SMALL firms are setting their sights on overseas markets - and not just to have new places to sell to. Driven by plentiful land and cheaper labour, they are also taking the decision to move their manufacturing and research and development operations to other countries in the region. And though these companies may differ in their market preference depending on their purpose for going overseas, many are contemplating foreign operations from the outset, says Tan Chor Sen, OCBC's head of emerging business. "As it is, there are young companies that are already overseas from day one," he says.
Mr Tan cites the example of a speaker manufacturing firm that had not only sold to Singapore at its inception but planned to distribute its products regionally. Today, the five-year-old company sells to more than 60 countries worldwide.
"This is something which is not unusual, but we're beginning to see more and more during the last two to three years," he says. "And we will see more as it goes, for various reasons."
Traditionally, small and medium enterprises (SMEs) expand overseas to seek new markets for their products. Their success can be measured by the amount of revenue that comes from outside Singapore.
A survey conducted by trade agency IE Singapore in May last year found that overseas revenue accounts for nearly three-quarters of overall sales for Singapore firms, compared with 65 per cent a year earlier.
More SMEs are moving their manufacturing overseas as well, Mr Tan notes.
"In the initial years you see them in China, but also you're beginning to see them in South-east Asia. There are companies which set up manufacturing operations here, but within a short period of two years they have to move because there's not enough land," he says.
And while local labour woes have hogged headlines recently, "sometimes it's not just labour, it's that they don't have enough land. So they have to move overseas," he adds.
In South-east Asia, Malaysia and Indonesia are popular choices for manufacturing operations.
Research & Development
Research & Development is another factor compelling firms to look overseas, Mr Tan says. "Four to five years ago, you hardly see anybody talking about R&D in China and India. But more and more, companies are more technology-driven and have more high-end products. You'll tend to see that they have some expertise located in China and India."
Though such research work can be carried out here, the pool of researchers in China and India is much larger.
Mr Tan says: "Nobody talks about R&D but there's this trend. Because SMEs can't afford the costs of doing R&D in Singapore - it's usually driven by manpower - they actually set up an equally deep R&D pool overseas at lower costs . . . Therefore you have small companies with very good R&D or proprietary business expertise without necessarily paying very huge costs to deliver those things."
With rising land and labour costs in Singapore, the trend of small businesses moving overseas has been accelerating especially in the past year, says Mr Tan.
An annual survey by DP Information Group last year showed that more than half of all SMEs reported overseas revenue in 2012, up 10 percentage points from a year ago.
Not only are more Singapore firms going overseas, more are also generating the bulk of their revenue from foreign markets.
Some 27 per cent of the 10,000 companies surveyed generated more than half of their total turnover from overseas markets last year, nearly double the 14 per cent which did so in 2011.
For smaller firms, the move overseas is beset with difficulties, since many lack the financial resources to do so.
Recognising this, OCBC set up a dedicated team in 2005 to serve the needs of emerging businesses, which it defines as those with a turnover of $15 million or less.
The bank, which claims it now serves one in two emerging businesses in Singapore, was the first in the industry to extend loans to one-year-old businesses in 2010.
The other local banks, too, want a slice of the action. UOB last month launched a BizTransact Account that aims to help small businesses with a turnover of $20 million and below cut costs by giving rebates on bulk payroll transactions and inter-bank Giro transactions, while DBS started a new banking account for business start-ups in 2011.
As SMEs evolve in their overseas strategies, the type of loans needed will change. While in the past a typical business loan could be used to jump-start overseas operations or to meet working capital needs, those with manufacturing and warehousing operations will require mortgage or commercial property loans, Mr Tan says.
R&D operations are relatively simpler, needing just a business loan to pay salaries, he adds.
Foreign-exchange risk is another issue those making a foray into overseas markets for the first time need to consider. This, Mr Tan reckons, can be mitigated with a "natural hedge".
For example, for a firm with manufacturing operations in Malaysia and paying overheads in ringgit while collecting revenue in US dollar or Singapore dollar, a loan in US dollar or Singapore dollar respectively should meet most of its cashflow requirements.
"People think you need a product for this. But sometimes you don't need one," Mr Tan says. "You just have to understand the needs of the business and match them."
How the loans are to be placed - whether out of Singapore or in the respective country itself - should also be thought through, for taxation and accounting reasons, he said.
"What do they actually want the end game to be as they grow bigger? For that they have to consider the company set-up, shareholding structures and loan arrangement," he says. "If you don't structure it properly with a slightly longer-term view, then as you grow bigger you will be constrained by the structure."
This is especially the case if the firm intends eventually to have external shareholders or to float the company, he says.
The good news is that emerging enterprises are a resilient lot. While between 25 and 30 per cent of businesses typically become dormant within the first year, the rate of failure for smaller SMEs has remained constant even during the financial crisis, Mr Tan notes.
"They are substantially more resilient during stress times. Basically they don't have the resources in terms of manpower and money, so they tend to be more careful in the way they do things," he says.
"And a lot of it is not just about them, it's also about their families and employees. It's closely knit, so there's a lot of resilience to want to make sure they can push through," he adds.
The small size of these firms also makes them more adept at changing directions when things do not work out or seizing opportunities which present themselves.
The numerous challenges of small businesses notwithstanding, business owners can achieve success if they have in-depth knowledge of the business and customers.
"Most of the bosses are on the ground, and they talk to the workers of their customers. Some of the success stories come when they know their customers' customers, and that helps, because then you can help your customer meet the needs of his customers," he says. "Ultimately the days of knowing your customer is not enough. These days, knowing your customer's customers will set you apart."