Quick thinking can be key to SME survivalHigher wages, forex volatility force adjustments
06 Mar 13
Two manufacturers in the hard-hit textile/garment and jewellery industries are showing that small and medium-sized enterprises can overcome the lower purchasing power from the global recession, lower income from the baht's appreciation and higher cost from the Bt300 minimum daily wage by being fast on their feet.
For Full Thai Knitting Factory Co, an original equipment manufacturer (OEM) of sweaters, the increase in the minimum wage has hurt the company - and its industry - more than the strengthening of the baht, as 95 per cent of its raw materials are imported, Weera Charoensintaweekoon, a director of the company, said yesterday.
It does not buy products to hedge against currency volatility, he said.
The company is a 100-per-cent exporter, so the expensive baht is surely pounding its profit.
It had to revise its quotes to retail buyers last year using a conversion factor of Bt28-Bt29 against the US dollar instead of Bt30.
The uptrend in Asian currencies started last year and should continue this year. Local businesses cannot avoid the strong baht as long as capital flows into the country.
Quick adjustment will help SMEs to survive.
"We have chosen cost reduction by modifying and redesigning products. The advantage of being an OEM is that our design does not need to compare to competitors'. Retail buyers have also adjusted their lead time from two orders per year to every month to cope with the lower purchasing power and the behaviour of shoppers," he said.
The textile and garment industry is labour-intensive. The 400 workers at Full Thai Knitting account for 30-40 per cent of total cost.
The company uses subcontract workers in Tak's Mae Sot district, which is close to the Myanmar border, to maintain labour costs. It also has changed its role from a mass manufacturer to a niche player focusing on design and quality.
At Craft Art Co, a jewellery producer, the baht's appreciation is gnawing more on its profitability than the wage hike because it exports all its output, while imports make up only 20-30 per cent of its raw materials.
The company has reduced risk by buying foreign-exchange options because for every baht increase in the exchange rate, its margin will shrink by 3 percentage points, executive director Ponpoj Patarakitthamrong said.
Baht appreciation was also a problem in Thailand five years ago and the company made adjustments then to guard its profit.
The company uses a foreign deposit account for import transactions and a natural hedge for export transactions to reduce the risk from currency appreciation.
Ponpoj is not familiar with FX options, so he has set his risk appetite at Bt29 against the greenback to manage operating costs and shore up earnings.
Jewellery is a luxury purchase, vulnerable to economic slowdowns, so the company has to stress productivity and put a freeze on new hires. It does not replace workers who resign.
The shortage of skilled labour is a bigger headache than the higher wages.
Gold-price volatility is another negative factor for jewellery. The company has reduced the quantity of gold for making jewellery to less than 10 per cent from 30-40 per cent.
Sales this year should be on par with last year, he said without giving figures.
"Our customers are retailers, not individuals, so even if sales fall or rise, we have to try to maintain our profitability," he said.
Servicing loans is a challenge for SMEs, so financial institutions should lower interest rates. The survival of SMEs also hinges on assistance from banks.
Both executives said relocating production bases to neighbouring countries was not a solution yet. Even though labour costs in Myanmar are attractive, the incomplete infrastructure is still a handicap for doing business there, Weera said.
Ponpoj said it was not too late for SMEs to invest in Myanmar or neighbouring countries once the infrastructure and facilities are in place.
The two companies are customers of Kasikornbank, the leader in SME lending.
Patchara Samalapa, an executive vice president of KBank, said half of the 7,200 SMEs in the bank's portfolio were importers, 30 per cent exporters and the rest importers and exporters, so the strong baht did not make much of difference for its customers. However, only 250 customers purchase FX and other options.
The definition of an SME at KBank is a business with annual sales of Bt50 million to Bt400 million.
The garment/textile and jewellery industries account for 10-15 per cent of KBank's total credit portfolio of Bt486 billion. The bank is de-emphasising these industries because of the high risk.
However, the two companies are examples of those succeeding in adjusting, so KBank says it is ready to help them in terms of a credit line and risk diversification.