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Small firms banking on ties with MNCs

-The Star-

THE linkages between multinationals companies (MNCs) or large enterprises and small and medium enterprises (SMEs) are always important in marketing SMEs’ services and products. Needless to say, it’s a sound platform to help small firms expand abroad.

To be able to best utilitise the available network and linkages with MNCs, nothing beats homework and indepth knowledge as SMEs are generally required to fulfil the requirement or standards imposed by MNCs to become the latter’s suppliers.

Managing director of management and technology consultancy Innosol (M) Sdn Bhd Dr Umasuthan Kaloo says the linkages contribute towards both the production of marketable goods and services and marketing communications.

Chua Tiam Wee … ‘MNCs are outsourcing many non-core businesses to SMEs.’
“SME is usually the supplier to the larger enterprise although it is also possible for the roles to be reversed as in the case of large volume manufacturers of cars supplying to boutique car builders who make changes to the base product to appeal to wealthier or more discerning segment of the market,” he says.

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Generally, SMEs supply goods or services to an MNC which trades in global markets and the advantages include reduced costs and the opportunity to concentrate more effectively on their own core competencies.

“Through such collaboration, SMEs are forced to upgrade process and products to match the international standards of the MNCs, thereby upgrading the entire enterprise to global supplier status,” Kaloo adds.

In most MNC-SME linkages, the MNC partners supply considerable assistance to small businesses in the early stages of their relationship to upgrade their processes and products. This process will also typically involve transfer of technology in the critical technical and commercial aspects of doing business in international markets.

“SMEs could gain direct or indirect access to key export markets which typically include the more challenging and demanding markets of North America, Europe and North-East Asia,” he says.

However, Kaloo points out that this symbiotic relationship is not without risks to both parties.

“The MNCs run the risks of the SMEs integrating vertically to provide goods or services in direct competition with the MNCs. MNCs also run the risks of being saddled with non-competetitive SMEs thrust upon them as part of licensing agreements with local authorities,” according to Kaloo.

Meanwhile, SMEs run the risks of anti-competitive practices and of unequal bargaining positions when they form only one link in an established supply chain which is owned and managed by MNCs.

“MNCs have also been likened to global gypsies shifting their operations to lower-cost locations, when the economics of change favour such a move, leaving the local SME partners high and dry,” he says.

Notwithstanding these inherent risks, such relationships provide an important launching pad for SMEs with aspirations to export their goods or services.

“Forming linkages with MNCs is one of the more popular methods of bringing small enterprises in selected industry sectors more quickly up the leaning curve of innovation and marketing skills,” he says.

Dr Umasuthan Kaloo … ‘SME is usually the supplier …’
In this respect, he points out that agencies in Malaysia have facilitated the formation of linkages between multinational retail chain in recent years, like Tesco and Carrefour, with small agro-based enterprises for the supply of fresh food items.

In Thailand, the linkages with a number of the world’s leading manufacturers of automobiles have persuaded a large number of small engineering enterprises to adapt and develop world-class skills in the manufacture of cast metal items and parts and moulded plastic parts.

“Several hundred innovative procedures had to be learnt and practised to meet the global standards for the finished products set by the MNCs. Again, qualified Thai agencies and the MNCs provided the small enterprises with the training and development needed to develop these advanced skills,” he says.

Meanwhile, SMI Association of Malaysia national president Chua Tiam Wee says there are a lot of SMEs that have strong linkages with MNCs or larger companies in Malaysia and SMEs do realise that it is important to have such linkages to grow their business.

“The trend is that MNCs are outsourcing many of their non-core businesses to the SMEs, especially logistics, distribution, information technology and marketing works, so that they can concentrate on their core operation,” he says.

“Banks also outsource their marketing works of credit cards and loans to third-party marketers. Consumers can also pay their phone bills through third parties (SMEs) assigned by telecommunications companies.”

Countless Malaysian SMEs supply large electronic companies with parts while these MNCs provide training for SMEs with information about their products.

But getting in on the game is not easy. SMEs need to comply with some stringent requirements set by MNCs in terms of quality, delivery time and good service to gain the trust of MNCs and build their business rapport.

To help small businesses grow, Chua suggests that government-linked companies also outsource more of their non-core business to SMEs.

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