© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME DEVELOPMENT SURVEY Conducted by DP Information Group “SME Challenges & Changes for Continued Growth”

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED 1.Impact of domestic cost competitiveness on SMEs 2.Strategies adopted by SMEs for overseas expansion & growth 3.SMEs’ competitiveness & opportunities with MNCs & GLCs 4.Adoption rate of process automation & impact on productivity & cost efficiency on SMEs 5.SMEs’ needs & readiness to tap on alternative equity financing 6.SMEs’ recruitment issues & staff training needs SME Development Survey Survey Objectives

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED  This yr: 1,206 coys responded (2006: 1,068 respondents)  Significantly higher no. of larger companies responded - 59% with paid-up capital >S$0.5m - 13% with >100 employees vs 8% last year Respondents by Paid-Up Capital SME Development Survey Characteristics of Respondents Paid Up Capital S$2 - S$50,0007%18%6% S$50,001 - S$0.5m34%53%27% > S$0.5m - S$1m20%6%26% > S$1m - S$2m14%13%16% > S$2m - S$5m12%5%12% > S$5m13%5%13% Total100%

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Improved turnover & Strong profitability  26% posted turnover > S$20m; as compared with 20% over last yr SME Development Survey Characteristics of Respondents Turnover <S$0.5m12%18%17% S$0.5m-S$1m9%10%8% >S$1m-S$5m21% 12% >S$5m-S$10m18%15%24% >S$10m-S$20m14%16%14% >S20m-S$50m14%12%8% >S$50m12%8%17% Total100% Profit Losses21%23% <S$100,00026%30% >S$0.1m-S$0.5m26%22%21% >S$0.5m-S$1m8% 4% >S$1m-S$3m10% 9% >S3m-S$5m3% 9% >S$5m6%4% Total100%  Drop in no. of loss-making companies  Increase in no. of SMEs generating profit >S$5m; from 4% to 6%

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Increasing no. of companies experiencing accelerating turnover growth of >10% p.a.  Downward trend in no. of companies with turnover on the decline Stages of Development Start-up: First 3 years of operation Accelerating Growth: turnover growth of > 10% per annum Moderate Growth: turnover growth of up to 10% per annum Mature: Zero turnover growth Decline: Negative turnover growth SME Development Survey Characteristics of Respondents

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Competition remains the most cited challenge (58%)  Operating Cost overtook Manpower as 2nd topmost selected growth hindrance (53%)  Market size constraint is a new hindrance cited by 24%  Downward trend observed for Difficulty in accessing biz opportunity, New Financing & Uncertain economic environment SME Development Survey Challenges to Growth

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Increasing Labour cost top concern across most business sectors especially Construction, Services and Food & Beverage; will significantly affect profitability in the next 1-2 yrs  2 other cost components that will have major impact on SMEs’ profitability are Cost of raw materials/ intermediate or final products & Rental of premises  Increasing Cost of raw materials/ intermediate or final products of greater concern for Construction (78%) & Manufacturing (77%) sectors  Increasing Rental is the third most cited cost concern amongst Food & Beverage, Retail, Finance & Services SME Development Survey Challenges to Growth

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Significant jump on cost-related issues (11% up) : - Improving Cost Efficiency - Productivity  Less emphasis on New Products / Services (7% drop)  Decline in Scaling Down / Consolidation; 80% of them are making losses or have low profit margin  Growing importance on 2 new business strategies : - Improve Customer Service (9%) - Branding (3%) SME Development Survey Business Strategies

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Continued increase in SMEs having access to Term Loan  Downward trend continues for Overdraft  Government Funding Schemes still low; though upward trend continues SME Development Survey Financing/ Funding Types of external financing obtained Debt Financing Term loan47%43%37%33% Trade financing39%32%39%29% Overdraft32%40%44%47% Hire purchase / Leasing29%31%33%35% Factoring6%7%6% Equity Financing Venture capital13%15%5%NA Funds from friends or relatives12%17%NA Business angels2%3%2%NA Govt Funding Schemes10%8%6%NA

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Local Enterprise Finance Scheme still the most widely used govt funding scheme  More SMEs accessing : - SME Access Loan (up 3%) - Loan Insurance Scheme (up 6%) - Regionalisation Finance Scheme (up 3%)  Downward trend continues for Microloan  Low take-up for Variable Interest Loan Scheme & Start-up Enterprise Development Scheme SME Development Survey Financing/ Funding

