Friday, May 6, 2011

SWOT Analysis of SME segment of UAE

                      fig: Abu Dhabi( source: emiratespalaceabudhabi.com)    

For any nation a vibrant SME  (small and medium enterprise) segment does not only play an important role in providing vibrancy to the national economy but also  a very important role in providing employment and unwinding entrepreneurial spirit of the population. In the following blog author will be doing a SWOT analysis of the SME sector at UAE.


SME primarily means small and medium enterprises. Different nations have different definitions for the SME segment. According to the definition by European Union companies with up to; 250 employees come under medium enterprise, 50 employees come under small enterprise and 10 come under micro enterprises. Another global definition has been defined by Standard Charted bank that places any organization with a turnover of US $ 1 Million to US $ 25 Million under the SME segment.



SME segment has the following advantage:-

• It’s an important constituent of economy and a major source of employment for many of the emerging economies across the world. In many of the economies around 90% of the non oil GDP comes from the SME segment. SMEs constitute 50% of the global GDP and employs 85% of the world population. (Dun and Bradstreet, 2008)

• Helps in realizing entrepreneurial zeal and creativity of individuals.

• Helps in diversification of the economy.

• Due to ease of entry and exit into the SME segment, it helps  building more elastic and competitive economies.

Along with the usual benefits, SMEs do have their own disadvantages that are as follows:

• These are usually small companies lacking management capacities.

• They find it tough to afford various support services such as, financial services, HR services, IT support etc, which hampers their productivity.

• SMEs have been hit hard by the global economic crisis on two fronts, due to credit crunch as well as customers owing money to them finding it tough to pay back. This had resulted in closing down of many of the SMEs across the globe.


Government across the entire MENA (Middle East and North Africa) and GCC (gulf cooperative council) are emphasizing strongly on the SME segments. UAE one of the important constituent of the GCC has got a very strong SME segment with more than 70% of the non oil GDP coming from the SME segment (Chris Bruin, 2010). The major Emirates of UAE , both Dubai as well as Abu Dhabi have got ambitious socio economic development plans in the form of Dubai 2015 and Abu Dhabi 2030 with a strong focus on SME segment.

The following table shows some important facts and figures regarding the SME segment in UAE



SMEs by Emirates and Sector (Source: Dun & Bradstreet, 2008)


 SWOT Analysis of SME sector in UAE
Strengths:

• Strong economy: as a nation UAE is a rich country with huge oil, trade and tourism revenue. This helps in providing the required institutional support for the emerging SMEs in the Emirates.

• Rise of oil prices: the rise of oil prices have resulted in stronger economy for UAE, eventually resulting into stronger confidence among the business fraternity and higher disposable income for consumption. This will surely have positive impact on the SME segment. (Emirates 24/7, 2011)

• Efficient government: The govt. authorities at UAE are known for their efficiency and speed of execution. As a part of their plans for Emiratization and economic diversification, they are keeping the SME segment high up on their agenda. Both at Abu Dhabi and Dubai associations, intended for encouraging and supporting SME segments, had been formed.

• Intra Regional trade: SMEs are expected to be benefitted by the rise in trade across the MENA region. (Emirates 24/7, 2011)

• Strategic position: UAE is placed strategically between the cross roads of West and East and North and South. This strategic position helps it to attract and retain businesses and human resource talent from all across the globe.

• There had been rapid growth in lending activities for the SME sector in the recent years, from 2003 to 2008 there had been an increase of 200% in lending activities for individuals for business purpose. Along with domestic banks many of the MNC banks like Standard Charted and HSBC have their dedicated business units at UAE, catering specifically to the SME segment. Some of the banks active in SME lending in the given geography are- HSBC, Mashreq, RAK, Union national bank, ADCB, Citi bank etc (Dun & Bradstreet, 2008)

• SMEs can also draw strength from the Inherent strength of Dubai and Abu Dhabi as trading hubs and regional financial centers.


Weakness

• In spite of a booming SME segment, they keep facing various challenges in the form of high start up cost and difficult access to capital. In spite of growth in credit for SMEs, most of the individual businesses still complain about lack of capital. According to a research conducted by Dun & Bradstreet loan rejection  has been estimated to be in the range of 50 to 70%.

• Other challenges include high registration fee, high rental charges, information asymmetry etc. (Dun and Bradstreet, 2009)

• SMEs are vulnerable to low financial buffer, low margins and high operating cost.

