SMI DEVELOPMENT PLAN (2001 - 2005)

SMIDP
EXECUTIVE SUMMARY

ISBN 983-40884-1-8 Copyright Reserved Released on 30 March, 2002. For sale of copies and further technical information refer to: Small and Medium Industries Development Corporation (SMIDEC) 701D, Level 7, Tower D, Uptown 5, No 5, Jalan SS21/39, Damansara Uptown (Damansara Utama), 47400 Petaling Jaya, Selangor Tel Fax e-mail : : : 603-76608585 603-76601919 http://www.smidec.gov.my smidec@smidec.gov.my

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CONTENTS

Page

EXECUTIVE SUMMARY I. II. INTRODUCTION SMEs AND INDUSTRIALISATION IN MALAYSIA Structure of the Manufacturing Sector Definition and Profile of SMEs SMIDP Targets III. IV. V. ISSUES AND CHALLENGES REVIEW OF SMI POLICIES AND PROGRAMMES THE SMI DEVELOPMENT PLAN (SMIDP), 2001-2005 SMIDP Objectives and Strategic Thrusts Enterprise Development Technology Requirements New Initiatives Strengthening Existing Initiatives Broad-based Programmes VI. HIGHLIGHTS OF SMIDP PRIORITY INDUSTRY SECTORS Electrical and Electronics Industry Group Transport Equipment Industry Group Wood-based Products Sector Machinery and Engineering Services Group Secondary Focus Industry Groups VII. IMPLEMENTATION FRAMEWORK Strengthening the Role of Industry Associations Strengthening Private-Public Sector Collaboration Strengthening the Institutional Capacity of SMIDEC VIII. CONCLUSION 3 4 4 5 8 9 12 13 13 14 15 16 18 19 21 21 23 23 23 23 24 24 25 25 26

EXECUTIVE SUMMARY

SMI DEVELOPMENT PLAN (2001-2005)

EXECUTIVE SUMMARY
THE SMI DEVELOPMENT PLAN (2001-2005)
I. INTRODUCTION

1. The Small and Medium Industry Development Plan (SMIDP), 2001 -2005 aims to prepare small and medium enterprises (SMEs) for the challenges and opportunities arising from trade liberalisation, globalisation and advances in information and communications technology (ICT). The study inputs for the Plan examined the profiles, capabilities and competitiveness of SMEs and reviewed the assistance to SMEs in addressing the five key areas relating to markets, technology, skills development, finance and information. 2. The SMIDP complements the Second Industrial Master Plan (IMP2), 1996-2005 which is premised on the Manufacturing Plus-plus concept through the emphasis of knowledge utilisation and adoption of ICT, and identifies small and medium industries (SMIs) as central to the deepening of key industry clusters. Inter-firm linkages and synergies in industry clusters, assume important roles in deepening the industrial structure through backward and forward linkages. 3. The Plan reviews existing SMI policies and programmes as well as addresses the macro issues and challenges confronting SMEs. Following the IMP2, the Plan will target SMEs, especially those in industrial sectors with prospects for further growth. These are the: international clusters, which are basically foreign-investment driven, such as the electrical and electronics industry; policy-driven clusters, which are attempts at creating strategic industries for technology acquisition such as the automotive industry; and naturally-evolving or indigenous clusters, which are resource-based clusters such as the palm-based and wood-based clusters.

4. These three clusters account for more than 50 per cent of the output of the manufacturing sector. The other industry groups such as food, textiles and apparel, rubber-based products and traditional medicine and herbals are 3

sectors in which SMEs predominate. Despite the low level of inter-industry linkages in the other industry groups, there are opportunities available for export and creating niche markets for these industries. Under the SMIDP, SMI assistance programmes would target each industry group according to sector priorities.

II.

SMEs AND INDUSTRIALISATION IN MALAYSIA

Structure of the Manufacturing Sector 5. The electrical and electronics group, which comprises a third or more of the total output, value-added and employment, is the largest of the manufacturing sector, as shown in Table 1. In terms of manufacturing output, the second largest sector is the food sector followed by wood-based products, industrial and other chemicals and transport equipment. Wood-based products however, account for the second largest share of employment followed by textile and apparel and food industries. The sectors covered in this Plan account for more than 70 per cent of the output, value-added and employment in the manufacturing sector.
Table 1

STRUCTURE OF THE MANUFACTURING SECTOR

Sectors Electrical & Electronics Food Industries Wood-based Products Transport Equipment Rubber-based Products Textiles & Apparel Machinery Chemicals (Industrial & Others) Iron & Steel Basic Industries Fabricated Metals Non Metallic Mineral Products Plastics All Remaining Sectors Total Source: SMIDP Study Report, 2000. Output Value-added Employment Workers 478,983 99,850 214,451 51,004 69,275 113,063 29,766 30,016 24,651 71,288 45,995 75,353 145,138 1,448,833 % share 33.1 6.9 14.8 3.5 4.8 7.8 2.1 2.0 1.7 4.8 3.2 5.2 10.1 100.0 RM (mil.) % share RM (mil.) % share 107,644 34,294 18,660 15,326 9,780 9,635 2,799 16,133 9,560 9,013 7,646 7,099 25,850 273,439 39.4 12.5 6.8 5.6 3.6 3.5 1.0 5.9 3.5 3.3 2.8 2.6 9.5 100.0 24,704 4,921 6,080 4,268 2,884 3,180 1,067 5,427 1,850 2,852 2,923 2,708 8,675 71,539 34.5 6.9 8.5 6.0 4.0 4.4 1.5 7.6 2.6 4.0 4.1 3.8 12.1 100.0

