinets for the materials

• Provision of staging racks and cabinets

Firm 2: Tool & die makerFirm 2: Tool & die maker

BEFORE AFTER

Some of the non moving materials were sold

Funds were used for the repainting of the room and

cabinets

Firm 2 Firm 2

Provision of demarcation lines to enclose exclusive areas for machines, walkways and location of safety devices

AFTERBEFORE

Firm 2Firm 2

Provision of machine enclosure and safety goggles for operators.

AFTERBEFORE

Firm 2Firm 2

4 45 5 5

68

161414

10

16

1415

12 12

10

8 8 8 7 7

Firm 2Firm 2

EXCELLENTREVENUE!

400k 400k500k 500k 500k

600k

800k

1M

1.4M 1.4M1.5M

1 Toolset = P100,000

Firm 2Firm 2

V. Linkages Survey

Status  GarmentsAuto Parts Electronics Total

Total numberof firms that responded 9 9 5 23

SME networking with MNCs & large domestic corporations

SME networking with government Networking among SMEs

Metro Manila, Bulacan & CALABARZONSurvey Area

Company ProfileIndustry

Number ofEmployees

Annual Sales

MajorProducts Segment

%  Equity

LegalStatus 

AutoParts(9)

30-200 P11-220M  

Plastic parts, Precision tooling kitsStamped auto partsBrake and fuel tubesMag wheel caps

Mid-stream 1firm-100% foreign1 firm 60%- Japanese and 40% Filipino 7 firms-100% domestic

1 Partnership8 Corporation

Electronics(5)

40-120 P18-25 M Systems for time & attendanceEnergy saving devices, electronic scoreboards, electronic ballasts, Power on Delay, Wiring harness

Midstream- Downstream

4 firms-100% domestic 1 firm-100% foreign

Corporation

Company profile: garments Major Products

Number ofEmployees

Annual Sales Segment

%  Equity

LegalStatus 

Children’s wear,shorts, pants, T-shirts,Sweaters,Office Wears, UnderGarments(9)

4-175 P0.2M-82M

Downstream 100%Domestic

6 Corporations3 Single Proprietorship

Subcontractor Profile19 Subcontractors

Primary Customers

% of subcontracted work to total production

Number of years as subcontractor

10 auto parts & electronics

Large Domestic companies and MNCs

2 firms: 60-65%8 firms: 100%

8-27

9 garments Large Domestic companies and MNCs

7 firms : 100%2 firms: 50%

1- 31

(1) Networking with MNCs & large domestic corporations

• Main reasons for engaging in subcontractingLong term growth and profitabilityPartnership with MNC   Network of subcontractors   Participate in government programs   Knowledge of foreign market

• Critical factors in maintaining good subcontracting relationship CostProduct quality   Delivery  

SME Networking with MNCs & large domestic corporations (cont’d)

• Support expected from contractorsdesign supporttechnologyproduct development and innovation management & production

techniquesimproved networkinggarments: financial assistance

(2) SME networking with government• Support received from the government

participation in trade fairsworkers’ training (auto & electronics)one-stop shops providing information on export

market opportunities & raw materialsaccess to credit, financingtechnical assistance

• Effectiveness of government assistanceelectronics & auto: satisfiedGarments: not effective

(3) Networking among SMEs• Cooperation program in auto: EBESE (limited

to suppliers of Toyota Motor Phils)• Benefits from participation

exchange of information with other SMEs on access to market and best practices

SME visibility to MNCslink with other SMEs and in some cases establish

production agreements with them • Cooperation programs in electronics &

garments: weak

VI. What can government do Develop local suppliers/parts: increase value added of MNCs

Losing competitiveness in mass produced products Move up the value added chain, SMEs need government support

Design complete package for technical assistance, training, access to & availability of finance

Promote outsourcing/subcontracting arrangements Increase government subsidies on clustering activities & other

public-private partnerships like EBESE in automotive including technology upgrading & HRD programs

Improve all aspects of competitiveness crucial to create linkages, higher value added

Create & maintain SME database Government priority on SMEs that have GPN industries,

separate cottage industry microenterprises from SMEs, designate one agency for SME promotion