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  3 new concerns : - High Interest Rates - Extensive documentation required by banks - Short loan repayment period  Only half of those without financing facilities express need for external funding (9.5%)  High Interest Rates charged by banks replace Lack of Access to Bank Financing as top concern SME Development Survey Financing/ Funding

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  SMEs fared better than previous year with 10% drop in those reporting losses  Nevertheless, SMEs continue to register low profit margin Distribution of Respondents by Profit Margin SME Development Survey Profitability Profit MarginFY2006FY2005FY2004FY2003 Negative margin 16%26%30%28% 0% to <5% 54%47%40%43% 5% to <10% 15%14%12%17% 10% or more 15%13%18%12%

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Despite Govt & Fund Investors efforts, majority of SMEs not looking to IPO, OTC or Private Equity Investment to provide alternate sources of financing  More informative sessions/ programmes needed to help SMEs to better understand these alternate financing options  Of those who have expressed. some interest in such alternate financing : - Majority (70%) looking for >S$1m - 28% looking for >S$5m of additional capital injection SME Development Survey Financing/ Funding Source of equity financing Initial Public Offering Over the counter Private Equity Investment Yes 6%3%5% Would like to know more before deciding 7%8%7% Maybe 14%11%13% No 73%78%75% Total 100%

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED SMEs have expanded their overseas biz activities  70% have overseas interests  Almost 60% of respondents have biz activities in overseas markets for more than 3 years  Among those with no overseas biz (30%), one- fifth of them intend to venture overseas in the next 12 months SME Development Survey Overseas Expansion

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  70% of respondents have revenue generated from overseas; increase of 11% from previous year  7% jump in those who derive >70% to 100% of their revenue from overseas markets SME Development Survey Overseas Expansion

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  High initial investment/cost on engaging overseas biz activities, especially within the first 3 years  Long-term sustainability of SMEs venturing into overseas markets remains a concern as profits remain relatively similar to that when they were about to venture overseas SME Development Survey Overseas Expansion Years of overseas biz activities Net Profit Losses S$0 to S$0.1m >S$0.1m to S$0.5m >S$0.5m to S$1m >S$1m to S$3m None 18%24%29%7%23% Intend to Venture 18%29%24%5%24% Just Started 11%29%22%7%32% 1 to 3 years 17%23%38%12%10% >3 to 5 years 26%22%18%9%26% >5 years 18%25%27%10%21%

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Malaysia, Indonesia & China remain the Top 3 favourite destinations  Middle East overtook USA as 9 th most popular destination  Overall reported increase in all of the top 10 countries for overseas expansion SME Development Survey Overseas Expansion

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  Vietnam overtook India as the most popular new market for SMEs to venture into in the next 12 months  China has also emerged as one of the Top 3 preferred destination in the next 12 months  Noticeable absence of Middle East amongst the Top 3 preferred destinations for overseas expansion in the next 12 months SME Development Survey Overseas Expansion

© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME Development Survey Overseas Expansion Top 3 critical success factor for overseas operations% Finding the right overseas partners61% Overseas market knowledge57% Adaptive to local business practices / customs56% Sufficient funding / financing34% Product differentiation31% Manpower25% Branding21%

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME Development Survey Human Resource  68% claim to pay the market average  16% pay higher than average

© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME Development Survey Human Resource Business Sector Average monthly earning per employee SME respondents 2007MOM Release 2006[1]% Difference Commerce - WholesaleS$3,504 S$3,017 [2] 16% Commerce – RetailS$2,854-1% Communications/ Transport/ StorageS$3,154S$3,507-10% FinanceS$4,252S$5,949-29% ManufacturingS$2,935S$3,495-16% PropertyS$2,956S$2,7328% ConstructionS$2,217S$2,513-12% ServicesS$3,520S$3,4981% Food & BeveragesS$1,243S$1,360-9% [1][1] Source: Report on Wages in Singapore 2006, Ministry of Manpower [2][2] As released by MOM, the Commerce sector includes both Wholesale and Retail. No breakdown was provided

