Europe's Business Backbone Looks Abroad to Survive

Europe has 23 million small and medium-sized enterprises (SMEs), according to a 2011 report by the European Union. They made up two-thirds of all private employment and created around 80% of new jobs over the previous five years.

With the eurozone economy in crisis and several of its members needing billions of euros in rescue funds, how are SMEs coping with scarce financing and weak domestic demand, and what are they hoping for in the years ahead?

Reuters has spoken to SMEs in Germany, France, Italy and Spain and will follow their progress over the coming year, looking at the challenges they face, the policy changes that affect them and the strategies they use to protect and grow their business.

SPAIN: Unidesa-Odi

Unidesa-Odi, the only manufacturer of artificial teeth in Spain, has been through crisis before in its 60-year history.

Eleven years ago, its distribution arm had over-reached itself and was making losses that threatened the future of the business, so it retrenched to its manufacturing base, closing stores and slashing its staff from 250 to just 52 today.

"What saved us then was exports," said Soraya Dominguez, daughter of the founder and now export director for the company.

With Spain sliding deeper into recession in the second quarter and taking EU cash to bail out its banks, the company is again pinning its hopes on the 62 countries to which it exports to offset weak demand at home.

Domestic sales have fallen in both of the last two years and accounted for just 35% of the 2.6 million euros ($3.2 million) it turned over in 2011. It doesn't expect growth in Spain this year, either.

As the euro zone crisis rumbles on, spreading its malign influence to the global economy, the company is hoping to maintain market share in its existing markets and grow in new ones such as Britain and the United States.

It is already feeling the pinch from rising competition and lower prices and is particularly concerned by Chinese competitors.

"The Chinese have the money to buy companies' know-how, the technology, and if they have the technology, they can get the same quality," said Dominguez.

"But the salary of one of our employees is equivalent to 10 of theirs. At the end of the day, that difference affects everything. We, as a European company, can offer a price that is three times higher. That's a serious problem."

Obtaining finance is not easy, either. Banks are inflexible and increasingly demand guarantees and even personal collateral, the company said.

Unidesa-Odi is lucky, however, in that it does not have large outstanding bills from customers as it works with just a few distributors, which keeps working capital requirements lower than they might have been.

Dominguez knows that to prepare for the future, the company has to invest in research and development and cut costs. It is spending 1 million euros to automate more of its manufacturing process, which will inevitably lead to more staff reductions.

"It is a disgrace," she says, "but it is about surviving."

Sentimentality is a luxury she cannot afford, when dentists can send an order direct to Chinese makers and have the product back by courier within three days.

FRANCE: Michel et Augustin

Augustin Paluel-Marmont and old friend Michel de Rovira quit their strategy and marketing jobs in 2004 to bake shortbread in a small Parisian flat, which they sold to local stores.

Before long, they were renting bakeries twice a week to make nearly a thousand bags a day of delicate, crumbly sablés, a golden biscuit prized in France since the 17th century.

Now they have entrusted the baking to food manufacturers and the company's 35 staff - with an average age of 29 - can devote their time to marketing its more than 12 million euros' worth of biscuits and yoghurts to small boutiques and supermarket chains.

Having conquered Paris and penetrated deeper into France, they have now signed deals to supply their brand to stores in Belgium, Switzerland, Singapore, Hong Kong, Moscow and New York and want to win over other major world capitals.

Selling an affordable luxury to what marketeers term the resilient "bobo" consumer - bourgeois and bohemian - the company says euro zone problems haven't really stopped them growing.

"Despite the crisis, we have never sold as many luxury products as today," says 36-year-old Paluel-Marmont. "We see the rise of (supermarkets') own labels, and we are the antidote to own labels."

The company's main concerns are the cost of raw materials in a period of rising commodity prices, but also the conservatism of big retailers and distributors, whose buyers tend to go for safe haven brands rather than innovative newcomers, especially during tough times.

Paluel-Marmont is aiming to push turnover to 100 million euros in five years and is looking for financing of 15-20 million to make it happen.

"Instead of raising 15-20 million, I would quite like to raise 100 million, because I believe in it," he confides. "Could we make Michel et Augustin the next Haagen-Dazs within five years? I believe so. Only for that, we have to find the financing."

He is currently looking to raise the cash from family-owned funds, private equity and industrial investors, but admits it isn't easy. He has never called on the banks for funding, he says, as raising money in France is complicated, and the banks are reluctant to fund ambition.

