payments

How Small is Small? Why Do Firms Stay Small in ASEAN?

While most countries celebrate small and medium enterprises (SMEs) as the “backbone” of their domestic economies, there is surprisingly little consensus about what defines an SME, what conditions are critical to the success of SMEs and what sort of government policies are most helpful to support SMEs.

This post does not have sufficient room to cover all these issues either, but will highlight the divergence of definitions over what constitutes an SME in just a handful of countries within ASEAN and note one important challenge that SMEs in Southeast Asia face in making the leap from small to even medium size:  a lack of access to financing.

It turns out that even within just five ASEAN countries (Indonesia, Malaysia, Philippines, Singapore and Thailand) the definition of an SME varies quite significantly.[1] 

Indonesia counts turnover and net assets.  Malaysia and Philippines count turnover and employee numbers.  Singapore does as well, but does not have different categories to break out micro, small and medium enterprises—any entity with less an USD$74 million in turnover and under 200 employees is an SME (medium, small or micro).  Thailand counts fixed assets and employee numbers and lumps together small and micro enterprises.

To get a sense of the variation across the five countries, consider just the category for small enterprises (all figures in USD):  Indonesia has turnover from $20,000-200,000 and net assets from $4,000-40,000.  Malaysia counts turnover from $80,000-800,000 and 5-30 employees.[2]  Philippines says “small” is turnover of $68,000-340,000 with 10-99 employees.  Thailand expects fixed assets of less than $900,000 with less than 15 employees.   

By definition, anything smaller than this is a “micro” enterprise.  Most of these firms have been ignored or overlooked. 

My APEC readers will quickly point out that during Philippines host year in 2015, the definition of SME was altered to be MSMEs.  This actually makes a great deal of sense given that the proportion of enterprises in the five countries are nearly all micro enterprises.  (Note that the data is slightly skewed by Singapore’s classification of all SMEs into one category.)  Nearly 99% of Indonesian firms are micro enterprises, 77% of Malaysian companies, nearly 90% in Philippines, and probably most of the 99.5% of Thailand’s firms that are grouped together under micro/small. 

Governments, of course, care a great deal about MSMEs, because while they do not all contribute as much to overall GDP relative to their overwhelming numbers, they do contribute significantly to employment. 

MSME contribution to GDP in 2013 included Indonesia with 59% of USD$868 billion (2012 figures); Malaysia with 33% of $313 billion; Philippines with 34% of $272 billion; Singapore with 47% of $298 billion; and Thailand with 37% of $387 billion. 

The employment contribution of smaller firms is substantial.  Nearly every Indonesian (97%) works in an MSME.  More than half of all Malaysians (58%) work in MSMEs, as well as 63% in the Philippines, 70% of Singaporeans, and 81% of Thais. 

Hence the urgency in figuring out what government needs to do to get greater productivity out of the MSME sector and how the smallest firms can be encouraged to grow larger.  There are, of course, many obstacles to growth for small firms.

But one significant roadblock to growth is a lack of credit or financing, particularly for the very smallest firms.  SME loans and financing options are increasing, but remain extremely low relative to the importance of these companies to the overall economy.

What is so striking about the Deloitte study is the shockingly high levels of personal financing used by small firms.  In other words, most of the small firms in ASEAN are making do with money they have saved themselves or have borrowed from other family members. 

For example, in Thailand, 90% of SMEs said they relied on their own savings.  In Indonesia, 86% of SMEs reported relying on internal funds for financing needs.  Nearly half (48%) of Malaysian firms reported using their own funds for financing. 

It is true that providing bank funding, for example, to small firms and especially to micro companies, is difficult and expensive.  The complexity of processes for qualification can be too daunting for many small firms.  Credit rating agencies do not exist.  Most banks do not assess loans against business plans but against tangible assets.  Micro businesses, particularly, rarely have substantial assets or usable collateral.  The bank loans that do exist for these firms often do not get extended until small firms have been around for years.

All this leaves MSMEs badly served or underserved and unable to grow.

