About this Study
How have the SMEs in core ASEAN economies fared and what lies ahead? This EY survey-based study analysis how these organisations are sustaining and pursuing future growth, and innovating amid today’s competitive landscape.
SMEs: The Growth Engine in Southeast Asia
The small and medium enterprise (SME)* segment is pillar of economic expansion for the ASEAN countries. SMEs are responsible for up to 99% of all business establishments, over 90% of employment, and contribute almost 60% of the gross domestic product (GDP) in many ASEAN countries1.
Being less financially material and visible compared to the multinationals, and perhaps less conspicuous than some start-ups, SMEs are typically the least publicly profiled organisational sector. Albeit more discreet, SMEs are in reality the engines of growth in Southeast Asia. These organisations create jobs for the masses, motivate the development of new products and services, spur consumption growth, and play a crucial role in promoting industry competition. With deeper investment pockets compared to micro enterprises and start-ups, yet with less legacy baggage vis-a-vis their multinational brethren, SMEs can be nimbler in pursuing transformational change.
With weakening global economic conditions nudging some international competitors to exit Southeast Asia, homegrown SMEs now have an even more important role and opportunity to hold centre stage. Enhancing their competitiveness and resilience is key to supporting a more dynamic, inclusive and sustainable growth for the region.
Asean Economies Remain on a Growth Trajectory
Despite rising challenges that undermine broader near-term global growth, the impact on SMEs is somewhat buffered in the ASEAN region, given these reason.
The rise in the middle-class segment (to 363 million individuals or 52% of the population by 20252), a youthful workforce and real wage acceleration are driving consumer spending.
By 2025, about 68% of the population in the ASEAN region will be of working age. Unlike more mature countries, the region’s working population surpasses its older dependents, spurring economic expansion, generous consumer and investment spending, and wealth accumulation. This is particularly apparent in Indonesia and the Philippines, where domestic demands are getting additional support from election-related spending along with an expansionary fiscal stance.
Continued uptrend in government spending on infrastructure and utilities projects, and influx of foreign direct investment (FDI) into emerging ASEAN markets, are bolstering employment, talent creation, and enhancing production value chain. For instance, the Philippines’ ambitious P9t (US$176b) “Build, Build, Build” infrastructure program aims to restore roads and bridges, revamp airports and introduce its first subway.
The region’s merchandise trade is valued at US$2.56t (or 22.9% of the share of intra-ASEAN trade3). This helps to cushion the more sluggish momentum in advanced economies, counter softer external trade demand from major partners, and offset some lost opportunities from trade policy protectionism and uncertainties.
These developments support resilient expansion across the ASEAN region, with the Organisation for Economic Co-operation and Development (OECD) forecasting almost sustained growth of 5.2% (between 2019 and 2023) from 5.3% in 2018. Among the larger ASEAN markets, Philippines, Vietnam and Indonesia with GDP expansion of 6.6%, 6.5% and 5.3% respectively4 are the outperforming economies.
Such respectable domestic growth paves the way for SMEs in ASEAN nations to thrive, with a cumulative economic power that could probably rival that of dominant multinationals.
This EY study covered almost 370 mid-market organisations* across the six largest ASEAN markets of Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam to understand their strategic priorities, growth expectations and challenges, approaches to digital transformation (DX)** and application of transformative technologies.
The collective insights provide an understanding of the performance of these organisations and their unique traits across geographies, industry clusters and market sizing. This study also helps executives to benchmark their organisations against peers.
So, why the added focus on digital?
The dramatic disruptions of digital on businesses is already well-documented. While disruptions have been upending all industries — some more radically than others — many organisations have hitherto achieved limited genuine successes with digital transformations.
This EY survey provides a progress report on the extent to which ASEAN SMEs have digitalised their organisations (or feel they have digitalised), their digital approaches and the IT enablers, and challenges in transforming effectively.
More critically, having senior stakeholders from the ASEAN SMEs comment on these issues provides primary data for analysis. Based on these insights, suggestions are then offered on how they can be better equipped for the digital economy.
Growth and Operations
While the ASEAN economies present regional SMEs with ample growth opportunities, organisations still face headwinds from multiple fronts. This section explores the specifics around their growth expectations and overarching strategies, core operational concerns, areas of investments and sources of funding.
Factors influencing expansion
ASEAN SMEs come across as a resilient, resourceful segment with interviewees expecting an average revenue growth of 12.6% in FY19. Of these 368 respondents, 91% anticipate this year’s performance to be better than that in FY18, with 56% projecting double-digit expansion.
The Net Positive Score (NPS) thus registers a very robust 86% the the region. This averages the more optimistic respondents from Vietnam, the Philippines and Indonesia with their economies remaining on solid footing in 2019, against the slightly more cautious sentiments emerging from those in Singapore, Malaysia and Thailand (see figure 1 and 2).
Looking at strategic pursuits to drive growth, 85% cite an urgency to raise customer service as they seek to differentiate through customer-centricity and experience and drive brand loyalty (see figure 3).
