the roles of small and medium enterprises (smes) to support the large industries in the context of m

8/8/2019 The Roles of Small and Medium Enterprises (Smes) to Support the Large Industries in the Context of m

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Malaysian Management Review

THE ROLES OF SMALL AND MEDIUM ENTERPRISES (SMEs) TO

SUPPORT THE LARGE INDUSTRIES IN THE CONTEXT OF MEngineering, Universiti Putra Malaysia Department of Mechanical and Manufacturing S MSAPUAN Derby, UK Derbyshire Business School, University of Derby, A H ABU BAKAR,

Dr D J SMITH

ABSTRACT

This paper studies the roles of the Malaysian SMEs

to support the large industries. The importance of

SMEs and the Malaysian government policy on SMEs,

especially in the use of local content, are

described. A case study of SMEs practice in the

automotive industries is presented. The case study

concentrates mainly on the Malaysian situation as

well as in the Southeast Asia and Pacific countries.

The latter serves as a comparison for the Malaysian

situation. The weaknesses of current SMEs Practices

in Malaysia and in advanced countries are also

discussed. Finally, some ideas for improving the

performances of SMEs in the Malaysian manufacturing

industries are suggested.

INTRODUCTION

The Malaysian economy has been one of the best

performers among the developing countries over the

past twenty-five years. It has been documented that

the annual Gross Domestic Product (GDP) great the

rate of 7 per cent during the period of 1971 to

1990. Malaysia has now become one of the more

advanced countries in the Third World, and has, in

recent years, experienced one of the highesteconomic growth rates at approximately 8 per cent

per annum. The economy moved from a

primary-commodity dependent sector to manufacturing

sector which accounted for approximately 60 per cent

of the total exports, 27 per cent of the GDP, and 18

per cent of the employment by the early 1990s. The

share of the manufacturing sector in the GDP keeps

on increasing, from 14 per cent in 1971 to 30 per

cent in 1993. To achieve the vision of a fully

developed and industrialized country by the year

2020, Malaysia requ ires an achievement of a

sustainable growth of output of 7 per cent per

annum. Thus, the manufacturing sector will be the

main thrust which is expected to grow rapidly atapproximately 40 per cent by the year 2020.

According to Meyanathan and Ismail (199 4), despite

the impressive performance of the manufacturing

sector, there are several weaknesses which include,

firstly, the narrowly -based industrial structure

such as a low level of industrial linkages, research

and development, and export diversification,

secondly, insufficient manpower training, and

thirdly, the lack of a vibrant SME sector.


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THE IMPORTANCE OF SMIs IN MANUFACTURING SECTORS

To energize the industrial sector, a country

requires the small, medium and large enterprises in

the manufacturing industries. These enterprises work

complementarily according to their specific

functions in the field of supply, production, sales,technical development, and maintenance and repair.

These functions can best be served by varieties of

sizes of enterprises. It must be emphasized at this

point that large enterprises need small enterprises

on economic grounds as suppliers or subcontractors

and purchasers of products and in many service

capacities (for example, repair and maintenance).

The implication of this fact is that an efficient

small and medium enterprises sector can be vital to

the economic efficiency of large enterprises and

could further contribute towards improving economic

relationships between and within industries, both

upstream and downstream in the various sectors.

A recent survey by the Department of Statistics formanufacturing establishments indicated that SMEs in

Malaysia constitute more than 80 per cent of the

overall manufacturing establishments. However, they

have accounted for 41.43 per cent of the total

employment and 36.23 per cent of the total value

added in the manufacturing sector.

MALAYSIAN GOVERNMENT POLICY OF SMEs

The development of SMEs will be enhanced by the

country industrial base that was too over - dependent

on imports of intermediate goods. Several special

programmes have been initiated by the government to

strengthen industrial linkages, particularly betweenlarge enterprises (LEs) and SMIs as suppliers of

components.

SMEs are defined as (Anon, 1996) :

Small and medium-scale industries are collectively

defined as manufacturing establishments with

shareholders' funds of less than RM2.5 million.

While small-scale industries (SSIs) are

establishments with shareholders' funds not

exceeding RM0.5 million while medium-scale

enterprises are establishments with shareholders'

funds between RM0.5 and RM2.5 million.

However, this definition only applies to small and

medium manufacturing enterprises and does not apply

to small and medium -scale non-manufacturing

enterprises.