Definition and Profile of SMEs 6. The SMIDP defines SMEs in the manufacturing and manufacturing related services as: Small and medium enterprises (SMEs) with annual sales turnover not exceeding RM25 million OR full-time employees not exceeding 150. 7. SMEs accounted for 93.8 per cent of all establishments in the manufacturing sector as shown in Table 2, and contributed: 27.3 per cent to manufacturing output; 25.8 per cent to value-added; 27.6 per cent of fixed assets; and 38.9 per cent of employment.
Table 2 PRINCIPAL STATISTICS OF MANUFACTURING SECTOR, 1996
% Share by Size of Firm Total Small No. of Firms Output (RM million) Cost of Input (RM million) Value-added (RM million) Workers (000) Salaries (RM million) Fixed Assets (RM million)
Source: SMIDP Study Report, 2000.

Medium 17.8 23.4 24.2 21.1 27.5 24.8 23.6

SMEs 93.8 27.3 27.8 25.8 38.9 33.0 27.6

Large 6.2 72.7 72.2 74.1 61.1 67.0 72.4

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

20,204 273,439 201,901 71,538 1,449 19,170 112,831

76.0 3.9 3.6 4.7 11.4 8.2 4.0

8. Of the total number of SMEs, small enterprises comprised 76.0 per cent, while medium companies accounted for 17.8 per cent of all manufacturing establishments. In terms of manufacturing output and employment, small enterprises accounted for 3.9 per cent and 11.4 per cent, while medium firms contributed 23.4 per cent and 27.5 per cent respectively. Majority, or 85 per cent of the small establishments generated less than RM5 million in output annually and employed less than 25 workers as shown in Table 3. 5

Table 3 NUMBER OF FIRMS BY OUTPUT AND EMPLOYMENT, 1996

No. of Workers Output (RM) <25 Less than 5 million 5,000,000 to 6 million 6,000,001 to 7 million 7,000,001 to 8 million 8,000,001 to 9 million 9,000,001 to 10 million 10,000,001 to 15 million 15,000,001 to 20 million 20,000,001 to 25 million More than 25 million Total
Source: SMIDP Study Report, 2000.

25-50 1,987 75 46 51 34 23 127 22 20 80 2,465

51-75 557 81 46 61 48 42 82 40 37 85 1,079

76-100 234 45 28 66 31 29 112 29 38 153 765

101-125 87 28 27 22 18 11 95 47 18 82 435

126-150 26 16 7 13 23 18 72 42 13 106 336

>150 56 14 40 26 18 35 193 154 149 1,254 1,939

Total 15,989 309 210 255 182 164 705 341 280 1,769 20,204

13,042 50 16 16 10 6 24 7 5 9 13,185

9. SMEs are found mainly in textiles and apparel, food, wood-based and fabricated metal products sectors as shown in Table 4. The SMEs in woodbased products provide the largest employment share followed by food, textiles and apparel, fabricated metal products.
Table 4 DISTRIBUTION OF SMEs BY SECTOR, 1996 Sectors Textiles & Apparel Wood-based Products Food Industries Electrical & Electronics Machinery Rubber-based Products Transport Equipment Fabricated Metal Products Plastics Non Metallic Mineral Industries Chemicals (Industrial & Others) Iron & Steel Basic Industries All Remaining Sectors Total
Source: SMIDP Study Report, 2000.

Number of firms % share 17.5 15.6 15.3 3.2 5.6 2.2 2.2 11.9 5.3 3.7 2.3 1.9 13.2 100.0

Value-added % share 5.2 13.3 16.3 7.7 4.1 5.7 2.8 7.9 8.4 4.7 10.1 2.4 11.3 100.0

Employment % share 8.8 20.3 12.6 7.5 4.3 5.6 2.6 8.4 8.4 4.3 2.9 1.7 12.7 100.0

10. Highlights of the performance of SMEs during the period of 1993 to 1996 as shown in Table 5 are: Gross output attained by SMEs grew by 11.1 per cent per annum, while that for large scale enterprises (LSEs) grew by 21.6 per cent per annum; SMEs are losing labour at a rate of 1.3 per cent while employment by large firms increased by 17.5 per cent per annum, suggesting that the main contribution to growth is from capital rather than labour;

Table 5 SME PERFORMANCE AND PRODUCTIVITY INDICATORS, 1996 CAGR 1993-96 (%) SMEs Production Indicators Gross Output (RM mil.) Inputs (RM mil.) Value-added (RM mil.) Employment Indicators Workers (000) Salaries (RM mil.) Salaries/Worker (RM) Unit Labour Cost (RM) Labour Productivity Gross Output/Worker (RM) Value-added/Worker (RM) Capital Productivity Fixed Assets/Firm (RM000) Output/Fixed Assets Value-added/Fixed Assets Capital-Labour Ratio Fixed Assets/Worker (RM)
Source: DOS and SMIDP Study Report, 2000.