• In UAE though some 90 percentage of the firms come under the SME segment where as SME also contribute one third of the GDP, the figure is still low in comparison to other developed and emerging economies where the contribution of the SME segment is around 60 percentage.


Opportunities

• SMEs will get a great boost by the abolishment of the minimum capital requirement of US $ 40, 000 (150,000 DH) for setting up of a limited liability company in UAE. (Dun & Bradstreet, 2009)

• Some of the SMEs are quite competent. Around 58% of them are expected to be operating internationally by 2013. (Emirates 24/7, 2011)

• SMEs at UAE are also expected to be benefited by the increase in international activities by the SMEs worldwide. It is expected that by 2013, number of SMEs worldwide, conducting international activities will increase from 29 % to 40 %. (Emirates 24/7, 2011)

• As a part of their economic growth plans, the Emirates of UAE are planning to diversify into various alternate industries other than the usual ones like petroleum, tourism trading etc such as petrochemicals, education, media, metal works, aerospace, telecommunications etc. Such industries will require a cluster of SMEs working around them and providing various types of support and enabling functions. This will surely boost the SME segment at UAE.

• The Emirates in UAE are coming up with new platforms to encourage and support SMEs. Mohammed Bin Rashid establishment for young business leader had been established in 2002, which specializes in providing financial assistance, training and inspiration to UAE nationals in starting their own business. Another such initiative is “SME 100” that awards top 100 SMEs in Dubai. The Khalifa fund provides funds and training for startups at Abu Dhabi. Such strong initiatives taken by the government will definitely help the SME segment in the long run.


Threats

• As a region Middle East is susceptible to political unrest and turmoil. Though UAE has one of the most popular, efficient and transparent govt. in practice and there is no threat of any impending political unrest in the gulf state, but since the MENA region as a whole is prone to political upheavals, it can affect the intra regional trade, considered very important for the SME segment.

• Compared to other emerging and developed economies, SMEs at UAE are still not matured enough.

• Growing globalization will pose new competitive challenge to the SMEs at UAE.

• SMEs at UAE will also be prone to threat from the bigger industries of UAE. The SMEs will find it hard to match them in terms of management and technical skills, quality and cost effectiveness which their bigger counterparts can produce on account of their scale.


As any other business entity, the SME segment at UAE has its own pros and cons. Some of the them are  structural while some are  conditional. Beyond the given pros and cons, one thing that can not be denied is that, SMEs definitely had a great role to play in the nearby future of the UAE and the govt. authorities in association with private sector  will not prefer keeping any stone unturned in further boosting and encouraging the sector.

Reference:

1> Chris B, 2010, Supporting SME essential for UAE’s growth, Emirates 24/7, available at http://www.emirates247.com/2.308/comment/supporting-smes-essential-for-uae-growth- 2010-06-30-1.261304

2> Dun and Bradstreet, 2008, D&B business insight series: SME lending in UAE 2008, p-3, available at< http://www.dnbsame.com/downloads/D&B_SME.pdf >

3> Emirates 24/7, 2011, 58% UAE SME to go global in 2 years, available at http://www.emirates247.com/business/economy-finance/58-uae-smes-to-go-global-in-2-years-2011-01- 23-1.345825

4> Emirates 24/7, 2011, 58% UAE SME to go global in 2 years, available at http://www.emirates247.com/business/economy-finance/58-uae-smes-to-go-global-in-2-years-2011-01- 23-1.345825

5> Dun and Bradstreet, 2008, D&B business insight series: SME lending in UAE 2008, p-3, available at< http://www.dnbsame.com/downloads/D&B_SME.pdf >

6> Dun & Bradstreet, 2009, Challenges still remain despite removal of LLC capital, available at < http://www.dnbsame.com/news_aug20.html >

7> Dun & Bradstreet, 2009, Challenges still remain despite removal of LLC capital, available at < http://www.dnbsame.com/news_aug20.html >

8> Emirates 24/7, 2011, 58% UAE SME to go global in 2 years, available at http://www.emirates247.com/business/economy-finance/58-uae-smes-to-go-global-in-2-years-2011-01- 23-1.345825

9> Emirates 24/7, 2011, 58% UAE SME to go global in 2 years, available at http://www.emirates247.com/business/economy-finance/58-uae-smes-to-go-global-in-2-years-2011-01- 23-1.345825

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