The government has, under the National Development

Council (NDC), emphasized the various development

issues pertaining to SMEs and decided to implement a

new set of policy guidelines for further

development. These policies cover the followi ng four


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specific issues:

(i) SMEs should contribute to the development of a

balanced economy and a more equitable distribution

of income;

(ii) SMEs should complement and support the

large-scale, heavy and modern industries through anetwork of industrial linkages;

(iii) SMEs should increase produce quality and high

value-added products and services for the domestic

and export market and contribute to national output;

and

(iv) SMEs should increase their productivity through

the use of modern technology and management

practices to increase their competitiveness in the

export market.

Malaysia has put concern over SMEs (especially for

the Bumiputera) since 1950s, however, with mixed

result, since the government policy has a biastowards large e nterprises and Multi -National

Enterprises (MNEs). It is only recently in the

Second Industrial Master Plan that the policy on

SMEs became the main agenda for industrial

development.

Although the industrial sector is made up of a large

number of SMEs (over 80 per cent), they account for

only a small proportion of total manufacturing

employment and value added, while large enterprises

(LEs) have been expanding rapidly in terms of

employment, output and value added. It is very

unfortunate that SMEs traditionally concentrated in

such sub-sectors as food processing, wood products,light engineering, and paper and printing. Malaysia

has put more effort into broadening its industrial

base through the development of SMEs.

SMIs' PRACTICE IN SUPPORTING L ARGE COMPANIES: A CASE

STUDY OF THE AUTOMOTIVE INDUSTRY

In this paper, a case study of the roles of SMEs in

supporting large industries in the automotive

industry is presented. The automotive industry is

regarded as one of most important industries in an y

country. The paper covers the Malaysian situation as

well as the situation in neighbouring countries

which could be used as a comparison.

In the automotive industry, suppliers which mainly

consist of the SMEs, play a vital role in the

completion of an automobile. The role of suppliers

is as important as other functions (Dubensky, 1993)

such as planning, sales, marketing and purchasing,

and other positions such as manufacturing engineers,

stylists, quality controllers, engineering designers

and design engineers, as shown in FIGURE 1.


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Current Practice of SMEs' Support to Large

Automotive Companies in Malaysia

A study of the automotive industry in Malaysia

invariably refers to the pioneering company in this

field, namely, Proton. The situation could also be

comparable to other local manufacturers such as

Perodua and any other newly founded companies.Proton, a government supported 'giant' automotive

industry, was established in 1983 with the Heavy

Industries Corporation of Malaysia (HICOM) holding

70 per cent, Mitsubishi 15 per cent and Mitsubishi

Motor Corporation 15 per cent of the shares. Proton

Saga, based on Mitsubishi Lancer was launched in

1984. At that time, it had only 17 ve ndors supplying

228 components. In 1994, the number of suppliers

grew to 125 and the number of components being

provided was 1100 (Champagne, 1996c). These figures

show that the participation of local vendors

utilizing local materials, which are mainly SME s in

nature, is welcomed and encouraged by Proton.

Most of these SMIs are situated in the vicinity oflarge companies. In the case of Proton, the majority

of SMIs are situated within Shah Alam and the Klang

Valley. The advantages of this are that, the

components manufactured could easily be supplied and

efficient communication could be established

especially when a problem arises and requires

immediate attention. The aim of Proton is to

encourage the SMIs to develop local products

emphasizing the use of local materials and this

opened up job opportunities to the people. A special

department that was created by Proton is devoted to

the development of vendors and any issues related to

vendors.

Local content policy

It is reported by Champagne (1996c) that the local

content of components used in Proton cars has

recently increased to as high as 60 -62 per cent.

This figure has met the guidelines set by the

company in 1992. This 'local protectionism' is

practised in order to promote local materials and

products, involving the local people. In a country

with a relatively shallow industrial base like

Malaysia, what Proton has done is something to be

proud of. Despite its relative short history, it has

managed to increase the local content in automobiles

to over 60 per cent, when other assemblers are still

using around 30 per cent (Lall, 1995).

Current Practice of SMEs' support to large

automotive companies in Southeast Asia and Pacific

Region

The study of the vendor system in neighbouring

countries in Southeast Asia and the Pacific is

reviewed so that this could be compared with the

Malaysian need. Some countries in this region are


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producing cars, assembling cars using completely

knock down (CKD) parts while some countries such as

Singapore and Brunei do not manufacture cars but

rely on imports. TABLE 1 shows the involvement of

local content in the car industries in some

Southeast Asian and Pacific countries. From Table 1,

it can be concluded that most of the neighbouring

countries are also trying to utili ze local productsto the maximum possible. This could be accomplished

by the participation of local vendors which are

mainly SMEs in nature.