Large

Total SMEs Large Total

74,649 56,128 18,521

198,790 145,773 53,017

273,439 201,901 71,538

11.1 17.4 -2.2

21.6 19.2 29.5

18.3 18.7 17.4

563,596 6,326 11,224 0.08

885,238 12,844 14,509 0.06

1,448,834 19,170 13,231 0.07

-4.9 1.9 7.2 -8.3

13.2 26.0 11.3 3.6

4.6 15.6 10.6 -2.3

132,451 32,862

224,561 59,890

188,730 49,376

16.9 2.9

7.4 14.4

13.2 12.3

1,643 2.40 0.59

65,143 2.43 0.65

5,585 2.42

19.7 -1.5

2.9 1.7 8.2

23.6 0.7 -0.1

0.63 -13.2

55,256

92,279

77,876

18.6

5.7

12.4

Labour productivity or output per worker in SMEs was less than 60 per cent of the level attained by large firms; and Average unit labour cost of SMEs at RM 0.08 exceeds the RM 0.06 achieved by large firms.

SMIDP Targets 11. Based on the projected real Gross Domestic Product (GDP) growth of 7.5 per cent per annum and manufacturing sector growth at 8.9 per cent per annum of the Eighth Malaysia Plan, the rate of growth of SME output is projected at 10.1 per cent per annum, while value-added is expected to grow at an annual rate of 10.4 per cent during the SMIDP period, as shown in Table 6.
Table 6 TARGETED PERFORMANCE OF SMEs, 2001-2005p CAGR 1996-2000e (%) 6.0 3.7 -3.3 9.6 7.2 SMIDP 2001-05p CAGR (%) 10.1 10.4 1.0 9.0 9.3

1996

2000e

2005p

Gross Output (RM million) Value-added (RM million) No. of Workers (000) Output per Worker (RM) Value-added per Worker (RM)
Source: SMIDP Study Report, 2000. Note:e: estimate p: projection.

74,649 18,521 564 132,451 32,862

94,270 21,391 493 191,293 43,407

152,656 35,081 518 294,703 67,724

12. Gross output of SMEs is anticipated to increase from RM94.3 billion in 2000 to RM152.7 billion in 2005. Value-added will increase from RM21.4 billion in 2000 to RM35.1 billion by the end of the SMIDP period. The SMIDP will stimulate productivity gains in terms of value-added per worker that will arise from higher capital intensity and skills enhancement during the SMIDP period.

13. During the period 2001-2005, average output per worker of SMEs is targeted to increase 1.5 fold from RM191,293 in 2000 to RM294,703 in 2005. Similarly, value-added per worker is forecasted to increase 1.6 times over the next five years from an estimated RM43,407 per worker in 2000 to RM67,724 per worker by the end of the SMIDP period. The performance of the manufacturing sector will continue to be driven by the electrical and electronics sector, which is dominated by multinational corporations (MNCs). SMEs supporting this sector are to be found in the plastics, machinery and engineering services groups, which also support the transport equipment sector. As tooling is required in all sectors of manufacturing, the tool and die industry under the machinery and engineering services group will be promoted as a strategic sector that will enhance inter- and intra-industry linkages.

III.

ISSUES AND CHALLENGES

14. To achieve the objectives of the SMIDP, Malaysian SMEs will need to respond swiftly to the new challenges that are changing the business environment, both domestically and globally. These include: intensified global competition: Multilateral and regional trade and investment liberalisation policies have made markets more accessible and competition among local producers more intense. In order to remain competitive, SMEs will have to achieve economies of scale by focusing on supplying to international markets. With resource limitations, assistance must be provided to SMEs to enable them to capitalise on new trade opportunities and avoid loss of markets that could arise from trade liberalisation. Timely market intelligence and the ability to compete on the basis of quality, cost and speedy delivery (QCD) will be the critical success factors in a competitive global trading environment; new emerging technologies: With competitiveness being increasingly determined by leading edge technologies, it is crucial that Malaysian SMEs rapidly develop their capacity to adopt and adapt appropriate technologies. The QCD requirements are pressuring SMEs to be competitive and flexible. To be part of a global supply chain, Malaysian SMEs will need to upgrade their ICT capabilities as global companies have begun sourcing their intermediate goods and services from specialised Internet-based business-to-business (B2B) community portals. B2B systems are presently the fastest growing segment of the electronic business (e-biz) market and are expected to remain so in the medium term; and 9

changing export competitiveness: While Malaysia has performed very well in the export market, competition from other producers, especially from lower labour cost centres in the region, is expected to erode Malaysias market shares. The future would clearly lie in shifting to higher value products with higher knowledge content. SMEs would need to keep up with such trends and develop the capability to supply the larger firms or multinational corporations, as they move to the high end products. In the case of domesticoriented industries, the challenges lie in modernising the SMEs to adopt the requisite standards to access export markets. SMEs in such sectors need assistance to enhance their capacity to respond effectively to market opportunities.