Payments are a particular problem for smaller firms.  The Asian Trade Centre is working on one aspect of this issue, connected to companies trying to operate on e-commerce platforms.  At the moment, smaller firms trying to manage cross-border payments, especially on mobile devices, struggle to complete transactions with interested buyers of their goods and services in a cost-effective way across the region.

To give a concrete example of the problems companies face, consider our issues related to payment.  We had a large multinational last year that wanted to provide a payment via a credit card on our website.  Our website is hosted out of the US via Squarespace.  It uses a proprietary payments system called Square, which was not authorized for use in Singapore. 

We asked Squarespace for help.  They suggested using Paypal.  With all due respect for our colleagues at Paypal, the large MNC said no.  Plus Paypal has a fairly large transaction fee (for a small firm). 

Squarespace suggested we turn on the shopping cart function on our webpage with our local Singaporean bank.  We called our bank.  They said they would do so for SGD$4200 in the first year and keep it active for $2200 a year after that. 

In the end, the company gave us cash. 

Think about the inefficiencies in this system.  This is why we are pushing so hard to get governments in the region to sort out payments for smaller firms—without this critical leg of the problem addressed, e-commerce benefits will never flow to the companies that represent the largest segments of commerce in the region.

Of course, if you would like to give us cash or sort out our SME banking, payments or loan problems, do let us know! 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

[1] Data for this post is drawn from an interesting 2015 Deloitte study on Digital SME Banking commissioned by Visa.  Deloitte’s data was largely drawn from existing surveys or government statistics departments. 

[2]But apparently not in the manufacturing sector.  The Deloitte study draws from the Malaysia Department of Statistics.  (Perhaps readers could explain what is different about the manufacturing sector?)

Using e-Commerce to Help Smaller Companies

One of the fastest, easiest and lowest cost ways for smaller companies to join the global marketplace is to use e-Commerce.  By harnessing the power of the Internet to connect with suppliers, producers, lead firms, and consumers, firms can sell their goods and services to a much wider audience than would otherwise be possible.

As the clearest example of this phenomenon, check out the attached policy report.  This document, Challenges of e-Commerce for Small and Medium Sized Enterprises in Asia, benefitted from the skills of a graphic designer in Pakistan.  The staff of the Asian Trade Centre in Singapore never met the designer.  Instead, the entire process was handled via the web. 

This designer charged one-tenth the price of a locally engaged person.   In the end, the magic of e-Commerce allowed one small firm in Singapore to support an even smaller firm in Pakistan and create a win-win situation for both companies in delivering a high quality service to a wide range of readers and government officials in Asia.

The report examined many of the challenges and opportunities for small and medium enterprises (SMEs) in the region that are engaged in e-Commerce.  It was generously financed by the British Foreign and Commonwealth Office and is intended to provide a small sample of case studies to launch our larger project on the topic.

Despite the promise of greater economic growth available by using e-Commerce, the cases highlight a set of challenges that smaller firms often face. 

Small firms, by definition, have limited resources including, especially, fewer staff members.  This makes getting things done more challenging and increases the premium on hiring and retaining quality workers.  Manpower issues of all sorts are a challenge for many of the SMEs profiled in our study. 

The Singapore-based firms have particularly struggled with tight access to foreign talent at various levels. But most of the firms in the region have also faced escalating wage requests and difficulties keeping employees adequately trained for their tasks.

Rising costs elsewhere, including ever-increasing rental charges, have also proven difficult to manage.  Purchasing facilities like office, warehouse or factory space may not be possible, depending on the type of firm and ownership structure.  Land acquisition is often difficult or time consuming. 

These problems may plague all types of smaller firms, not just those trying to work in the e-Commerce space.  For companies that want to buy and sell online, they have additional issues to consider.  Creating and maintaining an excellent web presence is very difficult for smaller companies.  A lack of knowledge about existing online platforms has lead many companies to create their own customized solutions. 

However, creating a functioning website can be quite expensive and often requires hiring staff with specific skills.  Getting employees with website skills can be particularly problematic for smaller companies that may not need someone full time and have to pay a premium wage to get skilled workers to join smaller firms.

