Small and medium sized enterprises in Southeast Asia have been hard hit by the Covid-19 pandemic. A way forward is for them to leverage on digital technologies to open up new markets.
Thousands of micro-, small- and medium-sized enterprises (MSMEs) are a major feature in Southeast Asia’s economic landscape. With the region hit hard from the Covid-19 pandemic, these smaller firms need to leverage on more advanced technologies to expand their markets. Government also need to do their part.
There is still no common criteria to define MSMEs across Southeast Asian countries. Each country in the region uses a different criteria to classify this type of firm. Malaysia and Vietnam put the employee threshold for such microenterprises at five and 10 respectively. Singapore defines SMEs as firms with a number of employees not more than 200, but it does not have criteria for microenterprises. Therefore, we adopt the national definition of MSME for each country. Excluding Timor Leste, MSMEs account for an average of 41.1 per cent of Southeast Asian countries’ gross domestic product (GDP) and up to 20.4 per cent on average of their exports. MSMEs, are also the region’s biggest employers, hiring 69.4 per cent of employees across all economic sectors in Southeast Asia.
Nevertheless, this group of enterprises might be the most exposed to the negative impact of the Covid-19 pandemic. The pandemic has challenged MSMEs’ traditional business methods and has forced them to adopt digital technology to stay afloat. In the past, participating in e-commerce was considered as a complement to more traditional business methods. However, they have now little choice but to offer services online because of national lockdowns and social distancing.
E-commerce is considered to be beneficial for small businesses because it helps them reach new markets. It allows them to go beyond geographical boundaries, whilst simultaneously lowering entry barriers for such types of enterprises. With a young population and relatively high internet and mobile phone coverage, Southeast Asian countries are potentially rich markets for e-commerce development. Since the pandemic’s outbreak, the use of e-commerce has surged. In Indonesia, e-commerce has more than doubled compared to the pre-pandemic era, followed by the Philippines (100 per cent) and Malaysia (90 per cent).
At present, the majority of MSMEs in Southeast Asian countries are focusing on developing e-commerce for domestic transactions. However, cross-border e-commerce inside and outside the region has very significant potential which has not been exploited extensively. But the adoption of e-commerce for cross-border transactions is mainly restricted to the more developed economies in the region. For instance, in 2018, 78 per cent of Singaporean SMEs used e-commerce to boost export revenue. Malaysia is recognised as a manufacturing hub on eBay’s marketplace for the ‘Automotive’ and ‘Furniture’ product categories thanks to the volume of the exports by MSMEs, mainly to the United States, the United Kingdom, Germany and Australia.
Some other developing countries in the region, such as Thailand and Vietnam, are implementing a series of programmes to help small businesses sell their products in the global market. They have collaborated with large cross-border e-commerce platforms such as Amazon and Alibaba to get their local products listed on international markets.
The pandemic has challenged MSMEs’ traditional methods of doing business, and have forced them to adopt digital technology to stay afloat.
However, MSMEs in developing countries still face difficulties when conducting cross-border e-commerce. A good digital infrastructure is a crucial condition for implementing e-commerce. One of the criteria that can be used to evaluate the quality of digital infrastructure is the speed of an internet connection. Most of the developing countries in the region have low connection speeds. Cambodia and Myanmar have the lowest internet speeds in the region, operating at only a quarter or even a tenth of the speed of more technologically-advanced countries such as Singapore, Thailand and Malaysia.
Even in countries with medium internet speeds and high internet penetration, the lack of appropriate regulations throws up obstacles to cross-border e-commerce. Vietnam is a case in point. It has an internet penetration of around 70 per cent, but state agencies regulate e-commerce activities relating to imported and exported goods in a pre-digital way. This increases the time and cost for business-to-consumer transactions across borders. A draft on the management of goods exported through e-commerce by the Ministry of Finance of Vietnam is expected to solve this problem and promote cross-border e-commerce activities.
The need for trained personnel specialising in e-commerce poses another barrier for small businesses. As reported by the Vietnam E-commerce Association (VECOM), 79 per cent of MSMEs lack e-commerce specialists or workers with competent skills in website and e-commerce floor administration. Besides, electronic payment is also a problem, given that many consumers still prefer to use cash. This makes it difficult for MSMEs to sell their goods to customers in other ASEAN member countries to take advantage of consumer tastes, geographical proximity and existing trade agreements.
Finally, Southeast Asia has a significant proportion of individuals who are ‘unbanked’ – that is, without access to conventional banking services. Only 20 to 30 per cent of adults in the Philippines and Indonesia have bank accounts. Therefore, they prefer cash payments rather than digital payments. Unless the level of ‘unbanking’ is reduced, this will hinder the development of e-commerce in the region. Phone-based digital payments could be a way of enabling unbanked customers to get access to financial services.
Thus, unlocking cross-border e-commerce requires governments in developing countries to step up their investment in technology infrastructure, and to boldly apply more advanced technology. Although investment costs in new technology can be high, doing so will accelerate the digitisation of administrative activities (such as customs processing), encourage more electronic payments, and make cross-border transactions faster. Export promotion programmes through e-commerce, or training courses for MSMEs, will also help improve the digital skills shortage that often exists in these enterprises.
Although the Covid-19 pandemic has slowed down the economic growth of countries in the region, it has also opened up an opportunity to encourage MSMEs to shift from traditional business delivery methods to online transactions. To be able to make good use of this opportunity, however, MSMEs need to have stronger support from governments, and must have the determination to proactively approach new technologies.
Vu Thi Phuong Mai is from the Faculty of International Economics, Foreign Trade University, Viet Nam.
Phi Minh Hong was Graduate Fellow at the ASEAN Studies Centre, ISEAS - Yusof Ishak Institute.