15. Besides the macro challenges, SMEs are also confronted with several issues which are affecting them to be competitive, efficient, and resilient: limited capability to meet the challenges of market liberalisation and globalisation: Most SMEs are dependent on the small and protected domestic market which deters them from upgrading their technological and management capabilities. This limits their ability to meet the specified manufacturing standards of large-scale industries and MNCs. On their own, SMEs are less able to penetrate export markets as the transactions and information costs involved are high; limited capacity for technology management and knowledge acquisition: SMEs will need to acquire critical knowledge and skills in order to remain competitive. Technology and knowledge investments have provided companies with significant competitive edge. These will ensure their capabilities to monitor and respond to new developments and opportunities in a timely and effective manner. Content provision is still lacking in many areas and is costly for SMEs to acquire on their own; low productivity and quality output: Opportunities for SMEs to be suppliers to large firms and MNCs are very much dependent on the technological capability and ability to meet specified manufacturing standards in terms of quality, cost and speedy delivery. SMEs need to upgrade their productivity on a continuous basis through automation in order to increase efficiency and lower product costs;

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shortage of skills for the new business environment: The continuing dependence of SMEs on foreign labour, delays the investment in automation, skills upgrading and knowledge acquisition, which are critical to long-term competitiveness. Despite increased funding allocation for industrial training institutes and skills development centres, the supply of skilled labour is still scarce, resulting in high staff turnover at the enterprise level and impeding output expansion. Increasing supply of skills is the only solution in the long run. There is a need to inculcate a training culture among SMEs and to improve the management capability of enterprises. The transition to the knowledge-based economy would require SMEs to create an environment for continuous learning; limited access to finance and capital, and the infancy of venture funds in initial or mezzanine financing: SMEs traditionally finance their operations through own savings, loans from family members and friends, as well as supplier credits. New start-ups, face difficulties in securing credit, as they have built little collateral or track record. The solution lies in improving access to institutional credit for SMEs. The venture capital industry is not sufficiently developed to spur the emergence or creation of new enterprises generating wealth from knowledge-based activities; high cost of infrastructure: The majority of SMEs are still located on land not designated for industrial use. The dispersed pattern of SMEs has impeded the full realisation of synergies in the industry clusters. There are also the additional difficulties of providing common user facilities thus affecting the ability of SMEs to comply with requirements of their customers; and general lack of knowledge and information: Cutting across the various issues is the underlying basics of access to information. The ability to seek information and apply it in their business operations helps SMEs to be efficient in the new business environment. SMEs thus, need a referral centre to which they can turn for information and advice on the various areas concerning their operations.

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IV.

REVIEW OF SMI POLICIES AND PROGRAMMES

16. SME policies and programmes introduced thus far are aimed at providing assistance to SMEs. Public sector incentives for SMEs comprise four basic instruments as shown in Table 7: tax incentives aimed generally at stimulating investments; grant assistance which forms the basis of many SMI or special purpose programmes; loans, credit and equity participation; and infrastructure and supporting services.
Table 7 EXISTING PUBLIC SECTOR INCENTIVES FOR SMEs
Tax Incentives Pioneer Status1 Investment Tax Allowance (ITA)1 Reinvestment Allowance (RA)1 Double deduction of expenses own incurred on brand advertising, export promotion, export credit insurance premiums and research and development1 Source: SMIDEC. Not restricted to SMEs. Grant Assistance Industrial Technical Assistance Fund (ITAF) Skills Upgrading Programme Technology Acquisition Fund (TAF) 1 Commercialisation of Research & Development Fund (CRDF)1 E-Commerce Grant Factory Auditing Scheme Loans, Credit & Equity Participation Minimum Lending Guidelines for SMEs Government-Funded Financing Facilities Credit Guarantees for SME Borrowers Equity Financing and Venture Capital Infrastructure & Supporting Services Infrastructure Development Grant Supporting Services: - Technical and business advisory clinics or briefings - Information dissemination and promoting awareness - Product displays and business matchings - Promotion of exports by SMEs

17. These incentives have been structured into broad-based programmes that are designed to strengthen SME capabilities in the areas of finance, technology acquisition, skills upgrading, market and infrastructure development. The main programmes are: Industrial Linkage Programme (ILP) to promote and develop local SMEs to become reliable and competitive suppliers of critical parts and components and services to leading industries; Global Supplier Programme (GSP) to enhance the capacity and capabilities of SMEs to provide world-class services and products to large corporations, or MNCs, and in their operations world-wide. 12

Market Development Programme to promote market opportunities for SMEs; Technology Development Programme to promote the usage of appropriate technology; Financial Assistance Programme, which cuts across all other SMI Development Programmes; Skills Upgrading Programme to enhance the skills of SME employees; Factory Audit Scheme to enhance the capability of SMEs; and Infrastructure Development Programme to assist SMEs in acquiring factory lots which will strengthen their capacity for expansion.

