June 27 is MSME Day—a day to celebrate and promote micro, small, and medium-sized enterprises, encouraging support and investment into this sector. Small business growth is incredibly important to global economic stability and sustainability. In honor of MSME Day we take a look at some of the challenges and opportunities available to small businesses in an age of digital reach and Western political protectionism.
What’s the definition of a small business?
The UN defines micro, small, and medium businesses as independent companies with fewer than 250 employees. In the United States, the definition is generally companies with fewer than 500 employees. However, depending on the industry the business is in, the definition of a small business may depend more on revenue than on staffing levels. The Small Business Administration in the US bases definitions on average revenue when compared to other businesses within the same industry.
The UN’s MSME day is meant to focus on businesses with fewer than 250 employees. These enterprises account for more than 60% of jobs worldwide, and 50% of global GDP.
The small enterprise is not just notable for its current contribution. The UN believes that targeted investment into this sector can help create sustainable global development.
Small firms are often the hatching ground of new ideas, since entrepreneurs often are motivated by a dream or an idea. Diversity is also one of the strengths of the small business sector: in the United States, more than a quarter of small businesses are minority-owned, roughly matching the population’s overall demographics. When looking at all sizes of business, this drops to only 17.5%.
Reliance Foundry is currently growing from a small to medium business. Vice President Shane Kramps sat down in honor of MSME Day to consider the challenges and opportunities for this sector in the current economic climate.
Small business growth and opportunities in the digital age
“Small business growth is niche-oriented compared to large corporations. This is especially true given new trends in information gathering,” Shane suggested. “One of the traditional advantages of mega-corporations are economies of scale. They often dominate in production of generic or bulk products. However, in the digital age, they also have big data. They’re able to do sophisticated trend analysis over many datasets.”
Faced with this asymmetry of information, Shane was not intimidated. “Certainly, these features offer large companies a competitive advantage. Yet focusing on the large data-sets can mean missing small niches. Small businesses are successful when they are sensitive and adept at reacting to smaller market spaces in order to compete.”
For this reason, Shane sees success in individual conversation with clients. “When you’re smaller, you have an advantage in creating bespoke, custom solutions to individual preferences. Innovation often comes from expressions of place or style. Finding the individual customer and working with them creates huge opportunities, specializations not available from a large corporation. We are able to create custom bollards for sites and municipalities because being responsive in that niche is our specialization. Our small business’ growth is based on this focus.”
The fates of large and small corporations are linked: Shane offered a vivid image to describe the interrelation between the two types. “In sci-fi movies like Star Wars, large battleships travel interstellar distances. Once they’re in place, they deploy hundreds of small, nimble fighters. Large corporations are like these battleships: they move markets long distances, but they don’t have the same ability to adapt in local situations. Smaller corporations are more agile: they can make changes in a single quarter. They’re able to move laterally without causing shock to stakeholders. Local responsiveness is where small and medium-sized businesses shine.”
Trends in global politics: protectionism in the West vs. expansion in the East
Paying attention just to a niche is not enough, even for a small enterprise. Current political and philosophical trends will have an impact, Shane noted. “This is a time of transition, and it’s hard to know exactly where things are going. Companies must pay attention to these global forces or risk being surprised by them.”
One of the trends Shane is watching is the Belt Road Initiative, or BRI. “In the West we are moving toward nation states and protectionism,” Shane continued, “while China, which has historically been less open, is moving toward freer, integrated trade. BRI is an investment strategy that engages a huge number of partners in the East, Russia, Europe, and Africa. There are abundant resources in this sphere, and a large market. With our market closing, the natural priority for China will be the BRI, which will affect North American supply chains and, in the end, where our prices will settle.”
Globalization in the 1980s and 1990s caused a retooling of North America’s entire economy. Many industries were challenged, and many businesses failed. “Now is another global readjustment. Successful small businesses need to be watching these larger forces. Tariffs are only one element of these changes: even without a trade war, supply chains are being disrupted.”