© Copyright DP Information Group. All Rights Reserved. RESTRICTED  87% have expressed the need for staff to be trained  3 areas that most SMEs identified for training are : - Leadership & Team-building - Marketing & Promotion - Business Planning SME Development Survey Human Resource Business Sector 2 key areas of training needed Leadership & Team building Marketing & Promotion Business Planning Accounting & Finance Information technology Strategic Planning Policies, laws & regulations Retail20%39%37%16%18%14%2% Wholesale22%33%30%25%24%17%5% Comms/Transport/Storage36%17%26%21%20%19%7% Construction38%12%24%20%14%24%11% Finance17%24%14%38%14%10% Food & Beverages52%19%26%11% 22%7% Manufacturing30%34%21%17%19%21%8% Property28%39%22%17%6%0%6% Services30%26% 18%23%19%6% Overall29%27%26%21%20%19%7%

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME Development Survey Process Automation & Infocomm Technology  Top challenge faced in adoption of technology is High Cost involved; this is of great concern especially for Start-ups & lack of funding support exacerbates the problem  2 nd most cited challenge is the lack of staff capabilities; reinforces the need for training to be provided  20% of SMEs have no difficulty Key challenges in adopting technologies Overall Stage of Development Start- up Accelerating growth Moderate growth MatureDecline High cost involved 52%65%53%55%45%47% Lack of staff capabilities 35%34%37%33%34%35% Lack of funding support 19%25%22%17%14%22% Complexity of software licensing 9%14%8%10%7% Inability to keep up with technological advancement 8%10%6%8%9%10% Security concerns 6% 4% No difficulty 20%9%19%21%24%22%

© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME Development Survey Process Automation & Infocomm Technology  Low level of automation among more than two-fifths of SMEs (43%)  On positive note, slightly more than a quarter have automated more than half of their functions/ process  Level of automation increases with staff strength Employee Size Percentage of functions & processes automated <25%25% - 50%>50% <1053%24%23% 10 – 2546%26%28% 26 – 5036%33%31% 51 – 7544%37%19% 76 – 10036%32% >10031%37%32% Overall43%31%26%

© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME Development Survey Process Automation & Infocomm Technology  Spending on R&D still low among SMEs  50% spend <1% of turnover in R&D  SMEs in Accelerating Growth stage investing more in R&D, followed by the Start-ups  More than half in Moderate Growth, Mature & Decline stage not spending on R&D Stage of Development Amount spent on Research & Development None<S$0.1m S$0.1m to S$0.3m $0.3m to S$0.6m >S$0.6m Start-up 44%35%14%4% Accelerating growth 39% 11%1%11% Moderate growth 51%34%8%4% Mature 63%28%5%2%3% Decline 68%28%0% 5% Overall73%18%4%2%3%

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED  #1 : Managing Overseas Competitiveness  #2 : More Training Assistance Schemes & Funding  #3 : Adoption of technology as an Investment rather than a cost  #4 : Enhance partnerships between SMEs and the GLCs/MNCs  #5 : Adoption of risk-based financing SME Development Survey Recommendations

© Copyright DP Information Group. All Rights Reserved. RESTRICTED Top barrier identified by our SMEs Intense competition overseas for 2 consecutive yrs; 2007(58%) & 2006(45%) 13% SMEs have difficulties in obtaining financing for overseas expansion Likely reasons  SMEs appear to be going through a learning process when they engage in international activities  Successful venture overseas hinges on finding right overseas partners, overseas market knowledge, limited funding and manpower shortages SME Development Survey 2007 Recommendation #1 - Managing Overseas competitiveness

© Copyright DP Information Group. All Rights Reserved. RESTRICTED What our government can do - with IE Singapore taking the lead?  Increase awareness of overseas financing schemes – IFS, LIS  More in-depth, timely & relevant overseas market knowledge  More substantial business networking & engagement opportunities in the right markets overseas  Raise National awareness via regional print & media  SME sharing development and use of ICT platforms (e-clustering or networked communities) for marketing at global level  Render shared services overseas : technology (secure platform, back-office), info collective and dissemination, business intelligence, capacity- building and collective services (marketing, payment, branding)  Focus on overseas-based activities for SMEs operating overseas SME Development Survey 2007 Recommendation #1 - Managing Overseas competitiveness

