It is time for SMEs to search for new business opportunities post coronavirus. We know that many existing supply chain business models were outdated long before the COVID-19 pandemic presented itself; global value chains obsessed about cost effectiveness were knowingly exposed to political risks and those of natural disasters.
Translating this into new opportunity for supplying SMEs is still very unclear and requires considerably more than speculative academic research for those in emerging markets to take the risk of embracing innovative models. SMEs need to take small but decisive steps towards the new supply chain tendencies if they are to survive, where the political, legal, economic and technological environments present themselves as barriers for such a change.
Although the pandemic is still in full stride in Mexico, the economy must play its part as a key player in global supply chains if it is to survive the short-term crisis. But what of the future? MNEs are already wising up to this nightmare experience, and are busy taking decisions as how to shorten their global value chains, regionalize operations, implement contingency plans to gain more supplier and client flexibility, and diversify the risk of depending on vital international supply chain links too heavily. This is creating a changing world for SME supplying companies.
Opportunities are there for the taking, as regional MNEs with more innovative and flexible value chains will be looking for a wider base of suppliers in a bid to diversify risk. In order to be prepared for future contingencies, these potential clients will be willing to source through suppliers within trade agreement member countries. As an illustration, the fastest growing markets for UK exports since the start of the coronavirus outbreak have been emerging markets; Latin American B2B SMEs should take full advantage of this oncoming economic integration, by creating synergies with UK companies wishing to create supply chains in the region.
Government officials and companies alike must learn to pick up the pieces and develop new clusters, attracting MNCs to areas with skills on hand. The example of Lordstown in Northeast Ohio USA is a good example, where General Motors and South Korea's LG Chem Ltd. decided to invest in a $3.4 billion dollar venture to develop and make batteries for electric vehicles. It creates opportunities for spillovers, technology transfer and other cluster activity; the development of electric vehicles & logistics companies are also being set up nearby. This also is also an opportunity for regional SMEs in emerging economies; Mexican B2B supplying companies should identify such projects & see them as a chance to provide essential inputs for product development, manufacture or service provision where they are not available inside the cluster itself.
SMEs cannot compete with low cost, high-volume competitors with the ability to standardize products and carry heavy inventories. These competitors have economies of scale which allow them to bid for and provide large batches of inputs for production lines, which smaller companies cannot aspire to. The idea is to find the right competitive advantage: low volume, focusing on specific B2B market segments, using reciprocal teams, designing and producing custom products. This way, SMEs can provide a product and after sales service which their larger competitors cannot match, and their clients will value more. In Mexico, SME supplying companies in the automotive companies could establish this arrangement with anchor companies such as Mazda and Toyota, with newly established plants and now remaining in the country, despite higher costs entailed by new 40% minimum content and $16USD hourly wage requirements from the new USMCA agreement.
Another important advantage of integrating into established value chains is the ability to lower the need for working capital. SMEs are going to require supply chain finance to remain liquid during the heaviest economic crises in living history. Working with MNEs will help SMEs gain access to "supplier finance" or "reverse factoring", a means of receiving swift payment on invoices. MNEs are more likely to be concerned about the financial stability of their suppliers, and will be more willing to enter into these supply chain finance agreements. As SMEs invoice buyers a funding organization, such as the Inter-American Development Bank, assumes the risk of non-payment by the buyer, by providing financing to the invoicing provider.
SME's need to develop greater negotiation leverage in order to command greater terms of payment and obtain workable conditions in agreement with clients. Suppliers must be willing to make collaborative agreements with competitors, this way they can become stronger and collectively get clients to partake in certain key supplier functions: to pay for supplier inventory costs, to partake in supplier R&D, for example. As concessions in negotiations with clients, suppliers must be flexible and ready to offer to participate in more complimentary and after-sales functions. Suppliers must remember that gaining negotiation leverage is key; the further away from the final client one is in the supply chain, the less working capital one has for covering short term expenses and financing orders with one's own resources.
In conclusion, much work has to be done by SMEs to catch up with the new tendencies in international manufacturing supply chains; but they can work in incremental stages as the recession plays out; in the meantime, we know that some key investments by MNEs had been initiated before the coronavirus crisis hit, and will soon be completed once economic activities have initiated. In emerging economies, the infrastructural modernization will probably hasten at an increased rate in the medium term, as countries strive to avoid a repeat of the economic depression caused by a future pandemic. This will ensure a new playing field for SMEs, and will help position them as more competitive players.
Author: Andrew Davis, Lecturer in international business from Tec de Monterrey University with a track record undertaking private research projects, participating as a consultant for SMEs, conducting international promotion activities, export feasibility, and international market research.