This is particularly important as expectations are being elevated by leading players in industries such as information and communication technology (ICT) and retail e-commerce, with other sectors feeling pressured to measure up.
Being agile and customer-first calls for deeper utilisation of digital technologies, with 81% of respondents strongly opining that transformational technology would enhance the way customers are served, and business processes are conducted.
These two strategies, however, require SMEs to modernise and frame their human resource strategy around new technologies and deeper customer alignment. Employees are the bridge between businesses and customers, and organisations with great employee experience can possibly double customer satisfaction and generate 25% higher profitability over competitors.5 Accordingly, rounding up the top three growth drivers is the urgency to upskill staff to future-proof the workforce, and attract and retain employees in the digital economy.
In their quest for expansion, SMEs must adapt to challenges and changes to seize the opportunities ahead. The leading concerns are threats stemming from cyber risks, with almost a-third identifying this as a core concern (see figure 4).
Such attention is indeed warranted as threats of cyberattacks grow in both sophistication and frequency as technologies evolve. According to research, the median time for a typical enterprise in Asia-Pacific to discover that its corporate security has been compromised is 520 days, compared to the global average of 146 days. The same research also highlighted that corporates in Southeast Asia are still generally lagging others in Asia, even as the region makes progress in cybersecurity.6
Awareness that cyber risk is a pressing issue is crucial in setting the stage for a strengthened risk management posture. Cybersecurity needs to be at the forefront especially with new technologies bringing new vulnerabilities.
In terms of where investment dollars will be spent, for the current year (i.e., FY2019), 77.2% of the respondents are keen to invest in current technology solutions to drive business-as-usual (BAU) performance. This means that marginally more are placing importance on conventional over transformative technologies and fixed asset spending.
However, the interest in transformative technology is apparent. This rises almost four percentage points over the medium term, with 80.7% planning to prioritise resources in three years’ time (i.e., FY2022) for more cutting-edge applications such as artificial intelligence (AI), machine learning and robotics process automation (RPA).
This existing focus on current technologies to strengthen and reconfigure core IT capabilities before diving deeper into emerging solutions is broadly evident across all the core verticals, be it in property, financial services (FS), health or consumer products and retail (CPR).
How Are ASEAN SMEs Funding Expansion?
Expansion plans are operational costs that require funding.
A typical SME finances these via ploughing back internal funds (29%), which is the most cost-effective and ideal. At 18%, the next largest source of funding comes from bank financing, then from public equities by listing on the stock exchange for some.
While SME may have longer financial histories and more attractive balance sheets compared to smaller and riskier micro enterprises, financing can still be a challenge. Raising equity is more time-consuming and costly compared to multinationals, with less well-established bank relationships leading to tighter covenant enforcement and tougher credit requirements.
This means that these SME firms need to consider other sources of funding such as private equity financing and government schemes. An example of such government schemes is the International Partnership Fund in Singapore, an equity investment scheme with a commitment of S$600m (US$443m) to help more established firms scale up globally.7 In addition, there is a series of other grants* for smaller organisations to enhance technologies, efficiencies, resourcing and marketing.
However, these funding sources may not always be accessible across industries and markets. Venture capital investors tend to gravitate toward high-growth sectors, while government funding schemes may not be permanent and typically carry specific conditions. This creates opportunities for non-bank digital lenders such as peer-to-peer (P2P) crowdfunding platforms to offer merchant and e-commerce financing, invoice financing and online trade financing that are specifically tailored for SMEs and smaller peers. These account for the 11% of the non-traditional sources of financing in figure 6.
2. Redesigning for the Digital Economy: A Study of SMEs in Southeast Asia-Digital Transformation
*There is no universal definition for SMEs, with classification differing across industries and countries. In the context of this report, SMEs are categorised as organisations with annual global revenues from US$1m upward to US$500m per annum, and with staff strength of up to 2,000 employees.
However, focus on this specifically referencing the middle-to-upper segment of SMEs, with annual revenues of US$20m- 500m.
*ASEAN is a heterogeneous region, with an extremely varied pace of development, opportunities and challenges across the various member countries. These stem from differences in scale of operations, types of funding, government support, size and skill base of the labor force, among others. These would influence the country-level responses.
However the purpose of this report, EY aggregates data for the six featured ASEAN countries and discusses collective findings for the region.
**For the purpose of this study, digital transformation (DX) is defined as the deployment of new tools and technologies, and alignment of these with business models and processes. These promote more frictionless ways of interacting and transacting, enhance existing offerings or create new ones.
*The Ministry of Trade and Industry in Singapore categorises SMEs as companies with at least 30% local shareholding; and group annual sales turnover of not more than S$100m (US$74m), or group of employment size of not more than 200 employees. Tier 3 SMEs (as defined in this report as those with annual revenues of US$20m-100m) that fall into these segments could qualify for SME grants. The list of grants for 2018 are available at https://www.smeportal.sg/content/smeportal/en/moneymatters/grants.html