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Key FindingsDun & Bradstreet India (D&B India), in association with British Airways reinforces 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: Chennai”. This report focuses on SMEs in the Chennai region and offers insights on the status and scenario of the SMEs operating in the Chennai cluster, in terms of their credit requirements and preferences, export and IT challenges, and various other parameters.

Following are some of the key findings from the study:

• About 53% of the respondents from this cluster are private limited companies, which are equally represented by manufacturers and service providers.

• Tax benefits, ease to market access and accessibility to bank finance emerged as the three major benefits of operating in the Chennai cluster.

• An analysis of the enterprises based on their revenues showed that more than half of the SMEs (52%) operating in the Chennai cluster earned annual revenues below ` 10 mn.

• Nearly 26% of the respondents’ exports revenue was in the range of 20% to 40% of their total income, while about 6% reported that their share of exports in the total income is in the bracket of 40% to 60%. Access to newer markets (for 72% of respondents) emerged as the biggest barrier while operating in the export markets.

• Quality improvement and increased efficiency were the two main factors driving SMEs to undertake technology upgradation. Simultaneously, the survey showed that high cost of implementation and budgetary issues are the two major deterrents for companies while adopting information technology tools.

• Public sector banks emerged as the major source of obtaining finance for the SMEs in the Chennai cluster.

• Flexibility in loan repayment (35% of respondents) and assistance on effective management of working capital (33% of respondents) are the key services that SMEs look for in a financier.

• Drop in orders from clients and increases in receivable cycles are the two major impacts of the current economic downturn.

• Majority of the enterprises are focussing on offering value-added services and on client retention to sustain their business growth amidst the current economic slowdown.

• Nearly 60% of the surveyed SMEs in Chennai are moderately confident on their business growth prospects.

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Chennai Cluster InsightsChennai is one of the biggest industrial and commercial centers in the country. It is also a major cultural and educational center. It is a leading industrial city in southern India with two major ports boosting its export capabilities. The city, also known as the Detroit of South Asia, is an automobile hub as it houses several global automobile and automobile component manufacturers. It is also an IT corridor and a major entertainment center in southern India.

Dun & Bradstreet has conducted a comprehensive study of the small and medium enterprises (SME) sector, based on primary research gathered from companies from the SME-oriented sectors. Approximately 60 companies from SME-oriented sectors were considered for the study. The analysis covers various business dynamics pertaining to operational structure, export performance, financing preferences, and IT implementation, among others. Companies with a turnover below ` 1,000 million in FY13 were considered for the analysis. The key findings of the primary survey are elucidated in this section.

Chennai SME Cluster - SME Perspective

Tax benefits and ease of accessibility to bank finance and markets turned out to be the key benefits of operating in Chennai clusterTax benefits emerged as the most significant benefit of operating in the cluster, followed by ease of accessibility to bank finance and markets. Interestingly, export promotion and available infrastructure facilities were among the least cited benefits of operating in the cluster.

Benefits of operating in a cluster

Note: Figures denote percentage of respondentsSource: D&B Research

Nearly 50% of the respondents who cited tax benefits as the major benefit of operating in the Chennai cluster were SMEs that recorded turnover up to ` 10 million during FY13. Surprisingly, none of the surveyed companies with income falling between ` 100 million and ` 500 million indicated that ease of access to bank finance and less bureaucratic hurdles as one of the benefits of operating in the cluster.

Features of the Chennai cluster

Proprietary firms fall in the lower income bracket and private entities in the middle income bracketThe Chennai cluster is primarily dominated by private limited firms as more than half of the surveyed firms were privately owned companies, while around 37% are proprietary companies. Partnership firms constituted 8% of the firms surveyed.

Further, the survey also revealed that 52% of the SMEs operating in the Chennai cluster recorded incomes up to ` 10 million during FY13. Around 42% of the SMEs fell in the income bracket of ` 10 million to ` 100 million. Furthermore, 82% of proprietary companies recorded incomes up to ` 10 million, and 56% of private limited companies reported incomes between ` 10 million and ` 100 million during FY13.

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Ownership Pattern Segmentation by nature of operation

Note: Figures denote percentage of respondents* Others include wholesalers and importersSource: D&B Research

The companies covered under the study in this cluster encompass varying operations such as manufacturers, exporters, importers, wholesalers, distributors and service providers. The companies are engaged in business activities across a range of sectors, including automobile components, IT services, plastic products, electronics products, equipment and machinery, engineering, surgical implants and instruments, and consultancy services, among others.

