Opportunities and Challenges for Small and Medium-sized Enterprises

By Angus Gillespie

There is no doubt whatsoever that the lifeblood of Canada’s workforce begins and ends with small and medium-sized enterprises (SMEs). These businesses play a massively significant role in the Canadian economy that cannot be overstated and provide the economic engine that drives the entire country. It’s always been that way and always will be – at least in our lifetimes and well beyond. Keeping SMEs healthy will ensure the country remains robust. In spite of knowing all this, there are more than a few warning signs that the desired support, especially from governments, is at times lacking, which puts some of these essential businesses at risk.

In fairness, Canadian companies of all sizes have benefited from such things as the Scientific Research and Development Tax Credit. But the business sector would still like nothing better than to procure additional government assistance. One way that has been mentioned quite frequently is a method of preferred procurement. Domestic procurement often drives export credibility, which would by extension help SMEs ramp up their developments on a global scale. As well, more public-private partnerships that allow SMEs to participate can help them flourish and thereby drive innovation.

About 99% of all companies in Canada have fewer than 500 employees and they employ 65% of the workers in the private sector. Canada’s SMEs see value in growing their business despite multiple challenges, sluggish results. According to a recent BDC survey four out of 10 SMEs are successfully meeting the challenges associated with growth, while 38% of Canadian small businesses experienced negative numbers or no growth over the past three years. The most successful entrepreneurs said their winning growth strategy is to look after customers and employees, innovate and invest in their business.

SMEs continue to pursue growth opportunities despite persistent challenges in increasing employee numbers and sales, according to a survey released by the BDC as part of BDC Small Business WeekTM 2015 last month. The annual event was held from October 18 to 24 under the theme “Knock down barriers. Dare to grow.” This was the 36th year BDC Small Business WeekTM has celebrated entrepreneurship at the local, provincial and national levels. The popular event brings together thousands of business people at hundreds of events across the country to learn, network and socialize.

The Canadian Business Journal spoke with BDC Vice President and Chief Economist Pierre Cléroux about some of those findings and the expectations of SMEs as we head into 2016.

“Revenue, profit and jobs are the three dimensions that determine the degree to which an SME is growing, and the findings are quite sobering, particularly for the smallest businesses,” Cléroux says.

While Canada’s medium-sized businesses (100–499 employees) are in a better position to maintain a sustained or strong pace of growth, the fact remains that 6 out of 10 SMEs (60%) showed weak or zero growth or even negative growth during the last three years. Forty-six percent of the smallest businesses (1 to 4 employees) are showing zero to negative growth.

Business leaders cited rising operating costs (64%) as their top obstacle to growth, followed by difficulties in hiring and retaining qualified personnel (55%) and external competition (48%).

However, there is a silver lining to some of the survey results. Thirty percent of SMEs did experience strong growth and profits. These businesses saw their revenue and profit increase faster than their number of employees, suggesting some level of improvement in productivity.

“There are solutions to turning this ship around and one of the most important is for Canadian entrepreneurs to invest in technologies to make their operations more efficient,” Cléroux emphasizes.

“Running a business these days clearly is no walk in the park,” added Pierre Cléroux. “Successful entrepreneurs show you can improve your chances by doing what amounts to fairly basic things—looking after customers and employees, innovating and investing—that are often overlooked,” he added.

Better planning can also provide a significant boost, with the largest SMEs far more likely to do strategic and growth planning than the smallest ones according to Cléroux said. Strategic and growth planning can pay off in a clearer vision, coordinated action and better results.

On the one hand, SMEs are presented with a multitude of opportunities, but there are also many challenges as the global society becomes more intertwined with each passing day.

“What we see in our research is that it’s much more competitive now than it used to be,” Cléroux says. “Every time we do research on small business we realize the additional competition within the Canadian market but also internationally. As example our exporters to the U.S. see more competition with countries like Mexico and China.”
Another major challenge that has been identified by the BDC and numerous other sources centres squarely on finding qualified individuals to carry out particular tasks.

“It’s like that across the country, even in provinces where the unemployment rate is higher,” Cléroux adds. “They also have a tough time in finding the people they need. For example, finding a mechanic in Ontario is almost impossible or finding a truck driver is difficult.

Due to our aggregate aging population there are more people retiring and leaving the workforce than are entering it. It’s going to be difficult for the next decade to find the right people to work for certain companies. There is a skills shortage and that dearth of expertise needs to be addressed.

