Here’s a story set in the early 2000s, shared by a retired senior manager of a small business in Coimbatore.
The company he worked for bagged its first export order from a manufacturer in South East Asia. Towards the end of the first year, a team from the customer’s company visited them. They expressed their satisfaction and politely demanded that they cut their price by 10%. The company agreed, taking it as a challenge. They had to take a hit in their margins, but eventually they found ways to cut costs.
Next year, their customers came up with the same demand — a 10% cut in price. Orders were going up, and his company couldn’t say no. But this time cutting costs turned out to be difficult. It was already being run efficiently, and over the previous year they had cut costs wherever they could. However, in the second year, they pushed harder and somehow managed.
In the third year, again, the customers wanted a further 10% reduction in price. This time, the CEO and his team put their foot down and said their margins were already thin and it’s impossible to cut costs.
Then, one of the visiting executives took a small notepad from his pocket — he was jotting down as they toured the shop floor earlier — and read out where he thought they could cut costs. Even though nearly 20 years had passed, this former manager remembered the mood in the room as the visiting executive read out a long list. For example, he said, he counted at least spots that had tube lights unnecessarily. ‘You can always cut costs,’ the executive politely explained. ‘It’s all mindset.’
‘It’s a cost-cutting treadmill”, the former manager, who now does technical consulting for a few small businesses in the cluster,’ said. ‘In times of crisis, this pressure goes up even further. Now, we haven’t seen any crisis like this pandemic. And the pressure to cut costs is at an all-time high now.’
Interestingly, what’s hitting media headlines as a good thing seems to be hurting the small businesses the most.
Consider the stories around economic recovery. The recent macro numbers were better than what many expected. The GDP shrank slower in Q2, and there is a general feeling that the economy might be recovering faster. However, there is a catch. A column in Mint newspaper, pointed out that while Indian companies reported a decline in sales for three months which ended in September, their operating profits went up in double digits. Large firms achieved this profit by slashing costs, the column said.
Similarly, some see the rise in commodity prices as a sign that the economy is recovering. For example, a newspaper headline said: ‘Rising copper prices suggest that a strong economic revival is underway.’ However, MSME businesses say this increase is hurting them. For example, the pump set industry in Coimbatore is facing the heat. Rise in copper, iron and steel prices by around 30% in the last few months has resulted in a 12–18% increase in the costs of manufacturing. ‘We haven’t even recovered from the lockdowns and now we are faced with this,’ a manufacturer said.
What looks like good news at a macro level, might not be good news at a micro-level.