SME Insight

The small and medium enterprises segment has been a topic of intense deliberation among banks, financial institutions, industry and academicians. However, the paucity of authentic information on this segment has limited the estimation of value contributed by this integral constituent of India’s economy. Through this primary research undertaken by Dun & Bradstreet, India (D&B India), we attempt to add value through insights that have emerged from our study.

The research team initially began with the D&B India’s database, association member directories and trade listings. This database was further short-listed based on the criteria of being only manufacturing companies, having less than Rs 1,000 mn turnover and other parameters. These companies were contacted through various means. Of the responses received, 370 companies met the criteria set by D&B India, and have been profiled in the publication.

Of the profiled 370 companies, 332 were considered for the purpose of this quantitative exercise. Some key characteristics of this sample include:

Ownership pattern of these 332 companies include proprietary firms 8%, partnership firms 12%, private limited companies 58% and public limited companies 22%
The firms included are to a degree replicating the concentration of auto component manufacturers across the country, with maximum representation coming from the North and West. Around 40% companies are located in the North, 37% in the West, 18% in the South and 4% in the East
Around 43% of the companies are small scale, and 57% are medium scale on the basis of their investments in plant and machinery
Of the 332 companies, 254 or 77% of the companies are having a website and 309 companies have an email facility
Over 60% of the companies in the sample began operations during the 1980s and 1990s. Around 7% of the companies are relatively new which have begun operations post-2000
Around 61% of companies have single manufacturing facility while 22% operates 2 plants.

Key observations and findings are covered below.

The proportion of companies in the sample with a turnover above Rs 500 mn is high in the Southern and Western parts of the country. Around 15% of the companies from the South and 17% of those in the West fall in this bracket as compared to 8.5% in the North and 8.3% in the East. Around 90% of the auto component manufacturers in the East are small enterprises with a turnover less than Rs 250 mn.

Overall, around 41% of the companies have an income up to Rs 100 mn. Only 13% of the companies were in the turnover bracket of Rs 500 mn to Rs 1,000 mn, of which 58% are in the private sector while 35% are public limited companies.

Around 57% of the companies are supplying to OEMs and Tier I suppliers. In terms of ownership, private sector companies are the largest suppliers to OEMs and Tier I firms followed by public limited companies. About 77% of total proprietary firms and 55% of partnership firms in the sample are supplying to only OEMs and Tier I companies. Around 30% of the companies are supplying to both OEMs and the replacement market.

Regionally, the North, West and South based companies are supplying to all segments of the market, while the East based companies are largely supplying to the OEMs. The North and West based companies are the largest players in the replacement market.

Regardless of type of ownership, around 60% of the companies in the sample are operating on standalone basis, while the remaining are either into contract manufacturing or are ancillary units. Around 56% of these standalone companies are supplying to OEMs. Assessing in terms of ownership of these companies, over 70% of partnership firms, 60% of private and public sector firms, and 55% of proprietary firms are operating on a standalone basis.

Region-wise, over 50% of companies in the North, East and South are standalone companies while over 33% of the companies in the West are ancillary units.

Almost 67% of the companies in the sample are exporting their products; 7% of the companies are totally export oriented. Around 21% of the companies export more than 50% of their produce. The major export destinations are Americas and EU, with over 60% of the companies exporting to these countries. The regional distribution of these exporting companies show a high concentration in the North and West accounting for 46% and 35% respectively.

Nearly 90% of the exporting companies in the sample have quality certifications. The private sector companies constitute a large portion of these certified companies, accounting for 59%. Proprietary and partnership firms constituted just 2%. Ownership-wise, the private sector companies were most dominant among the exporting firms, accounting for 56%, followed by public limited companies (25%), partnership firms (10%) and proprietary firms (7%).

In this sample, around 16% of the companies manufactures engine parts, 17% manufacture body & chassis parts, 13% manufacture suspension and braking parts and 14% manufacture drive transmission & steering parts. Only 35% of the companies sell their products under a brand name. Among these brand conscious companies, the private limited companies dominate holding a share of 61% followed by public limited companies with 25%. Branding among proprietary and partnership firms is low at 5% and 9% respectively. Over 55% of the companies with brands have indicated exploring new markets both in India and abroad. Around 31% of these companies are drawing up plans for undertaking innovative marketing initiatives.

Only 11% of the companies in the sample have entered into joint ventures or collaborations, either with domestic or international companies. Some of these companies have multiple collaborations, while nearly 90% of the companies indicated having tie-ups with foreign companies in some form or the other.

The purpose for the collaboration varied, ranging from financial, strategic to marketing arrangements and technical tie-ups. Of the total companies in this basket, 57% have collaborated for technical purposes, while 13% have strategic alliances. The rest have marketing, production and financial tie-ups.

The companies were found to be operating on an average at about 75% of their capacity. Around 19% of the companies have a capacity utilisation of over 90%. These companies were mostly concentrated in the Northern and Western parts of the country. The private limited companies constituted 55% of all companies with above 90% capacity utilisation. On an average, the
South-based companies showed higher capacity utilisation compared to the other regions. They exhibit an average capacity utilisation of 77%. This was followed by the North with utilisation rate of 74%.

A noteworthy factor noticed from the sample was that the smaller the company the higher their capacity utilisation. The small companies, with investments less than Rs 10 mn, operated at 81% capacity, with the average capacity utilisation ranging around 77-78% for higher investments. Partnership firms showed higher capacity utilisation while public limited companies were the lowest.

The companies have exhibited growth of an average rate of 35% over the last two years. The North-based companies conveyed a higher growth followed by companies in the Western region. Private sector companies showed the most robust growth followed by the public sector. Furthermore these companies are confident of maintaining the momentum over the next two years. Around 22% of the companies are expecting the industry to grow at a rate of 10-20%, while 30% of the respondents are expecting the domestic auto component industry to continue growing at 20% and above for another two years.

The companies indicating future plans for diversification, capacity expansion, modernisation and marketing accounted for 68% of the total sample. Of these, a large number (66%) are planning capacity expansion. Modernisation plans were indicated by around 45% of the companies, while 14% were planning marketing initiatives. A little over 55% of the companies intend to extend their reach by making forays into new markets.

The most preferred source of funding among companies in the sample was the public sector banks. Nearly 66% of the companies preferred banking with public sector banks (PSBs) or nationalised banks for their fund requirements, followed by private banks and cooperative banks. MNC banks were funding only 1% of the companies. There were approximately 4% companies that have funded their business through internal resources.

In terms of availability of funds, some 7% of companies in the sample have claimed difficulty in acquiring funds. These are primarily North and West based, standalone companies, with a turnover of less than Rs 300 mn.

Infrastructure and lack of institutional assistance were cited as the key hindrances to growth for these SMEs. Only 35% of the companies gave a response to this query. Around 56% of the companies that have responded complained of lack of infrastructure with close to 50% of the companies with issues pertaining to infrastructure from the Northern belt. Around 35% of the companies complained of marketing issues. This issue largely emanated from Maharashtra, West Bengal and Haryana.

We hope that the fine points that have emerged from this study are useful for further deliberation.