Tough times loom for SMBs

By Leon Engelbrecht, ITWeb senior writer

Johannesburg, 29 Apr 2008

Times are tough for SA's small and medium businesses (SMB). And things are about to get worse, say economists and IT industry watchers, as a dangerous cocktail of woes poison economic growth and threaten the futures of many companies and their employees.

About 1.4 million of SA's 1.8 million registered businesses fall in the SMB bracket - along with the majority of SA's 12 000 ICT companies.

Economists Mike Sch"ussler and Dawie Roodt, as well as trend watcher Arthur Goldstuck, see many of these facing an uphill battle to survive the current economic downturn. Insolvencies, liquidations and the auctioning of businesses, homes and cars are already spiking, they comment.

"We can clearly see evidence of business failure," says T-Sec chief economist Sch"ussler. "Small businesses are struggling and signs are medium businesses are as well," he adds. Efficient Group chief economist Roodt and World Wide Worx (WWW) MD Goldstuck say the poison chalice contains a mix of Eskom power outages, leaping interest and exchange rates, inflation, the effect of the National Credit Act, crime and infrastructural travails typified by traffic congestion in key business nodes.

"I concur with the economists," says Goldstuck. "SMBs are experiencing incredibly difficult circumstances." He adds that Eskom's supply difficulty "has the potential to put many borderline businesses down". WWW research shows 15% to 20% of SMBs are borderline and about 200 000 small businesses are "facing difficulties".

"Any significant shift in the ability to produce revenue will tip them into failure. When you consider load-shedding is a minimum of four hours out of a 40-hour workweek, or 10% of productive time - and that is the best case scenario - then you are in trouble.

"SMBs are facing a 'perfect storm' of negative issues," Goldstuck adds. "Interest rates are intensifying, leaving SMBs almost nowhere to hide. While growth is continuing at a reasonable rate, there is a slowdown and the promised benefits of 2010-related infrastructure projects are passing most SMBs by as they are not 'well connected'."

Coping with inflation

Sch"ussler says Eskom's proposed rates hike will hit SMBs, particularly IT-intensive SMBs, hard.

"Typically the problem with inflation is big businesses and monopolies can pass it on, but small companies cannot. This is a global phenomenon and well documented," Sch"ussler says.

"Eskom's pricing already discriminates against home users and SMBs, and under Eskom's proposed rate hikes they face increases between 63% and 100%. The price effect will be especially hard for them."

Sch"ussler last week told a conference that residential consumers and businesses too small to have special deals with Eskom were subsidising those who had privileged arrangements by paying two-and-a-half times more for electricity. Sch"ussler says this cannot continue.

Roodt says SMBs are indeed an engine of growth but generally handle downturns badly. "They lack the buffer or reserve that big business has."

Roodt adds that big business has entered the downturn cash-flush: "In fact, they are the only real savers in the economy at present." Sch"ussler further adds that big business has the ability to protect itself against recession by shedding contracts with SMBs that further imperil the latter.

Roodt predicts inflation could spike as high as 12% (from the current 10%) before coming back under control. "The Reserve Bank was too lax," he says, "it reduced rates too low and has so far raised them too little."

The result was an attempt by SA to spend itself to wealth. "You can't spend yourself rich, that's what we did the last few years. And sooner or later you must pay for it."

On the contrary...

Pieter Kok and other research analysts at research house IDC take a more upbeat position.

Discussing the poisoned chalice, Kok agrees it has had an impact on the economy but insisted the outlook remained promising. "It is true the economy is slowing but there are so many initiatives in place that will boost investment and the development of the economy ... [that] the future outlook is optimistic."

"These guys are going to fight and I don't see SMB growth slowing down in 2008," agrees PC research analyst Hannes Fourie. "The SMB market is still going and lots of money is being put into SMB development by the Industrial Development Corporation, the World Bank and others."

Fourie also dismisses the fatal impact of power outages, saying notebook sales have soared since January and was a sign of SMBs - in particular - working around the problem. "SMBs are fast adopters of technology and most now use notebooks and 3G to gain mobility and work around the outages."

"It is adapt or die and SMBs are adjusting to the circumstances they face," say Kok. "Solutions that allow companies to continue business are available at a relatively low cost and initial investment. I'm very optimistic about the growth potential of SMBs - both from a technology and an end-user customer point-of-view.