Suits The C-Suite

For almost all countries in the Association of Southeast Asian Nations (ASEAN), small and medium-sized enterprises (SMEs) are the primary engines for economic growth and development. With the creation of the ASEAN Economic Community (AEC) in 2015, reports have indicated that anywhere from 88.8% to 99.9% of total businesses in ASEAN member nations are SMEs, and account for 51.7% to 97.2% of total employment. On its website, the ASEAN also highlights the importance of SMEs in income and employment generation, gender and youth empowerment and sustainable economic growth.

Given the significant role of SMEs in the region’s ongoing development, Ernst & Young (EY) Singapore, United Overseas Bank of Singapore and Dun & Bradstreet recently conducted a study of 1,235 SMEs in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam to find out whether ASEAN SMEs were transforming rapidly enough for the future. The study offers a broad look at current conditions, challenges and opportunities for SMEs. To narrow down the focus, this article will consider what the report views as key areas for effective and competitive transformation.

Unsurprisingly, many ASEAN SMEs (60%) see the need to invest in technology over other fixed assets in 2018 to help drive business performance. Specifically, 70% of SMEs are looking to invest in software to enhance digital and mobile engagement, such as through websites, social media and apps. That being said, respondents also indicated interest in cutting-edge areas such as robotics process automation, artificial intelligence and 3-D printing.

What we should note, however, is that most SMEs are still considering tools such as licensed software, customer relationship management and content database management that are hosted or run from their own systems. The study also shows that, at the moment, few SMEs are considering the use of Software-as-a-Service (SAAS), and are not aware of the efficiencies that pay-per-use software can bring to the organization, such as in business processes like accounting, invoicing and payroll.

SAAS offers more flexibility and scalability for small businesses since they only pay for what they use, and can easily add on new functionalities as the business expands or the number of users grow, without the need for significant additional capital investment.

Currently, most ASEAN SMEs are generally satisfied with their primary financial providers, with 47% of respondents intending to retain their current financial service relationships. It is noteworthy, though, that 37% of ASEAN SMEs would like to elevate their level of engagement with their financial service providers, and be given more personalized attention and differentiated products, rather than simply being considered a retail customer. This is particularly the case for SMEs that have global or regional operations — they need financial service providers that don’t just offer efficient transaction and operational support, but can also serve as international trade partners, providing banker’s guarantees, services for import and export operations, as well as support in managing international credit risk.

Interestingly, 16% of ASEAN SMEs want to explore new nontraditional bank and financing providers. This is particularly the case for newer SMES that do not yet have a solid financial track record or those operating in cyclical industries with limited affordable and timely financing choices. Some SMES have also reported that loan approvals can take from 15 days to many weeks, which is clearly an area of improvement for financing institutions.

In such cases, more ASEAN SMEs are considering exploring alternative financing platforms, such as crowdfunding, private equity finance and government financing. For example, in Thailand, the Digital Economy Promotion Agency helps innovative software firms qualify for financing from the state-owned Thai Credit Guarantee Corp.

More opportunities are opening up for non-bank digital SME lenders, such as peer-to-peer (P2P) crowdfunding platforms specifically tailored for SMEs, notably in areas such as invoice financing, online trade financing and e-commerce financing. The report mentions that there are already various P2P financing platforms available, globally and regionally, with some platforms specifically emerging in Southeast Asia, such as Crowdo, CoAssets, Funding Societies and B2B FinPAL.

Given the pivotal role of ASEAN SMEs in sustaining regional economic development, it becomes even more vital for member governments to help sustain SME development. Some of the areas where respondents hope to get more government support are as follows:

• Creating sustainable business environments through simplified legal and regulatory frameworks and good governance

• Developing capital and infrastructure in emerging markets

• Assisting in capital funding, technical and creative support

• Providing guidance and support in Information Technology (IT) and digital innovation

• Providing support manpower and talent management

Many respondents indicated that, among these important areas, they would find the most value in government assistance to adopt digital technologies for greater automation and better cost efficiencies, as well as regulatory environments that do not penalize innovative risk taking. Some other steps that ASEAN governments may take, if they do not already exist, are: establishing a credit bureau that helps establish credit standings for smaller enterprises; creating government credit guarantee institutions to help SMEs qualify for loans; incorporating bankruptcy regimes into financial development agendas; establishing industrial parks with appropriate infrastructure; hosting industry clusters to position their countries in new sectors, such as biomedical, digital science, and global arbitration, among others; and reducing regulatory red tape to help SMEs overcome cumbersome regulations, foreign investment limits and other limitations.

While the existing level of government support in ASEAN member countries is encouraging, more can still be done. In the Philippines, for example, the government has created programs that support SMEs, such as the Credit Surety Fund, which helps cooperatives manage and administer credit surety funds to give micro and SME entrepreneurs, cooperatives and nongovernment organizations better access to financing; the Pondo Para sa Pagbabago at Pag-asenso, a microfinancing initiative that aims to eradicate usurious money lending practices and help micro businesses find alternative legal microfinancing facilities; and the National Retail Payment System, which defines high-level policies, standards and governance principles covering retail payment operations and infrastructure, with the objective of developing digital consumer payments and more efficient retail payment systems.

Currently, most of the respondents have an optimistic outlook despite global economic challenges in the areas of higher costs, reduced productivity and the inability to leverage new technologies quickly. This positive attitude may likewise be buoyed by the robust expectations for a successful and sustainable AEC integration.

With better digital and technological platforms, more supportive credit and financing options, and strong government support, it is very likely that ASEAN SMEs will better be able to progressively transform into economic powerhouses, both individually as companies and collectively as a regional business community.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.


Henry M. Tan is a Tax Partner of SGV & Co. and the Program Director of the Entrepreneur Of The Year Philippines program.