TABLE 1

Local content in Southeast Asia and Pacific

countries in automotive Industries

Countries Local manufacturing Reference

content

Australia 59 % (Champagne, 1997a)

Malaysia 60-62 % (Champagne, 1996c)

Philippines Not promising (Champagne, 1997d)

New Zealand 37-40 %, aiming at (Champagne, 1997b )

more than 50%

Vietnam 5 %, aiming at 40% (Champagne, 1997c)

Thailand Phasing out local (Champagne, 1996a)

contents, but

government encourages

the use of local

products

Indonesia Aiming at 60% (Champagne, 1996b)

COMMON WEAKNESSES OF SMEs PERFORMANCE IN SUPPORTING

LARGE INDUSTRIES

Weaknesses of SMEs Performance in Malaysia

It is pointed out that there are several weaknesses

of SMEs performance in Malaysia. These weaknesses

include the lack of industrial infrastructure within

the companies, the lack of finance to run the

companies and they require 'soft loans' to

facilitate their expansion and modernization (Anon,

1996). Other weaknesses include the shortage of

supplies of components from t he vendors for large

companies. The inventory level within the companies

is difficult to control and always inconsistent. The

vendors, sometimes, failed to meet the demand of

large companies, especially when their participation

was crucial. It is also obs erved that there is lack

of management within the SMEs.

Some SMEs were trying to implement the Just -In- Time


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(JIT) method in product delivery but this method was

not effectively implemented. Other companies failed

to solve major technical problems such as failure to

rectify major break -down of die castings.

Large companies, on the other hand, should also

improve the ways in which they handle the components

supplied by the suppliers. Any products that arespecifically meant for a particular component sh ould

not be used for other purposes although they might

have similar or identical functions. One obvious

example is, supposing in automobile development,

nuts and bolts are supplied by a vendor for fixing

the pedal bracket to the car body. The same bolts

and nuts could also be used to fix spoilers in the

car body. The large company should not take the

opportunity to exchange the parts simply because

they are identical and for convenience's sake. This,

of course, creates the problem of shortages of parts

supplied by the vendors.

Weaknesses of SMEs Performance in the UK for

Comparative Studies

Weaknesses of SMEs are found not only in Malaysia

but also in industrialized countries such as the

United Kingdom. In a recent study in the UK by

Sackett (1997) on SMEs, it was found that the owners

of good SMEs prefer investment in capital equipment

rather than organization change. They believed in

the uniqueness of their product /company and there

was a lack of enthusiasm for initiatives led by

government. Some SM Es are unaware of university

research funding assistance and when they develop

their own products, only 25% plan new manufacturing

processes - their product are not manufacturing

oriented.

Many UK SMEs are largely ignoring the human issues

in business/technology implementation and their

awareness of management tools and techniques is poor

- many could not find out what is available or its

appropriateness to their business. It is studied

that one in four SMEs does not believe that fast

growth is risky, even though it is a major cause of

company failure, and long standing programmer

initiatives have low penetration, e.g. most do not

have ISO 9000 accreditation.

STRATEGIES TO OVERCOME COMMON WEAKNESSES

The weaknesses of SMEs in Malaysia in supporting

large companies could be overcome in a number of

ways. Some of these suggestions could be adopted by

a company while some other suggestions could be

followed by other SMEs. Sackett (1997) suggested

that the SMEs need to have strong visionary

leadership, have a history of expansion even if only

slowly and erratically and have experienced/trained

management with vision. SMEs also need to have their

own products and serve a large number of customers.


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SMEs need to adopt a strategy which places grea ter

emphasis on the development of new, innovative

products offering tangible differentiation based

upon superior product performance. One possible way

of implementing such a strategy is to create

strategic alliances with other firms which can

enhance internal capability and/or market managementcompetency (Brickau, Chaston and Mangles, 1994).

It was proposed by Gunasekaran et al. (1996) that

SMEs need to have human skills and training,

strategic alliances, integrating functional areas,

networking and new production concept and

techniques. The SMEs also need to be involved in

exporting and joint ventures and should consider

market potential and competitiveness.

SMEs should also be implementing the concurrent

engineering (CE) techniques. This technique involves

the suppliers in development work and considers

issues related to manufacturing at the earliest

possible stage of design in order to save time andhence costs.

Berber and Attewell (1995) suggested a possible

solution to the way in which SMEs can benefit fully

from the use of CE. It is to form a temporary

dedicated team in a company which will be

responsible for the initial development of the

project. The aim of this team is to produce the

product design specification (PDS). After this, the

development will be carried on through the normal

departmental structure with the team leader

remaining in charge of the project. A further

proposal is that team members receive formal

training in the techniques such as Quality FunctionDeployment (QFD), Design for Manufacture and

Assembly (DFMA) and Failure Mode and Effect Analysis

(FMEA) as these methods are not fully understood.

