YEAR in, year out, the federal budget promises help for Malaysia’s small and medium enterprise (SME) sector.

Invariably, measures are introduced or maintained in order to support SMEs in terms of access to financing, human capital development and business promotion.

The focus on SMEs is understandable as they are a crucial part of our economy.

SMEs make up the lion’s share of all enterprises in the country and provide a huge share of employment, at 65.5% of the workforce. SMEs also contribute over a third of Malaysia’s gross domestic product (GDP).

The recently tabled Budget 2017 offers the usual help in financing SMEs as well as  credit guarantees plus tax incentives. The government also allocated millions of ringgit to promote SME development. But there is a noticeable shift in the budget.

For SME Association of Malaysia national president Datuk Michael Kang, Budget 2017 signals the government’s intention to move SMEs towards the new economic order.

“For SMEs, the previous budgets focused more on the traditional ways of doing business. There is now more emphasis on e-commerce and export promotion,” says Kang.

For example, the government is offering a 2% rebate on interest rates charged to SME borrowers to boost export-oriented SMEs. Malaysian Digital Economy Corp Sdn Bhd is also getting RM162 million to push digital economy initiatives, including Malaysia’s e-commerce ecosystem and Digital Maker Movement as well as the introduction of a new location category — Malaysia Digital Hub.

The government says it will also set up the first Digital Free Trade Zone in the world, which will merge physical and virtual zones, with additional online and digital services to facilitate international e-commerce and invigorate internet-based innovation.

What this underscores for SMEs is that business as usual — that is, selling goods and services the conventional way to a largely domestic market — is simply not good enough.

Prime Minister Datuk Seri Najib Razak says as much in no uncertain terms in his foreword to the annual SME Annual Report that the government puts out via SME Corp.

Simply put, a new world order is here and is already shaping the business landscape in profound ways. These include mega trends like financial technology, big data analytics, e-commerce and Industrial Revolution 4.0.

What’s more, increasing regional integration sees more and more markets being connected via trade pacts like the Asean Economic Community (AEC) and Trans-Pacific Partnership (TPP) agreement, among the many that Malaysia has signed on to.

“SMEs need to shift their mindset and overcome barriers from the convergence of these forces. Integrating into the global supply chain, meeting global standards, adopting best practices and sound governance will pave the pathway to creation of a new breed of world-class firms,” says Najib.

This is a sobering reminder that comes at a time when Malaysia’s SME sector has consistently posted strong growth rates. Over the last five years, Malaysian SMEs have enjoyed growth rates that consistently outpaced overall national growth rates.

SME Corp’s data has it that Malaysian SMEs grew at an average annual rate of 6.7%, a faster pace than the broader Malaysian economy, which grew at an average of 5.3% over the five years from 2011 to 2015. SME contribution to GDP has also grown 4.1% to 36.5% over the period, from below 30% in 2005.

For this year, SMEs are projected to grow between 5% and 5.5%, which is again higher than the average 4% to 4.5% growth for the Malaysian economy. It is certainly reassuring to hear this, especially when concerns remain over patchy global growth prospects and China’s slowing engine.

But the headline numbers certainly do not paint a full picture and mask a lot of the ongoing challenges that need to be addressed.

SME Association’s Kang points out that one area SMEs are struggling with is in moving beyond Malaysian borders.

Data from the Department of Statistics Malaysia shows that the share of SME exports to total exports grew very gradually from 16.4% in 2010 to 17.8% in 2014. There was a slight dip to 17.6% of total exports last year, mainly due to lower tourism-related and other services activities.

This is also still some way to go to reach  the government’s target for SMEs to contribute 23% of Malaysia’s total exports by 2020 and 41% to national GDP.

“Exports by SMEs have remained flat at 17%. A lot of SMEs want to export but do not know how to go about it. Maybe the one thing that can help is the budget announcement of a Digital Free Trade Zone but there are no details on it yet,” Kang says.

In a similar vein, a survey by SME Corp has found that while not a significant portion of SMEs have gone into exports, there is indeed much interest.

The survey also found that 14.2% of respondents have sold an average of 25% of their goods and services abroad, mostly to Asean countries, China and the US.

“About 23.7% of total non-exporters intend to penetrate markets abroad while 9.9% of respondents plan to increase their exports following the implementation of the AEC and the newly signed TPP,” says SME Corp.

But many respondents also express concern about going into the export game. The major constraints identified include inadequate market intelligence (38.8% of respondents) and insufficient trade financing (30.3%).

Kang suggests that the government should place more emphasis on those SMEs that have yet to start exporting instead of those that are already in the business of selling their goods and services abroad.

For a country like Malaysia, exports remain crucial for growth. Businesses cannot depend solely on domestic consumption, given the relatively small population of 31 million people and current income levels.

But merely signing trade agreements does not mean that the doors to new markets are automatically open to Malaysian SMEs. In fact, the World Bank warns that the transition might not be easy and proactive measures will be needed to ensure wider benefits under the new regional trade agreements.

“SMEs account for 98% of firms and 17.8% of exports, but they do not automatically benefit from these agreements as emerging export opportunities are likely in sectors with limited SME exports.

“Maintaining programmes that will upgrade skills and support SMEs — through training, easing labour mobility, promoting innovation and entrepreneurship, and expanding connections between SMEs and large domestic and foreign firms — will be critical,” the World Bank says in its Malaysia Economic Monitor, June 2016: Leveraging Trade Agreements.

For many, there is the lingering question of how competitive Malaysia’s SMEs are and whether they are at risk of losing out.

One criticism against local SMEs in general is that not many of them have invested in research and development, automation and human capital development to move up the value chain.

The writing on the wall is clear. Malaysia no longer enjoys the low-cost competitive advantage of yesteryear. There are other manufacturing hubs in the region that now offer competitive advantages for goods and services. Nor does Malaysia want to be forever playing the low-cost game, by keeping wages low and utilities cheap.

SME Corp’s data shows that labour productivity remains low. Last year, labour productivity of SMEs (measured by real value-add per worker) rose only 0.4% after falling 6.6% in 2014.

“The marginal growth demonstrates that SME productivity remains low due to being input-driven rather than productivity-led as reflected in an increase in labour, particularly in the services sector,” says SME Corp.

Kang says that at this point in time, Malaysian SMEs are still relatively competitive compared with those in neighbouring countries. But that is not to be taken for granted.

“If we do not improve our productivity and competitiveness, we will lose out quickly because Indonesia and Vietnam are very aggressive. The problem is, Malaysian SMEs are largely still very labour-intensive and do not invest in automation or building up human capital,” he says.

And these challenges require long-term policy planning and industry buy in. 

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