The future of SMEs after Covid-19
Rafael Lemaitre is a partner at consultancy SIA Partners and Maria Garrido is the manager of growth and innovation
During 2019, we conducted (together with our friends of Changeist) extensive research on the long-term trends impacting small and medium-sized enterprises (SMEs) in the context of the GCC region. We visualised the possible futures of how the competitive landscape of these enterprises will look like in the next 10 years. Our scenarios accounted for multiple factors, such as the shift in the productivity curve, the rapid increase of economic growth, the rise of automation, the displacement of the workforce, the skills-gap and the future skills required, among many others. Unfortunately, none of our scenarios accounted for the major disruption of Covid-19, which no doubt will have tremendous impact on the SME sector.
SMEs are key players in the global landscape, especially in emerging economies. On a global scale, SMEs represent 90 per cent of businesses and more than 50 per cent of employment according to the World Bank. Worldwide, SMEs are broadly focused on the service sector which is characterised by low entry costs and low resource requirements. Nevertheless, there is also a huge heterogeneity of SMEs, as a result of different market conditions. For example, in the UAE, according to the country’s Ministry of Economy, SMEs represent more than 98 per cent of the total number of companies operating in the country, contributing towards 52 per cent of the non-oil GDP.
Entire sectors, such as hospitality, food and beverage, entertainment, tourism and travel, will have to be at least reshaped if not totally reinvented. These sectors constitute an important base of the economy of the GCC countries.
Covid-19 scenarios range from a deep-steep to an optimistic recovery
Scenarios for the world economy post-Covid-19, range from a deep-steep (L-Shape economic growth) to an optimistic recovery (V-Shape). Within the range, there are all types of possibilities as key variables are widely unknown, including virus containment, ripple and systemic effects of economic shutdowns.
We believe that regardless of the shape of the scenario, we will be experiencing a “new normal” where not only economic but also social behaviours will drastically change. This will comprise a change in social dynamics (i.e. social distancing, restricted public events/entertainment), values (i.e. support to local businesses, value added to consumers/users, impact on wellbeing), consumer behavior (i.e. different expenditure priorities, less disposable income, online over brick and mortar), international travel decline (i.e. quarantine while traveling inside/outside countries), among others.
Winners and Losers
In such a context and based on the changes of the five trends analysed, we have laid out a set of potential impacts that SMEs will face once all the dust settles and the world moves into the “new normal”.
In the short term, the focus for SMEs is to stay alive, through the capacity to react, act and adapt to the current situation. This implies identifying and adjusting to the changes not only from the customers’ preferences, behaviours and needs, but also from the suppliers, networks, employees, and those untapped.
For those SMEs that manage to navigate through the current crisis and stay alive, there will be new opportunities that could emerge in the long term.
Trend 1: Culture of entrepreneurship / Venture culture
· Venture capital culture has been on the rise
· Major successful exists have boosted the morale of entrepreneurs
· Young age of average entrepreneurs
· Large number of SMEs operating in the service industry, F&B, and traditional economic sectors
· Startups emerging are mainly from the service industry using “traditional” technology. Absence of deep technology in new ventures
Wild Guess #1: How the future of entrepreneurship could look like in the region after Covid-19:
· There will be new fields of play for SMEs and startups in health, wellbeing, agritech, in-home entertainment, cybersecurity, virtual reality, food, online delivery.
· VC appetite for traditional technologies and service platforms will be further diminished, prioritising deep-tech investments
· The entrepreneurship landscape of the region could take a significant step back
· Many SMEs will disappear, especially those in the most affected economic sectors that do not have solid digital capabilities or the ability to digitise parts of their business model
· Only the few SMEs or startups working with deep technology will be significantly better off
Trend 2: Education needs upgrading – New skills development
· Despite a shortfall of STEM education, GCC governments are investing massively in upgrading education
· New tertiary education offers new knowledge fields (e.g. MBZ University of AI, or 1 Million Coders Initiative), although low level of post-graduate enrolment will remain
· High reliance on expatriate human capital for delivering advanced levels of education
· Limited success of previous MOOCs and online distance learning platforms
Wild Guess #2: How SMEs will cope with the future skills required
· Covid-19 will fast forward the mass adoption of distance learning adoption
· It will accelerate automation and create demand for new knowledge and skills
· It will put even more pressure on advanced degrees and STEM education
· SMEs owners/founders will have to upskill and reskill themselves
· GCC Governments will accelerate the development of micro degrees and micro training, as well as push for developing technology skills and advanced degrees.
