Techaisle Blog

In the first part of a three-part series, this post examines the growth of BRIC SMB IT markets, and their ranking relative to other markets. Here we will discuss the Top 10 markets from an SMB IT Spending perspective, and while it is well known that emerging markets grow faster from a smaller base, the absolute rankings of large markets tend to be relatively stable except in the case of exceptional growth, making it an important milestone. This is the case for China, in this forecast as it replaces Germany in its’ longstanding position of the third largest SMB IT Market. Other changes in ranking are that Brazil replaces Italy, and India comes into the Top 10 by the end of the forecast period. Korea displaced Australia as #10 in 2011 and manages to stay within the group throughout the forecast. The primary reason for this displacement is similar to that of other economic segments: sheer volume increase based on population and higher GDP per capita.

According to this Forbes article, the equity value of the BRIC economy financial markets peaked at 18% of the global value in mid-2011, and grew four-fold in the previous ten years. As a general rule, technology adoption lags economic growth and depends on many factors. This accounts for the slower climb up the rankings when compared with the overall economy, and is exacerbated by the fact that SMB IT adoption radiates from Tier 1 Cities to Tiers 2 and 3 as infrastructure allows.

Even so, we can see the fundamental differences in the market structures between Germany and China shown in this graph, despite the huge volume increase in China. Germany demonstrates a much more mature mix of IT products and services, weighted toward value-added segments of Software and Services, while the China market remains very hardware centric; almost half the opportunity is still hardware devices by the end of the forecast period. However, China is different than many other emerging markets because it is not only strategic as an end user market, it is also critical as a supplier to the world and to its’ own domestic market. The history of the IT market in Asia Pacific, especially since introduction of the standard PC architecture, has been a race between US brands and local manufacturers whose production is adopted in the domestic market through osmosis along with cultural and distribution advantages. In the case of China, this is more serious as it becomes an increasingly important global segment; on one hand there is a push to open the market while on the other US giants like Apple, IBM, Intel and Microsoft become more reliant on the Chinese Consumer and Enterprise IT markets.

There will be increasing international pressure to make sure there is a “level playing field” in China, as we have seen from initial forays like the Huawei controversy earlier this year. PC maker Lenovo is going very strong in the global market, having reached the #1 vendor in unit shipments worldwide in a relatively short period of time, and snatching three times more domestic market share than the nearest competitor. Lenovo and Huawei have also pushed Apple to sixth place in the Chinese mobile handset market, despite Apple manufacturing tens of millions of handsets and tablets in China. Welcome to the global economy.

How big is the SMB IT market opportunity? What is the potential market size of mobility, cloud, datacenter, PCs/Tablets? What is the growth in spend in regions? What are average the spends per business? What are the key business issues?

That is the topic of our Infographic. Click the image to download.

Global SMB IT Spend is poised to reach ~600 Billion dollar by 2016. Worldwide, there are still 26 million SMBs yet to buy a PC, 30 million SMBs do not have a server; some of these may directly move to cloud. They are already using internet to a very large extent. Granted that many of them are less than 20 employees but they are not going to be static. Approximately 560,000 new businesses were started each month in 2012. About 10,000 of small businesses become mid-market businesses each year.

North America and EMEA are infrastructure, software and services driven while Asia/Pacific is product driven. North America has the highest average IT spend per business spend while Asia/Pacific and Latin America the lowest. There is a vast difference between emerging market and mature market SMBs in terms of average spend per business. It is also useful to note that while Asia/Pacific has the highest number of SMB cloud users, average spend per user is less than 1/5th of SMB user in North America.

In terms of business issues, SMBs in the US are focused on collaboration and communications. The three business issues feeding into this focus are reducing operational costs, focusing on new markets and improving effectiveness of sales and marketing. On the other hand Western Europe SMBs are concerned about workforce efficiency with focus on costs was a key driver for SMBs in in that region, improving workforce productivity (getting more out of the workforce) and reducing operational costs. On the other hand Asia/Pacific SMBs want to grow faster than the market and are constantly worrying about market penetration. If they do not act now, they think that the opportunity will slip by.