"France is the country of caution. Generally, it lacks ambition; people find it hard to take risks," he says.

"I believe, more than ever, given the gloomy climate in France, growth is cheaper to achieve abroad than in France. Today, our export development is starting to look good, and there is a real demand and appetite for everything that is French in Asia."

ITALY: D-Group SpA

If patience is a heavenly virtue, suppliers to the national health service in Catholic Italy really earn their holy stripes.

D-Group, founded more than 20 years ago by chairman and owner Angelo Fracassi, says the state system pays its suppliers, on average, after 365 days. That can stretch to a staggering 1,500 days in Calabria, at the "toe" of the Italian peninsular.

Things are not much better in the private sector. Smaller clients take 120-180 days, but the large ones are taking up to a year and asking for a discount, exploiting Europe's financial crisis, Fracassi said.

"The situation is getting worse every month," he added.

Unsurprisingly, the company, which employs 300 people generating nearly 84 million euros of sales last year, mostly from its test-tube diagnostics unit, says liquidity is its main problem.

The big banks, where SMEs have no negotiating power, have not proved to be the most understanding business partners, so it has opened credit lines with mid-sized banks in northern Italy that allow them some wiggle room. It has also moved some deposits to banks in the south, which pay higher interest.

As fears for the future of the euro have mounted, the group's shareholders, mostly family members, have recently moved the bulk of their cash out of the euro zone. They are concerned that if the crisis comes to a head, they might otherwise be unable to pay their foreign suppliers, particularly in Japan.

"For the moment, none (of our suppliers) has asked us for higher guarantees," he says, but the future of the common currency casts a long shadow over the business.

"If the euro were to collapse, the impact on our company would be immense."

If the currency survives, the company still expects operating profit to drop between 5 and 10% this year on sales down perhaps as much as 3%, as government austerity measures cut spending in the health system.

Exports offer a glimmer of hope. Its Faster unit, which makes laboratory equipment and accounts for about 10 percent of turnover, has recently won a promising Swiss deal, but overcoming distance, language barriers and differences in legal frameworks is harder for SMEs than for their larger rivals, which have more resources to throw at such obstacles.

Exporting also carries greater risks, but Fracassi complains he can't get adequate export credit insurance.

The state facility, SACE, like much of Italy's public service provision, is too slow, he says.

Patience in such circumstances is less a virtue than a dangerous necessity.

GERMANY: KBA MetalPrint GmbH

It's a long way from his Stuttgart office to Communist Party headquarters in Beijing, but when Ralf Gumbel, chief executive of KBA MetalPrint, gives his wish list for government action, it's the Chinese government he's thinking of, not Berlin.

Asian customers alone accounted for 60 percent of KBA's 69 million euros of turnover last year, and up to 90 percent of its output is exported.

Gumbel would like China's leaders to pump more money into public works to arrest any slowdown in economic growth. He would also like them to do more to ensure fairer competition there, as he says Chinese businesses are increasingly counterfeiting KBA's machines, which are used to print on tins, beer cans, bottle caps and oil drums. He reckons he could triple his 270-strong workforce if customers buying counterfeit machinery bought his.

The company's export focus has helped it weather the euro zone crisis. Not only has it benefited from the weak euro, but trends in Asia such as the rise of the big supermarkets and increasing urbanization play directly to its strengths. It sees "absolutely huge" potential there, where only 2% of foodstuffs are currently packaged, compared with 98% in Europe.

It is also on the East that Gumbel's fears are focused.

While he worries about cashflow problems for customers in Italy and Spain - he says customers and partners are already complaining about more hesitant bank lending - it is an Asian slowdown that would hit his business harder.

In the meantime, Gumbel is working to squeeze out what savings he can to make the business more resilient. In February the company started implementing lean production techniques pioneered by carmaker Toyota, drawing on external engineers to cut costs and find efficiencies.

It has also hired consultants to assess its products, customer needs and market development, while internally it is working on marketing, staff motivation and reporting lines, all of which it hopes will give it an edge.

In Germany, it struggles with a problem familiar to many SMEs. Recruiting and retaining skilled employees such as electronics engineers and sales staff is always difficult when larger rivals can offer bigger salaries. Sharing a town with Daimler, Porsche and Bosch, KBA is really up against it.