Companies do not have the time or resources to invest in expensive hardware and storage systems.  Hence, most smaller firms need to be able to find other vendors with dramatically better abilities to manage e-Commerce platforms at lower cost, greater reliability, and improved security. 

Finally, our firm-level interviews turned up many examples of companies struggling with payments issues.  These challenges ranged from getting online payment mechanisms set up on the websites in the first place to crazy high fees imposed on companies wanting to set up online shopping carts.  The charges for online card processing can be very steep for smaller firms with limited cash flow.

Government officials trying to address the specific challenges faced by such an assortment of companies struggle to respond appropriately.  Because SMEs are small and numerous, getting feedback from such firms is always harder than finding out about the concerns of larger companies with greater resources.

Most small companies do not recognize that many of their specific challenges could be addressed by government policies.  They often regard their situation as simply part of a background environment that is immutable.  For example, firms may have a hard time managing multiple bank terminal machines as required by different bank and financial institutions.  Government could fairly easily sort out this obstacle to firms by requiring that terminal machines function for multiple financial institutions. 

When asked by government, however, most companies might not complain about the banking terminal issues to agencies or ministries.  This is not because the issue is insignificant, but because firms think that a problem like this could only be addressed by banks.  Such a complaint is not seen as a policy or regulatory issue.  Hence, officials that ask for “policy feedback” may not receive as much useful input as they might have expected. 

Governments in the region, and particularly Singapore, offer many different types of support programs for small firms.  These range from seed capital to training courses to salary supplements for different types of staff.  However, for a small company, managing these programs may require significant investments from staff members. 

Such programs also frequently take time—up to six months—to completely process through complex bureaucracies.  For companies, speed to market can be critical and delays along the way can be disastrous.  Hence, many firms do not bother to take up government assistance at all because they would prefer to just self-finance or otherwise sort out their own issues than face time and paperwork delays and hassles. 

Another challenge many types of companies face in trying to manage e-Commerce operations is a lack of understanding by government officials of how e-Commerce can work.  Many officials have a very limited view of e-Commerce possibilities with a narrow focus on delivering goods to final customers.  Instead, e-Commerce programs ought to focus on a broader definition of possibilities, including delivery of both goods and services, as well as business-to-business (B2B) applications and final consumer demands. 

A broader perspective on e-Commerce possibilities and obstacles should help governments in Asia focus attention on a wider range of issues that must be considered and addressed in creating supportive policies.  For example, smaller firms that do export or import goods need a set of policies for smaller size or smaller value shipments.  Delays at the border of any kind can be catastrophic for firms since it ties up inventory and prevents payment.  A small firm can easily go out of business waiting 45 days or longer for money to reach their bank account.

Government needs to recognize the possibilities for small firms to provide a wide range of services.  For many developing countries, especially, firms can plug into wider regional or global value chains through the provision of services much more easily than they can engage in trade in goods.  Again, barriers to entry for services providers can be substantial, even if firms do not recognize that their own specific challenges in this regard are related to policy decisions by government to, for instance, limit foreign firm access to certain markets.

The Asian Trade Centre is using the information provided by this range of companies in different parts of the e-Commerce world to create a set of policy proposals for governments in the region.  We have already presented the proposal highlighted at the back of the report to the 16 party trade negotiators meeting as part of the e-Commerce deliberations in the Regional Comprehensive Economic Partnership (RCEP).  We are also working to put these ideas into practice as part of ASEAN’s Vision 2025. 

Finally, we are working within the APEC framework to encourage governments across the Asia-Pacific to consider e-Commerce in a broader, more holistic manner.  APEC has created an ad-hoc committee on the internet economy that should help guide policy across a wider range of issue areas than just a focus on telecommunications policy. 

Getting the right policies into place to unleash the creative and entrepreneurial spirits of smaller firms like those featured in our report should lead to greater opportunities for economic growth and development across the region.  Thinking carefully about e-Commerce provides an ideal space for government officials to consider and address next generation barriers to trade.   We are looking forward to hearing from more firms and governments trying to operate in this space.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***