Torsten Murke: SMEs need support of the banking sector during their international expansion

For German small and medium-sized com­­panies, growth is both an obligation and a challenge. An obligation, as the export strength of German SMEs is an essential element for their continuous economic success, and a challenge, since the market situation is changing.

The majority of domestic companies still assess the business situation as stable and are therefore confident. However, the companies will have to face major challenges. In simplified terms, there are two categories: one has a national, the other an international dimension. What they have in common is the fact that they can have an effect of inhibiting growth if the companies do not react appropriately.

The national challenge can be explained with the demographic development of the German population and it requires the completion of a few “homework assign­­­­ments”. The requirements for prod­­ucts, design, service and customer support are changing in an ageing society. The companies have to adapt to these customer needs. Those who wish to grow also have to “do their homework” on their respective domestic market. Studies have shown that many German SMEs are planning considerable investments in the coming months, especially in the quality of their machines, to enable a more efficient production and in the modernisation of their IT systems.

The international challenge presents at least as much of a challenge as the national one, and it is becoming greater from month to month: it results from the economic situation of the euro zone. The SMEs’ resilience in the face of economic fluctuations may have increased, since many companies have reduced their costs and improved their equity capital base, but that is not enough. Europe is and always has been the centre of the German SMEs. However, the plan­­ning security of the companies was permanently disturbed by the international debt crisis. Therefore, companies are almost forced to take a more fo­­cussed approach towards the markets outside of Europe – the economic po­­tential seems to be far greater than in Europe itself, at least with a short-term view.

KfW_1776Although nearly 40 per cent of German exports are still destined for the euro ­­zone and another 20 per cent for other EU countries, SMEs are increasingly ex­­panding into markets outside of Europe in the course of globalisation. According to a recent survey, more than one in three export-orientated SMEs is committed to expanding into international growth markets.

The largest growth potential lies in emerging countries. China and South East Asia as well as India, Brazil and Russia are considered dynamic markets, but the USA is also becoming increasingly important as a sales market for companies. Only those who are active in these regions are able to succeed in the expected displacement competition in their home countries.

The potential to move beyond a continent, however, must be properly fi­­nanced. This is where the banking sector joins in. SMEs need strong financial partners at their side. In particular, partners who communicate on equal terms, know the relevant needs and provide practice-orientated solutions. This applies all the more when the companies are active even farther away from their domestic markets than before. Banks with their international networks have to provide the companies with relevant know-how. The expertise of financial institutions in the new local markets combined with a local presence in the area – this is what German SMEs with European roots can benefit from in new ways.

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Also, because the globalised world has become far more complex. The financial department of an SME faces a variety of different country-specific requirements – whether it is a question of optimising liquidity, developing cost-effective struc­­tures or introducing new product lines. The implementation of a variety of projects is being made even more difficult by regulatory requirements. Only local banks in an international network are able to manage complicated transactions on site. The expansion into new markets cannot only be financed centrally from Germany. In many respects, internationally orientated banks are needed, who know the markets and are able to devel­­op suitable solutions tailored to the individual needs of the company.

In light of the ongoing internationalisation, German SMEs increasingly focus on risk management. Their goal is to secure the continued existence of the company with a professional risk management. There­­fore, companies need financial ser­­vices to protect themselves against interest rate and currency risks. The costs of currency transactions are significantly higher, espe­­cially in emerging markets, than in “familiar markets” such as in the UK or Switzerland. These costs and risks have to be hedged in a sensible manner.

KfW_0995The consequence of both the national and the international challenge, however, is the same: the financial requirements of companies are growing. Accord­­ing to the rating agency Standard & Poor’s, European SMEs have to raise fresh capital in the amount of around 3.5 trillion euros by 2018. Contrary to the common prejudices that evolved in the context of the crisis, a bank loan is not a phase-out model. German SMEs still finance 90 per cent of their debts via bank loans.

So when many banks almost unanimously decide to launch initiatives targeting SMEs, this certainly does not represent a sector’s desperate search for new sources of income. These essential initiatives are much more targeted at providing SMEs with the appropriate resources. To finance growth, SMEs need suitable partners and they rightly place high demands on the financial institutions. But at the same time and in light of stricter rules for banks (such as the capital requirements known as Basel III), companies are concerned that they will likely have to pay more for fresh loans in the future.

The banks must therefore respond more intensely to the increased needs and offer solutions from one source. A global network with local knowledge, profes­­sion­­al and individual management of currency and other risks as well as new financing opportunities besides bank loans – with this consultancy service provided by the banks, SMEs get the “fuel” they need to remain the driving force in the German economy and be appropriately represented on the world stage.

TMurke_small_6820The author was born in 1963 and studied business economics in Cologne. In 2011, after having held several positions in New York, Frankfurt and London, he joined BNP Paribas S.A. He is CEO Corporate and Investment Banking Germany. In addition, he has been a member of the management board of BNP Paribas Germany since 2013.