© Copyright DP Information Group. All Rights Reserved. RESTRICTED Manpower & training needs identified by SMEs  87% identify more training to be required  Hiring difficulties of Supervisory (35%) & Operational staff (45%) with technical skills  Identified “Leadership/Mgt” & “Marketing/Promotion” as 2 main training needs Likely reasons  SMEs are unlikely to have readily available resources, both time and funding  SMEs are a diverse group  Ensuring initiatives such as the Management Development Programme reaches out to wider SME community SME Development Survey 2007 Recommendation #2 – More Training Assistance Schemes

© Copyright DP Information Group. All Rights Reserved. RESTRICTED What is needed – How WDA can help?  Develop management training programmes to address specific soft skill needs  Encourage & incentivise short duration & off-site training programs  Accelerate industry-focused training (such as the Retail Scholarship Programme & sharing of training resources  Rating system on local training providers; assurance of quality  Allocate more training funding from Government especially for soft skills development; Such expenditure should be deem as investment for our next generation workforce ( $7-$16 per trainee-hour is low! ) SME Development Survey 2007 Recommendation #2 – More Training Assistance Schemes

© Copyright DP Information Group. All Rights Reserved. RESTRICTED Key challenge ICT & Process automation adoption rate low amongst SMEs with 43% automating <25% of their processes & business functions 73% do not spend on R&D with 50% spending just <1% of turnover on F&D Likely reasons  Cost is one of the top challenges faced by 52% in adopting technology; next being staff capabilities & competence  Many SMEs do not understand nor appreciate the benefits that ICT can bring SME Development Survey 2007 Recommendation #3 -Technology Adoption as an Investment

© Copyright DP Information Group. All Rights Reserved. RESTRICTED How can our government help thru IDA? Overall Funding support for SMEs – to be included in Funding ICT trainings of owners & staff – to be included in Incentivise SMEs to extract advantages from the existing technologies – to be included in Active profiling of SMEs that have successfully adopted innovation in process technology Ensure Technology Innovation Programme reaches/appeals to majority of SMEs SME Development Survey 2007 Recommendation #3 -Technology Adoption as an Investment

© Copyright DP Information Group. All Rights Reserved. RESTRICTED Concern Low level of business engagement with MNCs & GLCs; only 7% of SMEs have business dealings with GLCs & 15% with MNCs Likely Reason  GLCs & MNCs do not proactively engage SMEs as their business partners  Little acknowledgement for those who had done so Suggestions which SPRING can help? Promote effective networking between MNCs and potential SME value chain via MNC sponsored event inviting SMEs to participate Government to officially recognize & award exemplary GLCs & MNCs Regular industry networking sessions involving GLCs, MNCs & SMEs Selected government tenders to stipulate requirement for consortia approach for GLC/MNC to partner with SME Elect some GLCs to ‘lead by example’ SME Development Survey 2007 Recommendation #4 - Partnerships with MNCs & GLCs

© Copyright DP Information Group. All Rights Reserved. RESTRICTED Top concern for financing High interest loan rate top concern of 52% of SMEs Short loan repayment period highlighted as a challenge by 24% Likely reason Are financial institutions charging higher interest rate to compensate for greater perceived risks? Encourage “lean” SME loans by i ntroducing Credit process automation and emphasizing high predictive power of rating  A risk-based, individualized and fair pricing for SME’s  Rejected applicants understand better how to improve to qualify  Proactive approach by SMEs to understand rationale of high interest rates & how loan repayment periods may be extended In the SME sector, fast loans and cost-effective processes are at least as important as risk sensitive obligor selection …... but often highly discriminative rating systems are one major precondition to simplify and accelerate loan processes SME Development Survey 2007 Recommendation #5 - Risk Based Financing

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME Development Survey 2007 Recommendation for SMEs SMEs should take charge  Examine the findings  Find the applications to your business  Stay relevant  Reexamine/reflect on your business  Actively source for assistance  Reflect your needs and challenges through appropriate channels  Never give up

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© Copyright DP Information Group. All Rights Reserved. RESTRICTED SME Development Survey 2007 Forum 10 October :30am – 2pm NTUC Auditorium (Level 7) One Marina Boulevard The forum that brings together the SME community to discuss the findings of the survey and reflect their views on the challenges to their growth.