V.

THE SMI DEVELOPMENT PLAN (SMIDP), 2001-2005

SMIDP Objectives and Strategic Thrusts 18. The SMIDP seek to integrate both new and existing SMEs into the main industrial base. Against the perspective of SMI development and current performance of SMEs, the objectives of the SMIDP are to: 19. create a conducive policy environment to spur the development of SMEs into globally competitive enterprises; and promote the development of knowledge-based SMEs.

The strategic thrusts of the SMIDP are to: enable SMEs to be productivity-driven, technologically capable and globally competitive; facilitate organisational change at the enterprise level to accelerate the transition towards globalised production platforms; and promote lead enterprises to drive SMEs to deepen cluster development.

20. To reinforce the recent focus on enterprise and entrepreneurial development, the action plans under the SMIDP will be targeted at: strengthening existing initiatives; introducing new initiatives; fine-tuning existing broad-based programmes; and selected priority industry sectors. 13

Enterprise Development 21. The integrated approach adopted under the SMIDP will take into account the needs of existing enterprises, which differ according to their stage of development. Four stages in the development of an enterprise are illustrated in Figure 1:
Figure 1 PHASES OF ENTERPRISE DEVELOPMENT
High GLOBALLY COMPETITIVE 4. Maturity stage
Technology Level

3. Expansion

2. Growth

Low

1. Start-u Stage Start-up

Basic Requirements/ Concerns

Time

1. Start-up Stage
* * * * * R & D incubator Adequate workforce Market knowledge Adequate raw material supply Adequate infrastructure

2. Growth
* * * * * Certification/ Standard Technical assistance Automated Process Tax benefit Market Development

3. Expansion
* * * * * * * Technological capability Management capability ICT capability Brand development Venture Capital Outsourcing Distribution channels

4. Maturity
* * * * Design capability Brand name promotion Industry upgrading Investment abroad

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Technology Requirements 22. Enhancing the technological capability of SMEs is crucial in their drive towards being globally competitive. Industry and government need to identify the critical enabling technologies required by industry to meet future demands. This process will be undertaken in consultation with industrial technology experts to identify current technological capabilities, future technology requirements and the expected investment involved. The key functional technologies identified for SMEs in the various sectors can be generally classified into three groups: business process technologies; design and manufacturing process technologies; and materials and product technologies.

23. These key technologies, as specified in Table 8, are not exhaustive, but include the most important technologies that are generally within the capability of SMEs to attain. One of the prerequisites for SMEs to scale-up the technology requirement is the adoption of ICT, without which, SMEs risk losing out on global opportunities.
Table 8 TECHNOLOGY REQUIREMENT: KEY FUNCTIONAL TECHNOLOGIES Business Process Technologies Manufacturing Resource Planning (MRP)/Enterprise Resource Planning (ERP) and other Information and Communications Technology (ICT) applications to facilitate Electronic Commerce Adoption of international standards such as ISO 9001, ISO 9002, ISO 14000, Hazardous Areas and Critical Control Points (HACCP), Good Manufacturing Practice (GMP) Supply Chain Management (SCM) and Customer Support Management (CSM); B2B and B2C transaction capability Design and Manufacturing Process Technologies 2-D and 3-D Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) Computer Integrated Manufacturing (CIM) Flexible Manufacturing Systems (FMS) Computerised Numerical Control (CNC) machine tools Automation and industrial robotics Materials and Products Technologies Composites and ceramics High performance metals, alloys and high impact polymers Electronic Chart Display and Information System (ECDIS) Biotechnology, nutraceuticals and pharmaceutical technology Microelectronics and Opto-electronics (photonics)

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New Initiatives 24. Under the SMIDP, two new initiatives will be introduced to achieve the objectives and strategic thrusts, which will be implemented through a more focused approach. These include: the SME Information & Advisory Centre to facilitate SMEs to access and manage knowledge; and the HeadStart 500 Programme.

25. In order to enhance the capacity of SMEs to respond to the challenges impacting their growth and sustainability in a knowledge-based environment, the following initiatives will be further strengthened for effective implementation of the SMIDP. These include: enhancing the role of the Malaysian Industrial Development Finance Bhd (MIDF) and Credit Guarantee Corporation (CGC) as the financial centres for SMEs; promoting venture capital to SMEs in manufacturing: strengthening technical advisory to SMEs; and providing a relocation incentive to SMEs.

SME Information & Advisory Centre 26. The SME Information & Advisory Centre as shown in Figure 2, is a primary policy initiative of the SMIDP, which exploits the power of ICT and Internet networking, delivery of support services and web-based content to SMEs while building up a comprehensive database on SMEs. The Centre will be used for virtual business matching, as well as for collective purchasing of services and content for SMEs. More importantly, it also transmits up-todate and real-time information to SMEs. The Centre reinforces the technical advisory programme, which will be a key feature in the delivery of SME assistance. The objectives of the Centre are to serve as: a means to elevate SME productivity through knowledge provision; a centre of excellence that drives connectivity and facilitates networking in the implementation of SMIDP policies and initiatives; and an information and knowledge provider to SMEs in adopting and using technology by providing direction through technology requirements plan and database, as well as updates and advice, in partnership with private sector content providers. 16

Figure 2 SME INFORMATION & ADVISORY CENTRE

SME INFORMATION & ADVISORY CENTRE

Financial Assistance Business Matching

Application

Registration

Resource Centre Research Collaboration

Advisory Services

Partner Network

Source:

SMIDP Study Report, 2000.