Ranky (1994) also suggested that the SMEs who are

mainly suppliers for large companies need to be

involved at an early stage of design of a product.

Typically, suppliers know the most about their

product technology and process constraints.

Suppliers need to maintain communication throughout

the product life cycle with the rest of the large

company development team. This will help to improve

and develop the next stage more easily.

Ponticel (1994) is of the opinion that the SMEs who

act as the suppliers of large company must have the

capability to take over responsibilities for design,

styling, development, component sourcing, cos t and

weight management and Just -In-Time (JIT) delivery.

Original Equipment Manufacturers (OEMs) or large

companies need vendors or suppliers that are capable

of working with the team in design engineering and

manufacturing of a product.


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Clausius (1996) suggested that in the involvement of

SMEs as suppliers to the large company, the large

company actually needs a network of suppliers and

not a hierarchical pyramid of suppliers. This is

mainly because all the suppliers are important and

without one of them, the development of a product

might be delayed or impossible to carry out.

To overcome the weaknesses of SMEs, Lee - Mortimer

(1997) stressed that SMIs must strive harder to

change traditional ways. The main problem of SMEs as

identified by Lee-Mortimer is that SMEs are not able

to easily gain practical advice and information on

what and how to change. Therefore, to obtain these,

manufacturers need to talk to manufacturers and

small companies need to be kept informed about what

is happening in the wid er business world. They

should employ consultants who could advise them in

this matter. SMEs can learn from someone else's

success through visit schemes to the companies which

are already 'world class'.

CONCLUSIONS

From this study, it can be concluded that the roles

of SMEs ih the successful development of a major

product by a large company is very crucial. The

importance of local content in industries should not

be under estimated. The promotion of local content

in industries could be carried out by the SMEs that

supply the components to a large company. In order

to be competitive, the SMEs in Malaysia have to

overcome their weaknesses and adopt some of the

ideas suggested in this paper.

REFERENCES

Anon (1996). Productivity Report, National

Productivity corporation, Kuala Lumpur, Chapter 7,

pp 145-151.

Berbers P.R. and Attewell, B (1995). "The front end

design team: the half key house for SMEs",

Proceedings of the Eleventh National Conference on

Manufacturing Research, Leicester, UK, 12 -14

September, pp 698 -702.

Brickau, R. Chaston, I and Mangles, T (1994).

"Factors influencing the performance of SME food

processing companies within the single European

Market", International Business Review, 3, no.2,

165-178.

Champagne, R (1996a). "Thailand today and in 2000:

an automotive report", Automotive Engineering, 104,

no. 8,15-16.

Champagne, R (1996b). "Indonesia: an automotive

industry analysis - today through 2000", Automotive

Engineering, 104, no.9,21 -26.


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Champagne, R (1996c). "Malay sia: a look at the

future", Automotive Engineering, 104, no. 10, 23 -24,

Champagne, R (1997a). "Australia: An automotive

industry report", Automotive Engineering, 105, no.1,

18-22.

Champagne, R (1997b). "New Zealand: an automotive

report", Automotive En gineering, 105, no. 2, 28 -31.

Champagne, R (1997c). "Industry sees potential in

Vietnam", Automotive Engineering, 105, no. 3,40 -42.

Champagne, R (1997d). "The Philippines: cultivating

a components industry", Automotive Engineering, 105,

no. 4, 21-22.

Clausius, R (1996). "Plastics and the car,

Engineering, 237, no. 10, 56 -58.

Dubensky, P G (25-27 October 1993). "Simultaneous

Engineering of systems", Proceedings of the RAEWorldwide Passenger Car Conference and Exposition,

Dearborn, Michigan, pp. 73-84.

Gunasekaran, A, Okku, P. Martikainen, T and

Yli-Olli, P (1996). "Improving productivity and

quality in small and medium enterprises: cases and

analysis", International Small Business Journal, 15,

no. 1, 59-72.

Lall, S (1995). "Malaysia: industri al success and

the role of the government", Journal of

International Development, 7, no.5, 759 -773.

Lee-Mortimer, A (1997). "Neighbourhood watch",Engineering, 238, no. 1, 19 -21.

Meyanathan, S D and Ismail, M S (1994). Industrial

Structure and the Deve lopment of Small and Medium

Enterprise Linkages - Examples from East Asia,

Economic Development Institute of the World Bank,

Washington, D.C.

Ponticel, P (1994). "Supply side engineering",

Automotive Engineering, 104, no. 10, 105.

Ranky, P J (1994). Concurrent engineering and

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3, pp. 14-21.

Sackett, P (1997). "Evolutionary process",

Engineering, 238, no. 1, 13 -15.

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