Home / Companies / News /  The retool imperative for small businesses to survive this crisis

The micro, small and medium enterprise (MSME) industry forms the backbone of India. Approximately 60 million MSMEs employ a workforce well over 110 million and contribute to about 30% of India’s GDP. According to the Bain-PRICE survey in 2018, more than 50% of all income earners in India are self-employed across income groups and therefore, the development of the MSME sector is critical to India’s growth aspirations.

However, this all-important sector has been plagued by a variety of structural issues, which have now been exacerbated by covid-19. The traditional challenges included limited access to finance, infrastructure bottlenecks, dearth of skills and innovation and regulatory constraints. For example, there is a massive credit gap in the sector of more than $500 billion, where 84% of the financing is via informal channels, which are expensive.

A sluggish advancement of communication and information flow has resulted in limited access to domestic and international markets while IP protection is poor, driven by lack of awareness. Finally, ease of doing business related to exports is low coupled with dispute resolution and high entry and exit costs.

Covid-19 has compounded these challenges and we estimate that 50% of MSMEs will be badly hit in varying degrees or forced to shut down.

Now, there are new challenges brought by this pandemic. The virtuous cash cycle that keeps MSMEs going has come to a screeching halt, making bankruptcy a real possibility.

The government has taken measures to ease liquidity, but that is only solving part of the problem. We may see defaults in loans, GST payments and payments to suppliers—all of which will have cascading effects. There has been a genuine softening of demand during the lockdown, especially in sectors like retail, travel and tourism and manufacturing.

Covid-19 is forcing companies to retool themselves for the future. This is especially true for MSMEs, who need to rethink their businesses, fundamentally to first survive this crisis and then recover over the next few quarters. The nature of imperatives will vary by sector, but there are five major themes that emerge.

Graphic: Mint
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Graphic: Mint

The first priority should be to apply strong handbrakes to reduce cash burn and reset the cost structure, including renegotiation of rents and contracts, rebalancing of senior team salary costs and plugging all discretionary spends.

Second, each MSME should think hard of which product lines they can add to their existing portfolio, both to survive during the crisis as well as to diversify, after the crisis.

Third, MSMEs should aspire to build a scaled exports portfolio to serve markets that are recovering faster, such as Europe and South-East Asia.

Fourth, several B2C MSMEs are aggressively participating in e-commerce platforms to leverage the 100% plus growth this channel has seen.

Finally, a large number of MSMEs are letting go of their offices (or at least reducing the size of their office premises) as covid-19 has forced them to adapt to the work-from-home model. This increases their agility, access to talent pools and opens up new business models in the post-covid era.

Deepak Jain, Ravi Swarup and Gaurav Nayyar are Partners at Bain & Company. Jain co-leads the firm’s India Advanced Manufacturing & Services. Swarup and Nayyar are leaders in the firm’s Consumer Products and Advanced Manufacturing & Services, respectively.

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