HeadStart 500 Programme 27. The SMIDP aims to produce SMEs that are productivity-driven, technologically capable and globally competitive. The HeadStart 500 Programme is designed to provide SMEs with support services needed to accelerate their transformation from domestic-oriented to global manufacturers. 28. Priority will be accorded to enterprises in the industry sectors that form the focus of the SMIDP. Companies that qualify for this programme will act as role models and, in turn, form smaller industrial clusters within their respective industries to support smaller enterprises. As a start, the programme will focus on SMEs participating in the ILP and GSP, the Annual Enterprise 50 Awards, National Productivity and Quality Awards and the Industry Excellence Awards. Participants of this programme will be assisted through the provision of integrated assistance packages comprising financial and technical know-how.

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Strengthening Existing Initiatives Enhancing the Role of MIDF and CGC 29. To increase the efficiency, the administration of the Quality Enhancement Scheme (QES) and Financial Package for SMEs (PAKSI) funds will be centralised under MIDF. To strengthen the role of CGC for SME lending, the Government will inject additional funds to strengthen the role of the Credit Guarantee Corporation (CGC) for SME lending. Bank Negara Malaysia (BNM) has appointed CGC to manage the Fund for Small and Medium Industries 2. 30. Over the Plan period, the Direct Access Guarantee Scheme (DAGS) of the CGC, will be instrumental in ensuring the channelling of bank credit to small manufacturing establishments. Such a move will ensure more effective funds intermediation to SMEs as they can apply direct to the CGC, which will evaluate and approve application for financing by the commercial banks. Promoting Venture Capital 31. The transition to a knowledge-based economy has been expedited with the provision of RM500 million in venture capital funding in the 2001 Budget. To ensure that adequate seed capital is channelled to the manufacturing sector, a portion of the RM500 million fund will be dedicated to SME start-ups and high-growth concerns. This will spur the emergence of innovative firms and the development of service providers to the manufacturing sector, thereby realising the added values from productivity improvements and innovation. 32. Towards this end, the Venture Capital Association will be encouraged to assume a proactive role in providing advisory and consultancy services to SMEs on the viability of companies that are being financed. The Malaysian Venture Capital Management Bhd set up under the Ministry of Finance to act as a one-stop centre will interface with SMI development agencies to ensure greater coordination in the implementation of venture capital financing. Strengthening Advisory Services 33. A more proactive means to diffuse knowledge, information and skills among SMEs is through advisory services that will enable on-site nurturing of SMEs. This complements the business advisory services undertaken through the SME 18

Information & Advisory Centre. The programme will entail the emplacement of industry experts directly in SMEs to transfer know-how and technology to them. In addition, on-site assistance will be provided by experts with industry experience. Relocation Incentive 34. To assist SMEs to relocate to designated industrial sites, the Government will consider providing relocation incentives that will directly benefit SMEs. This measure will enable them to acquire industrial properties, which they can later pledge to banks as collateral for loans.

Broad-based Programmes 35. During the Plan period, the Government will intensify efforts to review and fine-tune existing SME programmes to focus on the objectives of the SMIDP in developing enterprises to meet the challenges of the new business environment. These programmes will be expanded in scope to meet with new demands in the area of market development, managing knowledge and technology, human resource and skills development, and the fostering of industrial linkages. Market Development 36. Market development strategies will take into account the heterogeneity of SMEs and the different phases of enterprise growth. Meanwhile, globalisation and fast changing technologies are reshaping consumer preferences and tastes thus, impacting on the way enterprises compete. SME assistance will continue to focus on reducing the transaction costs of market development. Government assistance will continue to be crucial particularly in four areas: establishing a programme to support SMEs in building their brand name; enhancing trade promotion in existing and new markets; facilitating alliances with international trading companies to establish multi-channel distribution operations; and developing ICT strategies to enable SME participation in the global supply chain of major MNCs. 19

Technology Development 37. During the SMIDP period, a systematic programme will be undertaken to upgrade production technology and enhance absorptive capacities of SMEs. SMEs that are currently exporting need to be aware of new emerging technologies that will improve their ability to compete. Enterprises will be encouraged to generate greater value-added by undertaking original design manufacturing (ODM). Measures will also be taken for more effective targeting by focusing initiatives at the enterprise level in accordance with the technology requirements of each sector. ICT Programme for SMEs 38. There is urgency for SMEs to incorporate ICT in their production processes and take advantage of rapid technological advancements. The challenge during the SMIDP is to speed up the rate of application of ICT in such enterprises. As shown in Figure 3, vertically integrated corporations perform most of the supply chain functions from procurement, production, to R & D as well as distribution. Selectively integrated companies outsource elements such as logistics and procurement, while virtually integrated ones take advantage of rapid developments and diffusion of ICTs to also outsource their manufacturing processes.
Figure 3 VERTICAL TO VIRTUAL INTEGRATION OF FIRMS Vertically Integrated Selectively Integrated Logistics Logistics Procurement Manufacturing R & D Customer Relations Enterprise Procurement Virtually Integrated Logistics Procurement

Outsourcing

Outsourcing

Enterprise

Outsourcing

Manufacturing R & D Customer Relations

R & D Customer Relations

Enterprise

Manufacturing
Source: SMIDP Study Report, 2000.