Exporting Climate is Strong

The export market will gain ground with the dollar being so low. It’s a great time to look for opportunities in the U.S. Even companies that don’t currently export their products or services are looking into the possibility because the demand is so strong. Cléroux believes that Canada being part of the Trans-Pacific Partnership is a positive step in the right direction.

“We need other markets to continue to grow our businesses,” he says. “Canada has a very highly-developed economy but our price points are high. Opening another free-trade agreement is a great idea.”

China is also still a very attractive destination for Canadian SMEs to be shipping their goods. This is in spite of the fact you often hear of pending doom and gloom about the slowdown in the world’s second-largest economy. It is true China just recently lowered their interest rates in an effort to stimulate their economy, but many financial experts will argue that it’s not plausible to expect their rapid 17-20% growth is going to continue forever. A pragmatic look at the situation still reveals a country’s economic base that is still expanding at a rate of 4-6%.
“Where we are successful with China is on the west coast, where a good portion of the exports were lumber,” Cléroux notes. “Two or three years ago 50% of British Columbia’s exported goods went to China. The number dropped because the housing market in China has slowed significantly. Still, 34% of all exports from B.C. go to Asia. On the east coast some companies are selling in specialized markets such as seafood, meats and wine. Seafood to China has tripled over the last five years because their middle class is expanding and so they are able to purchase higher quality products made in Canada.”

The percentage of exports to China from Ontario remains quite small at about 7%, but it has been increasing in recent years.

The slump in oil prices is having a major effect in Alberta, and to a lesser extent Saskatchewan and New Brunswick, but the slowdown not only impacts on the big oil and gas players, it causes a huge ripple down effect into the SME supply companies. The good news is that a growth pattern in Ontario, Quebec, British Columbia and Manitoba has been established as improving.

“This will be a good year for the manufacturing provinces because we are exporting more to the U.S.,” Cléroux states. “People should be more confident about the Canadian economy. I know we had a slow start and that’s because investment in the energy sector has been declining but the rest of the economy has been doing well. We’ve been creating jobs over the last 12 months. It’s a good time to invest with a lot of financing available.”

SME Safety Net

In a survey of Canadian executives, six out of every 10 think that governments and public authorities provide insufficient support to SMEs for their innovation efforts. About four in 10 believe that small-to-medium enterprises deserve more subsidies, as well as procurement preference by government.

While it’s known that SMEs are big contributors to innovation, the country’s innovation levels compared with others on the international stage is rather weak. According to a report by The Conference Board of Canada, this country remains near the bottom of its peer group on innovation, ranking 13th among the 16 peer countries, despite more than a decade of innovation agendas and prosperity reports. As nations trade more with one another on an increasing scale, it’s crucial that the problem be pinpointed and resolved.

“The small business sector has unequivocally kept Canada’s economy from sinking into deeper water,” says CIBC Deputy Chief Economist Benjamin Tal, who co-authored a CIBC Wold Markets report with Senior Economist Royce Mendes. “While Canada’s small and medium-sized enterprises have been an island of stability, not only demonstrating resiliency during the recession but also leading the way during the recovery, they are entering a new reality, one that will force them to innovate and enter new markets to sustain growth.”

A big part of innovation is coming from new start-ups. To launch a business you often need a new idea. Unfortunately the country is not starting as many new businesses in Canada as there once was and that could well be one of the main reasons why innovation is not increasing as much as we would like.

“Another reason is that we’re not investing enough in Canada. They are barely increasing in Ontario and declining in Quebec and those two provinces represent 60% of the Canadian market,” Cléroux says.

Comparatively, the United States invests much more into its companies to enhance the levels of innovation and competitiveness. It stands to reason that if there is purchasing of new equipment and/or acquiring newer technology, it’s going to make the job that much quicker, cleaner and more efficient.

Cléroux also notes that the online business sector is one that still has tremendous potential for unlimited growth.
“It’s definitely underdeveloped in Canada,” he remarks. “Canadians want to shop and buy online but as of now only 17% of SMEs are selling online and only 40% have websites.”

A compounding conundrum is that the overall sentiment leans towards a lack of confidence in the economy, which means investment levels decline, which in turn results in SMEs being unable to afford to explore and generate new technologies and innovative products and services.

Regardless of whether Canada is really that far behind on innovation or not, the fact that the sentiment is out there and there is conversation about it to a fairly significant degree is cause enough to warrant close attention. Innovation is driven by SMEs and they in turn drive our economy. Collectively, we need to ensure we keep driving on the paved road – and not off a cliff.