Of the surveyed companies, nearly half are manufacturers and more than one third are service providers. Further, around 5% of the surveyed companies are engaged in exports.

Exports Scenario

For a majority of the SMEs, export revenues constitute below 20% of their total incomeAmong the surveyed companies, 62% of the respondents reported that their exports revenues contributed less than 20% of their total income, while for 26% the respondents, exports contributed 20-40% to their total income.

Share of export income*

Note: Figures denote percentage of companies* Share of exports in total incomeSource: D&B Research

The survey results also revealed that merely 5% of the companies in the income bracket of ‘up to ` 10 million’ and ’between ` 10 million and ̀ 100 million’ had export income in the range of 80-100% of their total income. About 59% of the respondents with income less than ` 10 million and 64% respondents with income between ` 10 million to ` 100 million had export income less than 20% of their total income.

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Access to newer markets emerged as the top barrier while operating in exports marketsAccess to newer markets emerged as the biggest challenge (for around 72% respondents) while operating in the export markets for SMEs in the Chennai cluster, while about 68% of the respondents also indicated lack of information on buyers’ credibility as the next major obstacle. Nonetheless, the least cited concern was delayed payments from international buyers. Further, all the surveyed companies in the income bracket of ̀ 100-500 million identified difficulty in accessing new markets as also currency fluctuation as the major barriers while operating in the export markets.

Challenges in export markets (%)

Note: Figures denote percentage of respondentsSource: D&B Research

Technology Scenario

Improved quality emerged as the key benefit of technology, while high implementation cost a major deterrentQuality improvement and increase in efficiency turned out to be the two main factors driving IT implementation in the Chennai cluster. As per the findings, improvement in quality was stated as the biggest benefit (by more than 78% respondents), while increased efficiency emerged as the next best advantage of IT implementation (for about 77% respondents).

For 74% of SMEs earning income up to ` 10 million, quality improvement was the major benefit of implementing IT; while, process improvement was the major benefit for about 88% of SMEs with income bracket of ` 10 million to ` 100 million. Interestingly, 59% of the respondents which experienced cost reduction after adopting IT were those that generated income up to ` 10 million.

Benefits of Technology

Note: Figures denote percentage of respondentsSource: D&B Research

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The survey revealed that for more than three-fourths of the respondents (85%) high implementation cost is the biggest hurdle while implementing/upgrading IT. In addition, about 62% of the companies also faced budgetary issues while implementing/upgrading IT. Further, about 33% of the respondents viewed their businesses as too small for IT adoption.

The survey results also revealed that about 53% of companies which cited high costs as a major deterrent for implementation of IT were those that generated annual income up to ` 10 million. While poor consultancy support services was the second major hurdle for about 61% of companies in the income level up to ` 10 million, about 68% of the companies in the income bracket of ` 10 million and ` 100 million viewed non-availability of skilled labour as the second biggest hurdle while implementing/upgrading IT. Furthermore, none of the respondents with income between ` 100 million and ` 500 million faced non-availability of skilled labour while implementing IT.

Hurdles in implementation of technology

Note: Figures denote percentage of respondentsSource: D&B Research

SME financing preferences

PSBs and government institutions are the most preferred sources of funding for SMEsAs per the survey findings, public sector banks emerged as the major source of obtaining finance for the surveyed SMEs in the Chennai cluster. PSBs were popular among companies in the lower income range. Government institutions (like SIDBI, NSIC, etc.) and private banks emerged as the other most preferred options for sourcing finance among SMEs. However, SMEs in the Chennai cluster least preferred NBFCs and other financial institutions as a source of finance. Interestingly, none of the surveyed SMEs in the income group of ` 100 million and ` 500 million preferred regional co-operative banks as a source of finance.

Major source of funds

Note: Figures denote percentage of respondentsSource: D&B Research

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SMEs expect loan repayment flexibility and information on working capital managementFlexibility in loan repayment and information on working capital management were the top two additional services that SMEs look for in a financier so that they can better manage their financial liquidity. Requirement for flexibility in loan repayment gained around 35% share among the various additional services which the SMEs expect from their financiers.

Note: Figures denote percentage of respondentsSource: D&B Research

Majority of the companies in the income bracket of ‘up to ` 10 million’ and ‘between ` 10 million and ` 100 million’ (about 35% and 40% respectively) expect flexibility in loan repayment. Interestingly, none of the companies with income in the ‘ ` 100-500 million’ category expect loan repayment flexibility or information update on the industry/market and on tips to avoid loan default.

