The Shift in SME Productivity

From Back-Office to the Front Line

The Shift in SME Productivity: From Back-Office to the Front Line

I have spent the past eight years working closely with SMEs, primarily within the traditional service, construction and manufacturing sectors. Through my work advising on finance and capital policy, I’ve reached a definitive realization:

There is a clear ceiling to how much we can optimize SG&A—which typically accounts for only 20% of sales—through software alone (including GenAI). To achieve a true breakthrough, we must address the labor costs embedded within COGS, which represents a much larger 75% of sales. By intervening directly in the cost of production, the potential for margin expansion is immense.

More importantly, this is no longer just about profitability; it is becoming a matter of supply restriction. Without these improvements, SMEs simply won’t have the labor capacity to meet demand.

Historically, however, this has required significant capital investment. High-impact equipment—such as robotics and advanced automation—was almost exclusively the domain of mega corporations. This was largely because the industrial equipment sector focused on enterprise-level clients, with technology evolving specifically to serve mass-production industries like electronics and automotive.

However, looking at recent advancements in Physical AI, I believe the day has finally come for Japan’s 3 million SMEs to fundamentally improve their COGS. Given the vast market scale relative to their individual size, the ROI for SMEs will be exceptional—even if the scale of each investment is relatively small—once they can deploy effective CAPEX.

Less money, more gain