Download the Infographic (click on image) to get a great snapshot of SMB opportunity including spend on PCs/Tablets, Mobility, Cloud, Data Center, Security.

Despite the bank bailout, American small businesses have had limited access to financing. The blame game has focused on the greed of bankers who are taking advantage of the “free” (meaning zero interest) dollars given to them by the government and using that to make Wall Street bets as opposed to lending to small businesses and homeowners. But are they really to blame? Money is efficient. It finds its way to places that give the best returns. It so happens that the best returns no longer come through lending activities but from high frequency trading. The fact that the bankers asked for and were given the money to engage in this activity at no cost to them was a mistake the Bush and Obama administrations made. No question about it. But why blame the bankers? They are simply fulfilling their obligations to their shareholders. Should they make such obscene amounts of money in bonuses? Why not? The amount of money they contribute back to the country is a matter of taxation and tax reform. That said, proprietary trading seems to be on its way out and banks are gradually returning to their boring old lending practices.

In a recent survey, nearly 35% of small businesses clearly mention that availability of credit/loans is impacting their business, as shown in the chart below.



The real issue though is the lack of good options for delivering financing to small business in an efficient manner. Bank consolidation over the last decade has left business lending to small businesses largely in control of large and mega banks. Small businesses can and often do turn to the Small Business Administration (www.sba.gov) for financing. The SBA has a number of micro-financing schemes that allow small businesses to borrow a maximum of $35,000. SBA data suggests the average amount borrowed hovers around $13,000. The delivery of those loans however is done through various local, community and national/global banks. The process is onerous, locks in collateral and is often not available to the weakest of small businesses. These initiatives also do not help START small businesses as most loans require a documented operating history. Small businesses therefore often start businesses by using credit cards as a way to finance ventures. This is dangerous as cards have higher interest rates and defaults can negatively impact personal credit histories for years to come. The result is a dampening of the ability of individuals to take risks. The result is less innovation and fewer small businesses.

Perhaps this is an opportunity for us to look to the third world where micro-finance lending has created whole new businesses by the hundreds. These businesses are small but successful enough that loan repayments are above the 90% level. Because of the small amount of money in each loan, the risk per loan is low often requiring no collateral commitments. Micro-financing organizations such as Grameen Bank have turned in impressive performances both in terms of the amount of money they have lent over the years and the number of businesses they have helped. Grameen Bank’s history is well documented having been in existence since 1976. In some ways they could be hailed as the world’s most successful venture capital firm. By the end of 2009 Grameen had lent over $8 BILLION (since inception) in micro-credit to nearly 8 million small businesses. What is impressive is the low default rate. At the end of 2009 less than 3% of the loans outstanding were overdue. All of this has been accomplished in an impoverished country like Bangladesh with 2500 branches and about 13000 loan agents.

Can the model be replicated in the US? Absolutely! But it demands structural change in the way small businesses access financing today. Perhaps the solution lies in establishing a micro-finance exchange – a clearinghouse for micro-credit made specifically to allow people to start businesses. What would the benefits of such an exchange be?

1. Access to low interest financing with low or no fees. Access is limited to companies with fewer than 20 employees (80% of all small businesses)

1. A cap equivalent to current micro-finance initiatives or slightly lower (say a maximum of $35,000)

1. No collateral requirements but the applicant must submit a business plan

1. No impact on personal credit history if the loan is not repaid

1. Operational support for small businesses including better rates on things like internet access, mobile service plans, transportation and logistics, import/export, legal services, banking, insurance and talent acquisition.

Micro-finance in developing countries has proven to work well and it demands serious consideration as an option here as well.

Abhijeet Rane
Techaisle

I recently attended and "Small Business Analyst" event hosted by Cisco in which the Company talked to us analyst types about their strategy in approaching the SB market on a worldwide basis. The conference lasted a day, the group of attending analysts was small but well represented including leading names in the IT analyst market such as Gartner, Forrester and Yankee Group.