Business Travel Trends

SMEs make domestic business trips more frequently than international tripsAround 36% of the SMEs surveyed indicated that they make around 2-5 domestic business trips annually, while about 18% make around 2-5 international trips annually. Around 5% and 17% of the companies make more than five international trips and more than five domestic trips, respectively, through airways.

On the other hand, the survey revealed that more than 60% of the SMEs did not make even a single international business trip. Similarly, around 22% of the SMEs did not make even a single domestic business trip through airways.

Further, about 35% and 36% of the companies in the income bracket of ‘up to ` 10 million’ and ‘between ` 10 million and ` 100 million’, respectively, made around 2-5 domestic business trips annually. Nonetheless, around 32% respondents in the income bracket of ` 10 million to ` 100 million made at least one international business trip in a year.

Frequency of domestic and international trips

Note: Figures denote percentage of respondentsSource: D&B Research

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As per the survey, half of the surveyed respondents plan and book their flight tickets through a travel agent. Interestingly, only about 3% of the surveyed companies used mobile phones for booking their flight tickets. Furthermore, our survey revealed that more than 88% of the respondents travel through economy class, while around 10% travel through business class and the rest travel through first class.

Asia (excluding the Middle East) emerged as the most frequently travelled destination (for more than 86% respondents) for business purpose by SMEs, followed by US (for about 25% respondents). However, none of the surveyed companies made a business trip to Latin America.

Around 52% of the respondents allocated less than 2% of their company’s total budgeted expenditure for business travelOur survey findings showed that around 52% of the respondents allocated less than 2% of their company’s total budgeted expenditure for their business travel needs. Around 35% of the SMEs surveyed allocated 3-5% of their company’s total budgeted expenditure for business travel. Only around 3% of the surveyed SMEs allocated 11-15% of their total budgeted expenditure for business travel needs, while none of the surveyed respondents allocated more than 15% share.

Budget allocated for business travel

Note: Figures denote percentage of respondentsSource:D&B Research

About 48% and 44% of the SMEs with income between ̀ 10 million and ̀ 100 million allocated upto 2% and 3-5%, respectively, of their total budgeted expenditure for business travel, while all of the surveyed SMEs with income level between ` 100 million and ` 500 million allocated 3-5% on business travel expenditure.

Safety and travelling cost emerged as the top two criteria for choosing a particular airlineThe SMEs surveyed ranked safety as the most important attribute while choosing a particular airline. This was followed by travelling cost and availability of direct connectivity as the other two important factors. Surprisingly, amenities (such as airport lounges, ground services, in-flight services etc) and loyalty programs/reward points were indicated as least important criteria for choosing a particular airline.

Free travel insurance and value added services are the key benefits that SMEs derive from a particular airline partnerAs per the survey, free travel insurance emerged as the most important benefit while choosing a particular airline (as represented by about 81% respondents), while value added services such as assistance in hotel booking and car rentals was indicated as the second most important benefit (by about 76% respondents).

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Benefit of choosing a particular airlines

Note: Figures denote percentage of respondentsSource: D&B Research

Future plans and outlook

Fall in orders from clients hit the SMEs the most on account of the current economic slowdown Drop in orders from clients emerged as the most critical impact of the current economic downturn. This factor was followed by increase in receivable cycles and decrease in manpower, as the other major adverse impact of the slowdown. Of the SMEs that indicated drop in client orders as the major impact of the current economic downturn on their operations, 56% have a turnover up to ` 10 million.

Impact of economic downturn on SMEs

Note: Figures denote percentage of respondentsSource: D&B Study

Offering value-added services and retaining existing clients remain top priorities of SMEs amidst the current economic slowdownThe survey revealed that focusing efforts on offering value-added services and retaining existing clients will be the most important priorities for the SMEs amidst the current economic slowdown. Collaborating with other businesses and associations and diversifying into new geographies have emerged as the other important focus areas for SMEs.

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Strategies of SMEs amidst economic slowdown

Figs. denote percentage of responsesSource: D&B Study

Majority of the SMEs moderately confident on their business growth prospectsNotwithstanding the current economic downturn and the adverse impact on business, a significant majority of the SMEs (60%) are moderately confident on their business growth prospects, going forward. Further, a significant 37% of the respondents are, in fact, highly confident and optimistic about their business growth prospects.

Optimism levels of SMEs on Growth Prospects

Note: Figures denote percentage of respondentsSource: D&B Study

Of the SMEs which are highly confident on growth prospects, 50% have turnover between ̀ 10 million and ̀ 100 million. Of the SMEs that are moderately confident about their growth prospects, 58% have turnover up to ` 10 million.