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[Viewpoint] A global path for SMEs

Expanding abroad is a proven option for SMEs, which have the ability to navigate new environments to gain profits.
Nov 07,1997
In Korea, the shorthand way of denoting the importance of small and medium-sized enterprises (SMEs) is “9988.” It means that SMEs account for 99 percent of the nation’s companies and 88 per cent of its workforce. Still, in terms of globalization, this main pillar of the Korean economy lags behind overseas peers. In the early 2000s, more than 40 percent of Korea’s total exports were shipped by SMEs. But since 2005, it has fallen below 40 percent.

Expanding abroad is a proven option for SMEs, which have displayed the ability to navigate new environments to boost profits. Those that export more than half their output enjoyed higher gains in their operating profit/sales ratio, according to a survey by the Small & Medium Business Administration and the Korea Federation of Small and Medium Business.

SME manufacturers in this export group saw their operating profit/sales ratio jump to 8.28 percent in 2008 from 3.05 percent in 2005. Meanwhile, domestic-oriented SMEs saw the figure rise only modestly over the same period.

While expansion to foreign markets creates its own risks, SMEs obviously miss potential opportunities if they do not at least consider exporting. So they first need to adopt a global mindset.

Among the aforementioned SME manufacturers, some of them realized at an early stage that their growth would be limited if they totally relied on domestic sales. Prime examples are Aurora World Inc., which became the world’s third-largest stuffed toy and gift manufacturer, and Simone, an original design manufacturer of high-end handbags.

Service firms have also booked themselves for global destinations. Bibigo, a popular Korean bibimbap (rice mixed with vegetables) chain, succeeded by tailoring itself to the tastes of global customers. Opening its first overseas branch in Beijing in August 2010, Bibigo plans to open 1,000 outlets around the world by 2015. Caffe Bene, meanwhile, will be the first Korean-owned coffee specialty group to open an overseas chain. It will soon open outlets in Manhattan.

Sectors for advancement are not confined to food. Hair salons Lee Chul Hair Kerker and Park Seung Chol Hair Studio, Korea’s first laundry and dry-cleaning franchise Cleantopia, optician shop Davich Optical and ink cartridge refill franchise Ink 1009 all have overseas outlets and plan to expand. The two hair salons and Davich Optical are targeting Shanghai; Cleantopia has plans for Beijing and Los Angeles; and Ink 1009 is considering Sydney and Istanbul.

For SMEs that may not be able to launch a full-scale overseas push, links with multinational companies could be used as an entry point. That approach would give them time to build up overseas exposure and credibility.

Telechips, which produces audio chips for vehicles, for example, supplies Hyundai Motor and Nissan Motor of Japan. Many Korean SMEs are concluding contracts with Germany’s BMW.

Cooperating with bigger companies and associations in overseas markets also enables SMEs to access markets as well as reduce direct costs and risks. Sewon Precision used an idle U.S. plant owned by Hanjin Corporation, saving 37 percent in storage costs, while Hanjin gained additional income for leasing the property to Sewon. When electronic component supplier Galaxia Device planned to advance into China, it learned about purchasing methods, cost-cutting ways on material costs and product diversification from the Center for Large and Small Businesses under the Federation of Korean Industries, a business lobby.

As for new industries and products, they require different approaches. Along with high marketability comes high risks. Therefore, cooperation among companies is crucial, starting at the early stage of overseas advancement.

In the high-speed electric vehicle sector, SMEs and large companies collaborated in developing key components of “Blue-On,” Korea’s first full-speed electric vehicle, with some 130 companies involved.

In the environmental sector, an agreement on cooperation in the green environment industry was signed between SK Energy, a leading local energy company, and the Korea Environmental Industry and Technology Institute and 10 SMEs to develop key environmental technologies.

Korea’s import-dependent components and materials industry can also expect win-win potential from close ties between related companies. Finished goods makers and components makers can jointly develop key components and materials to substitute for imports and raise the competitiveness of SMEs.

Hyundai Mobis, Korea’s top auto parts maker, built a technology test center equipped with advanced equipment in China and shared the technologies with its suppliers. As a result, in the early stage of developing components for large companies, SMEs can utilize the R&D infrastructure of large companies and boost synergies with these large companies.

SMEs can undergo difficulties while becoming global players due to a lack of information, weak brand power and a lack of overseas sales networks.

To improve their chances of success outside of Korea, the government should provide SMEs with information on markets and potential risks, while actively publicizing SME products as “Made in Korea” brands.

Yet the most important step is for SMEs to build a competitive edge on their own. They must continuously develop technologies through active R&D and upgrade these technologies to succeed in the global value chain.

When this key competitiveness is coupled with their experience and infrastructure, SMEs will have a better foundation for globalization.

*The writer is a research fellow at Samsung Economic Research Institute.

by Kim Jung-woo