New products were showcased and strategies outlined and while I won't go into detail about new products due to non-disclosure conditions on many of them and also because it wasn't the products that impressed me the most. Make no mistake the products did impress me and my colleague - enough for us to decide that we should evaluate them for our own business.

What impressed me the most was the focus and disciple Cisco has brought to bear. Too often we see companies that are leaders in the enterprise space take on the SB market opportunity under the rationale that what's good for enterprise is good for SBs - with a few changes. Wrong. Too often we have seen it doesn't work and when it doesn't these firm redefine "SB market" to simply mean companies that are a little bit smaller than their traditional market and calling it SB or worse "SMB". The latter often used as a catch all for all those firms that are currently not being sold to be the comapny's sales force which is too boxed in in their thinking of who their customers are and how they should be sold. Its organizational inertia at work.

Cisco, themselves a leader in the enterprise space is approaching the market as any company in it's position should - with a strategy, products and organization designed to address SB needs. Here are some of the key elements

• Cisco has created an entirely new group to not just market products to SBs but to design products that fit SB needs. The product development group will re-think products ranging from simple routers, switches to telephony products keeping SB needs as their sole perspective. For a company used to enterprise style margins on products they have realized that they may not be able to gain the same kind of margins on thee SB products but the important point is that they are incorporating that reality into their strategy. This is a very difficult shift to make for most companies but Cisco realizes it is not just about how products are manufactured but how the organization is structured as well.

• Speaking of organization, the Cisco SB organization is in many ways a company within a company with its own set of priorities and complete in that it has its own sales, marketing, services, support and product development initiatives.
  
  
  • Marketing: Cisco has come to terms with some market realities such as the fact that the Cisco brand is not well known among SBs. Cisco's VP of Small Business Marketing Rick Moran, stressed this point as a major component of their SB marketing strategy. Here again we see Cisco's pragmatism, willingness to adapt and learn come through. For a company traditionally used to talking about speeds and feeds their SB marketing efforts exhibit a focus on SBs and the people running them. The importance of SB to Cisco as a company is evident from the fact that there is a link to a variety of SB related pages on the Cisco home page. Cisco has established a place where SBs can have a conversation with Cisco, its employees and its partners called Cisco Community Central. the site is less used to market Cisco products and more to help SBs learn about the developments relevant to them - technological or otherwise. It's a young site - barely a year old but a promising start.
  
  
  • Sales/Channel Development: Cisco has always relied on a strong network of channel partners to sell, service and support its products. Now Cisco has introduced a special certification for channel partners selling to SBs called "Cisco Select Certification". Achieving that certification requires taking training and an exam. Interestingly, Cisco has laid out the return in investment for a channel partner to help them decide whether it is worth it to achieve that certification or not. Achieving the certification comes with the usual benefits of support and market development funds.
  
  
  • Regional Sensitivity: Cisco is showing a lot of pragmatism by not taking a "one-size-fits-all" approach to SB marketing. The bulk of the current SB effort appears to be targeted towrads countries where Cisco has a leadership position in the enterprise space. In other words, given their penetration of enterprise markets its seems logical to go after SB markets in order to increase revenues from a region. Also not all solutions are being marketed aggressively to SBs in all regions. For example, in countries such as India where are large opportunity still exists among enterprise markets for solutions such as collaboration or enterprise network hardware, the SB market is taking a back seat - for now.
  
  
  • Services and Support: Cisco VP Sherri Liebo introduced the services and support offerings targeted towards SBs. These include add-on warranties and varying levels of support for channel partners as well as end customers. The support solutions range from entry level technical support (branded as Smart Foundation services) to ongoing monitoring of network resources (SmartCare and SmartNET). All have varying levels of support and hardware replacement options. These will also be sold through the burgeoning network of SB channel partners.
  
  
  

Bottom line - I believe Cisco is off to a good start in the SB space exhibiting the focus and discipline required to gain share in this very difficult market.

Abhijeet Rane
Techaisle