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Human Resource and Skills Development 39. The attainment of the goals of the SMIDP will require an accelerated programme of human resource development to fulfil demand for skills in the new business environment. An intermediate solution is to increase the supply of skilled workers through training and re-training programmes. 40. The expected increase in adoption of ICT applications will impact the demand for knowledge workers. Tertiary level training of ICT professionals will be accelerated to meet the requirements of the SMIDP in transforming SMEs to become enterprises that apply knowledge in a dynamic process of creating new values. 41. An important complement to skills training for workers is the training of entrepreneurs. In this regard, public and private institutes of higher learning, technical colleges and vocational schools will work together with industry and trade associations to organise effective management training services.

VI.

HIGHLIGHTS OF SMIDP PRIORITY INDUSTRY SECTORS

42. The SMIDP will target SMEs especially those in industry sectors with prospects for further growth. At the same time it takes into consideration the differences not only in the level of enterprise growth, but also the different nature of the industry clusters as a result of the industrialisation process pursued over the last 30 years. The sectors which form the focus of the SMIDP are indicated in Table 9.

Electrical and Electronics Industry Group 43. In the electrical and electronics group, the presence of leading edge MNCs provides opportunities for technology transfer and linkages to SMEs. This sector has stimulated the growth of SMEs in other supporting sectors such as, machinery and equipment, precision-engineering, plastic injection moulding and metal fabrication industries. Together, SMEs in these supporting sectors contributed an estimated 10.0 per cent of output and 14.0 per cent of valueadded by SMEs. 21

Table 9 FOCUS OF THE SMI DEVELOPMENT PLAN Sectors Primary Clusters Electrical and Electronics Semiconductor and Electronic Components Computers and Peripherals Communications Equipment Consumer Electronics Electrical Appliances and Apparatus Automotive Motor Vehicle Parts and Accessories Marine Transport Ship Building Ship Repair Leisure Craft Off-Shore Marine Structures Sawn Timber Panel Products Mouldings and Joinery Furniture Paper and Paper Products Non-Electrical Machinery Electrical Machinery, Apparatus, Appliances and Supplies Secondary Focus Group Food Processing Convenience Food Halal Food Rubber-based Textiles and Apparel Miscellaneous
Note: n.e.c.: not elsewhere classified.

Industry Focus

Transport Equipment

Wood-based

Machinery and Engineering Services

Rubber Products n.e.c. Made-up Textiles, Garments Traditional Medicine and Herbal Products

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Transport Equipment Industry Group 44. The automotive sector, which is policy-driven, has generated a number of vendors supplying to the national car manufacturers. The relatively small size of the domestic market and the trend towards global alliances and establishment of regional system integrators provides the impetus for SMEs to consolidate and strive to penetrate the OEM and replacement equipment manufacturing (REM) parts market in the region. The other component in the transport equipment group is the marine transport sector in which potential exists in the production of leisure crafts, cruisers, speedboats and vessels below 5,000 dead weight tonnes (dwt). Wood-based Products Sector 45. The wood-based cluster, which is driven by furniture production, is one of the most dynamic sectors in manufacturing and SMEs are predominant in this cluster. The furniture cluster emerged in response to market forces and Malaysia has established a reputation for rubber-wood furniture. The development thrust lie in enhancing cluster strength in furniture production to lead other segments of the wood-based sector. Machinery and Engineering Services Group 46. The machinery and engineering services group assumes a critical role in supporting the key industries. The thrust would lie in developing the tool and die industry to drive the demand for various engineering services. As tooling is required in all sectors of manufacturing, the tool and die industry will be promoted as a strategic sector that will enhance inter- and intra-industry linkages. Secondary Focus Industry Groups 47. Enterprises producing final consumer products for the domestic market such as convenience food, rubber-based products, textiles and apparel as well as traditional medicine and herbals, started with their own brand names. These sectors tend to operate using low-end technology. During the SMIDP period, a concerted effort will be undertaken to modernise these enterprises to realise the full value-added potential of the brand name. 23

48. The SMIDP will therefore, focus on those sectors in which SMEs have strong presence and potential such as the wood-based, food products, rubberbased products, textiles and apparel, machinery and engineering services and the traditional medicine and herbals sectors. These are the sectors with high value-added content and are largely Malaysian-owned. They are also sectors with the potential for further cluster growth, as they possess strong inter-and intra-industry linkages.