Shane offered several examples of how the global economy is retooling.
“One example is in shipping. Logistics costs will see near-term cost increases due to new emissions rules.” The International Maritime Organization is introducing new regulations for January 1st, 2020, prohibiting the use of fuel oil with a sulphur content above 0.50% m/m (mass by mass). Refineries are currently preparing to keep up with demand for these fuels through the winter, impacting their regular maintenance cycles. Though the regulations are a boon in that they limit the production of environmentally-damaging sulfur oxides, Shane noted that, “Ship owners need to brace themselves for higher fuel costs. Costs will eventually be passed on through the market.”
Additionally, container ships between North America and China have traditionally lowered effective round-trip costs by being full both ways.
In the 1990s, stock metal leaving on China-bound shipping containers was a blow to North American foundries: new demand for stock metal sent tonnage prices higher and quality lower. However, this metal export subsidized import costs.
Currently, Shane noted, “we’re developing an increasing imbalance between full incoming and outgoing containers. For a long time, we have been sending recycling to the East. These shipments are no longer wanted. The Philippines has started sending our recycling back.Empty containers returning overseas will increase shipping prices, and we’re less likely to find something to fill them during a trade war, or if China and other buyers give greater priority to BRI member countries.”
However, even with Western economies increasingly moving toward protectionism, global digital infrastructure still makes business visible outside of their small geographical region. “Where a business is headquartered does not matter. Distribution centers do matter: logistics costs are based on that location. Yet at headquarters, the important thing is hiring worldly employees who see global reach as an opportunity, rather than only looking in their back yard.” Shane paused to consider. “A small business with a well-defined niche provides a lot of value. The customers looking for that value may be spread over an enormous area. Large corporations are dependent on economies of scale; smaller enterprises must scale their market-reach to sustain their niche.”
How the digital age affects small business growth
Modern technologies are available to large and small businesses alike, as R&D continues and costs come down.
“Development lead times are changing,” Shane said. “Fast fashion takes advantage of modern computing to help go from the runway to items in a mall in just 15 days. With materials already in stock, it’s a quick matter of turning digital designs into prototypes and patterns that can move into production. Similarly, rapid prototyping through 3D printing is a huge factor in more traditional manufacturing sectors, allowing lead times to be cut for clients that have a clear vision.”
Computer-assisted design helps optimize both form and function. Specifications can be examined and changed many times before they are manufactured. This iterative design is cheaper in digital space. When creating metal products, once the design is agreed upon, finite element analysis of material properties lets an engineer model von Mises stresses. Computers, then, can make accurate predictions about real-world behavior and provide engineering guidance. Laser-guided machining can create prototypes in metal, even if the ultimate production of the part is through sand-casting, 3D printing, or some other method of production.
“A lot of the advances in the digital age help with how responsive small enterprises can be. We have expertise and specialization to make sure what comes through is high-quality, even while the processes are quicker than traditional bespoke creation.”
Reshoring in the modern age
If political trends continue, small businesses throughout the Americas may have new opportunities provided through ongoing reshoring. “Whether in the US, Mexico, or South America, there are opportunities for small businesses here,” Shane said. “The process of re-shoring might help some businesses with logistics and distribution, and other sectors might jump on increased manufacturing opportunities. It’s a trend worth watching as offshoring gets more expensive through supply chain imbalance and tariff imposition.”
Celebrating MSME Day worldwide
Political forces, environmental challenges, changing supply lines, and logistics costs all are again causing disruptions in “business-as-usual.” The post-globalization economic landscape is changing again. Investment into this sector supports the flexibility, adaptability, and entrepreneurial spirit of micro, small, and medium enterprises.
The International Trade Centre is hosting events in Switzerland, France, Germany and India in honor of the day. For those entrepreneurs and investors who won’t be able to make the offered events, MSME day is a good day to check in on the forces affecting small business growth in 2019 and beyond.