How can MSMEs in ASEAN bounce back?

Micro, small and medium enterprises (MSMEs) account for an average of 97% of all businesses, 69% of employment, and 41% of GDP in the Association of Southeast Asian Nations (ASEAN) region. Additionally, 61%-89% of regional MSMEs are engaged in the services sector, while 72%-85% are rural based enterprises. These businesses generate employment and provide sustenance for millions.

MSMEs truly make the ‘economic world go round’. Their survival is important for any economy—emerging or otherwise—to register strong growth. Therefore, in an uncertain post-pandemic scenario, what are possible measures that can ensure their sustainability? More importantly, what steps can MSMEs take to strengthen themselves?

Problems prior to the pandemic

A large majority of MSMEs continue to operate using traditional business tools; their technology uptake has been minimal. The reluctance to grow their organisations possibly stems from a long-standing obstacle – of the inability to secure credit on favourable terms. 

Credit inaccessibility has been a growth barrier. In the Philippines, for example, MSMEs account for 99.5% of all businesses, employing as much as 63.2% of the total workforce. Yet, in 2019, the MSME share of total outstanding loans was only a meagre 6.1%.

But a share of the problem lies within MSMEs themselves. Their inability to secure credit is often due to their less-than-optimal book keeping practices. Without formal accounting processes being followed, it is difficult for financial institutions to approve loans without being able to determine an enterprise’s financial health.

Furthermore, the lack of skilled labour has also been a major cause for stagnating SME growth. There are college and university graduates aplenty, armed with degrees and certifications. But often, these qualifications are a misfit for a particular region’s labour requirements.

In Indonesia, meanwhile, a 2017 report highlighted that proficiency in soft skills was directly related to employability. Just as it is imperative for MSMEs to innovate to stay ahead, likewise, soft skills are a key attribute for individuals to maintain a competitive edge. 

Added woes from the pandemic

The pandemic-led lockdowns brought most businesses to a standstill. Brick-and-mortar operations had to be temporarily closed, and business and individual financial stress followed. However, amid the slowdown in physical businesses, online platforms made strong gains. Also, MSMEs with a hybrid model—ones with both a physical and online presence—were able to better cushion the pandemic’s impacts.

In a positive development, the number of MSMEs that filed for insolvency in 2020 fell to levels lower than in 2019 or preceding years. An Asian Development Bank (ADB) survey stated thus: “We would have expected more businesses to fail, not fewer.” However, although fewer bankruptcies were filed, the ADB survey also noted that “…many bankruptcies have not been avoided but merely postponed.”

The lower insolvency rates were almost entirely on the back of governments’ economic stimulus measures. In the months since, banks and governments have underscored the need to digitise and establish an online presence for existing brick-and-mortar stores.

No alternative but to innovate

Prior to COVID-19, MSMEs were already underutilising the power of the digital economy. It was not due to network unavailability but because knowledge regarding online tools was wanting. Thailand, for example, has a well-developed telecommunications infrastructure. Thai MSMEs boast robust telecom installations but MSME owners made little use of online sales channels. However, plans are underway to realise the Thailand 4.0 vision. It will involve the development of “automation, robotics, artificial intelligence (AI) and cutting-edge technology” solutions.

What must also be acknowledged is that in a globalised world, trade and commerce can go well beyond the physical geography that an MSME is located in. And with regional free trade agreements in effect, there are enablers in place too.

That said, the post-pandemic recovery has been slow. Lesser revenues have meant less funds that can be reinvested towards business growth. In simple terms, many MSMEs lack the resources to digitise and establish a strong online presence. Furthermore, compared to a year ago, there has been a four-fold increase in shipping costs. This, in turn, has translated into a higher cost of doing business.

Possible ways to catalyse SME growth in the region

Rising prices and increasing competition are a given. There are no legally proven ways to avoid them in free markets. Amid the prevailing scenario, MSMEs must adapt or risk shutting down. In this regard, the following suggestions can be considered. 

The uptake of basic digitalisation must be encouraged. Establishing a basic online presence does not entail a monetary expense. For the uninitiated, it requires only a few hours’ worth of time and effort. While established channels of e-commerce and social media optimisation must be leveraged, new entrants such as blockchain technology must also be explored.

Adhering to formal accounting practices. With the easy availability of online accounting tools, or by enlisting the services of part-time accounting help, MSMEs must prioritise maintaining formal books of accounts. It is a win-win situation for both debt seeker and credit provider.

Access to finance. With most ASEAN states already scoring highly in terms of fintech advancement and reach, neo-banks can help MSMEs with much needed access to credit. This will help them grow and tide over unforeseen circumstances.

Strengthening basic elements such as soft skills. Customer service and people skills are irreplaceable. An added benefit would be to try and imbibe social and cultural norms of another economy. This way, engaging in international trade becomes easier.

Start them young. Inculcating entrepreneurial skills through formal education is a definite part of the solution. Poland, for instance, introduced the concept of entrepreneurship in primary-school core subjects, just like history and mathematics. Upper-secondary students are required to take “Introduction to Entrepreneurship.” In India’s case, its National Education Policy 2020 outlines several changes that encourage entrepreneurship. A key highlight is making internships available from as early as grade six for students interested in a particular vocation.

A 2020 McKinsey report outlined three characteristics of a healthy and well-performing MSME ecosystem, that must be promoted. These included “boosting the business confidence of SMEs, enabling the growth of SMEs—in general and for high performers—and increasing the competitiveness of SMEs.”

The ADB survey’s forewarning must be heeded. As stimulus measures ebb, there could be an abrupt spike in MSME bankruptcies. Such a scenario will destabilise regional economies and cast a wider ripple effect. Instead, businesses must take pre-emptive steps to innovate, leverage technology and explore more markets for their products and services. MSMEs in ASEAN are perfectly placed to rebound from the pandemic, but it will entail driving significant change.