VII.

IMPLEMENTATION FRAMEWORK

49. The Small and Medium Industries Development Corporation (SMIDEC) established in 1996, has been tasked to promote development of SMEs, as well as co-ordinate the SMI programmes currently delivered through nine Ministries and 22 agencies. The primary approach of the SMIDP necessitates close interagency co-ordination as well as public-private collaboration. The challenge is one of effective co-ordination of the various programmes undertaken by various ministries and agencies in order to streamline operational arrangements. 50. To deal with the challenge, three major aspects of the institutional framework will need to be strengthened. These include strengthening: the role of industry associations; public-private sector collaboration; and the institutional capacity of SMIDEC.

Strengthening the Role of Industry Associations 51. Industry associations need to assume a greater role in servicing their members in an increasingly competitive environment. The ability to provide better services, however, hinges on resource availability, which is a function of membership. In order for industry associations to take on the challenges of assisting their members to cope with pressures of trade liberalisation and globalisation, industry associations will be strengthened through the provision of services that encourages membership.

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52.

The following steps will be taken to strengthen industry associations: SMEs will be encouraged to become members of industry associations to facilitate the application process for the various fiscal incentives and financial assistance; and industry associations will be eligible for selected financial assistance to enable them to assist their members.

Strengthening Private-Public Sector Collaboration 53. The success of the SMIDP in developing a global-oriented and vibrant SME sector depends on the collaborative efforts between Government and private sector. Existing collaboration between public and private sectors will include participation in the formulating of SME development programmes and feedback on their effectiveness. 54. A formal private-public sector working group will be instituted to map out the critical enabling technologies required by industry to meet future market demands. Through such a process, policy planning and development assistance for SMEs becomes more focused. Strengthening the Institutional Capacity of SMIDEC 55. The achievement of the SMIDP objectives and Plan implementation will require additional institutional resources in SMIDEC. To maximise utilisation of available institutional resources, SMIDEC will work closely with other Ministries and agencies to target enterprises in industry sectors. The expertise and networks of these Ministries and their specialised agencies will be tapped to disseminate the services needed by SMEs. 56. To enable SMIDEC to effectively assume its co-ordinating role in implementation and monitoring of the SMIDP, the institutional capacity of SMIDEC will be strengthened. These capacity building initiatives include: establishment of SMIDEC regional offices for more effective and wider dissemination of SME development programmes; emplacement of industry experts to assist SMEs: The Government will emplace industry experts from other Government agencies, international organisations or private sector to transfer and share their knowledge and expertise on industry and technology; and 25

establishment of SME Experts Advisory Panel (SEAP): The Government will invite experts with industry experience to register with SMIDEC. These experts will be assigned to assist SMEs to improve their technological capacity and productivity. SMEs requiring assistance from SEAP can apply to SMIDEC for special assistance.

VIII. CONCLUSION 57. The success of the SMIDP entails a close working partnership between Government, trade and industry associations as well as among SMEs. The institutional strengthening that is required to implement the SMIDP will ensure that the enabling environment is conducive for the desired outcomes. The Government is fully committed to assist SMEs to develop and take on the challenges and opportunities arising from trade liberalisation and globalisation. The conclusion of the SMIDP period will result in more SMEs which are productivity driven, technologically capable and globally competitive with well-recognised brand names internationally.

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ACRONYMS

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ACRONYMS
B2B B2C BNM CAD CAGR CAM CGC CIM CNC CRDF CSM DAGS DOS dwt ECDIS e-biz ERP FMS GDP GMP GSP HACCP ICT ILP IMP2 business-to-business business-to-consumer Bank Negara Malaysia Computer Aided Design Compound Annual Growth Rate Computer Aided Manufacturing Credit Guarantee Corporation Computer Integrated Manufacturing Computer Numerical Control Commercialisation of Research and Development Fund Customer Support Management Demonstrator Application Grant Scheme Department of Statistics dead weight tonnes Electronic Chart Display and Information System electronic business Enterprise Resource Planning Flexible Manufacturing Systems Gross Domestic Product Good Manufacturing Practice Global Supplier Programme Hazard Analysis and Critical Control Points Information and Communications Technology Industrial Linkage Programme Second Industrial Master Plan 29

ISO ITA ITAF ITC LSEs MIDF MNCs MRP ODM PAKSI QCD QES RA REM SCM SEAP SMEs SMIs SMIDEC SMIDP TAF

International Standard Organisation Investment Tax Allowance Industrial Technical Assistance Fund International Trade Centre Large Scale Enterprises Malaysian Industrial Development Finance Multinational Coporations Materials Requirements Planning Original Design Manufacturer Pakej Kewangan Untuk PKS (Financial Package for SMI) Quality, Cost and Delivery Quality Enhancement Scheme Reinvestment Allowance Replacement Equipment Manufacturer Supply Chain Management SME Experts Advisory Panel Small and Medium Enterprises Small and Medium Industries Small and Medium Industries Development Corporation Small and Medium Industries Development Plan Technology Acquisition Fund

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