Major trend 3: Technology Uptake and 4th Industrial Revolution (4IR)
· 4IR industrial sector expected to be 20 per cent of GDP in 2030
· UAE and KSA (which together account for 70 per cent of technology spending in the region) are encouraging tech-driven business around internet of things (IoT), robotics, health, biotech, etc.
· High level of investment creates barriers for SMEs to enter these sectors
Wild Guess #3: How the future of 4IR for SMEs could look like
· 4IR technologies will take a big boost as work becomes more remote, less reliant on physical interactions
· As companies will look to de-risk global supply chains, decentralisation and the use of alternative manufacturing like 3D-printing will grow
· GCC governments will place even more focus on boosting 4IR agendas and policies
· Less funding will be available and financial pressure will increase the barriers for SMEs
Major trend 4: Financing availability for SMEs
· While new funding mechanisms like peer-to-peer (P2) lending, crowdfunding are still incipient in the region, they are gaining traction and SMEs are getting used to them
· Mega funding initiatives are being deployed in Abu Dhabi and Saudi Arabia, which are injecting capital into the ecosystem
· Sovereign wealth funds are looking to create local impact
· High levels of disposable income and saving capacity of GCC citizens and residents can become an influx for new funding mechanisms
· Low level of interest from traditional banks towards SMEs means there is limited funding mechanisms available
Wild Guess #4 – What the future of the new financial models for SMEs will look like
· Disposable income will be seriously impacted, reducing drastically new funding mechanisms.
· Investors will look to safer assets like gold and low risk investments
· GCC citizens and residents will prioritise cash availability and low-risk investments over riskier investments for example P2P for SMEs
· Financial stress on SMEs could increase the number of defaults on their P2P loans, eroding confidence in this mechanism
· Government-backed funding mechanisms for SMEs will allocate larger sums of capital, although many existing SMEs funded pre-Covid will most likely default on their loans, causing larger stress in the system
· The indifference of banks towards SMEs will only be intensified, creating more stringent lending criteria and banking requirements
Major trend 5: Regulatory evolution impacting SMEs
· Countries start moving towards long-term and flexible visa programmes
· Changing bankruptcy laws and incentives for setting up new businesses
· Introduction of VAT and additional taxes on the rise
Wild Guess #5 – What the future of regulation on SMES will look like
· New restrictions could be imposed on mobility of people given health concerns
· Governments to relax further long-term visas aiming to attract and retain residents
· New taxes could be introduced to fund healthcare expenditure
· Starting a business could be easier as governments will relax restrictions and reduce costs for SMEs
· While GCC-owned SMEs will keep having preferential treatment and incentives, governments could start relaxing further restrictions for non-GCC founders
· There will be more pressure coming from countries outside the GCC, who manage to offer better incentives and leaner regulation
In light of uncertainty, it is important to stabilise and explore. While there is no single path forward for SMES, a short recommended path of action is to stabilise exploitation activities while focusing on exploring new horizons:
Stabilise exploitation activities in the short-term
Leveraging local subsidies and support to resizing the organisation, reviewing core activities, revisiting the supply chain, stress-testing P&L, focusing on cash management, etc.
Focus on exploration activities in the medium and long-term
Analyse ways of pivoting through either changing the value proposition, delivery channels or targeting new customer segments
Re-shape components of the business model to capture different opportunities and navigate the challenges explained
SMEs that are able to successfully focus on both will be able to navigate the crisis, others will face the risk of disappearing.