December 11, 2017 | MANILA, PHILIPPINES

To catch up, ASEAN SMEs should go digital

In 2015, one of the Philippines’ largest banks made a big push to get directly involved in promoting local small- and medium-sized enterprises (SMEs). With a consortium of partners that specialize in the different aspects of setting up and maintaining an online business, the bank launched a traveling convention designed not just to advocate for the potential of technology and e-commerce, but to take actual SMEs online, in effect launching their digital presence in the span of one day.

It’s no small sign of how “life-changing” it would be for SMEs to participate in the online marketplace.

There are estimates that only one percent of the country’s 1.9 million SMEs run their own Web sites. That is a huge untapped potential, especially if you consider that SMEs make up 98% of all enterprises in the Philippines. The possibilities get even more exciting when you look at these small businesses through the lens of the ASEAN Economic Community (AEC).

Since it was established in late 2015, the AEC has steadily advanced on various fronts in its four-pillared integration plan. But there is one critical area that Deloitte believes has not received enough attention: the promotion of the digital economy through the free flow of data.

A joint report released by Deloitte and the US-ASEAN Business Council underscored the importance for ASEAN governments to create policies conducive to the development of e-commerce and to the participation of SMEs in the digital economy. The report focused on areas where the combination of regional integration and the digital economy will lead to the most opportunity.

Many key drivers for a thriving digital economy are already in place in the region. According to a Google report, nearly four million new internet users in Southeast Asia (SEA) will come online every month for the next five years, which means the region will have a user base of 480 million by 2020, compared to 260 million now. This makes Southeast Asia the world’s fastest growing Internet region with a potential for online spending to rise to $200 billion by 2025 on the backs of predominantly young and increasingly middle class mobile users. And yet right now, the region generates only $30 billion in online spending.

Deloitte notes that regional consumers are still wary of transacting online when shopping. In the Philippines, for example, one of the biggest online shopping sites has found that only three to five percent of shoppers pay using debit or credit cards; more than half still prefer to pay cash upon delivery.

ASEAN member countries can address this mistrust by harmonizing their privacy and security standards, and establishing a framework that places data privacy measures at its center.

More also needs to be done to improve payment mechanisms. A 2016 Deloitte survey of mobile consumers, for example, revealed that while 62% of Filipino respondents are willing to try mobile-based, in-store payment solutions, these same respondents complained about the unavailability of such solutions, and when it is available, it usually entails slower processing times compared to cash transactions.

Fast, hassle-free exchange of data within and between countries is needed to drive the use of online payment options and for online sales to grow. An expansive delivery network, including online track and trace capabilities, also has to be developed throughout the region, especially in support of SMEs. These businesses tend to have higher volume of delivery, smaller package sizes, and destinations that are more dispersed compared to B2B transactions, hence the need for a secure and cost-efficient delivery system that can reach even remote neighborhoods.

Southeast Asia accounts for five percent of global manufacturing activity, and with deeper regional integration, it is poised to become an even more competitive industrial center. But it needs to address a number of issues.

For one, value chains in the region have yet to adapt to the opportunities that will exist through deeper integration. This could be why intra-regional trade remains at around 23% of total exports. The Philippines’ 2015 intra-ASEAN export was a mere 15% of total.

More dispersed, more connected, and more networked value chains will help manufacturers see a big boost in efficiencies and lower costs -- by some estimates, up to 20% of costs across the board. And this is a critical issue to address now as the world begins to look for alternative manufacturing hubs.

With China’s key driver changing from exports to consumption, labor costs in the country are on the rise. As a result, Deloitte has seen some manufacturers moving out, with more inclined to follow.

For the region to benefit from this relocation, it has to match China in productivity and in certain manufacturing fundamentals, starting with a more networked, more connected region.

While this is already the goal of the AEC, it bears emphasizing that what manufacturers need is the kind of integration that would allow them to consolidate plants into fewer locations, each with greater scale and specialization, and that would give them ready access to a large domestic market and a well-developed supply base.

Manufacturers in Southeast Asia also need to start adopting new technologies as automation, robotics, and connected devices become the new normal for their sector. The region has been lagging in this area: some manufacturers feel their systems are not ready for Industry 4.0, while others are concerned about disrupting their current work force.

But the incentive to move forward is too strong to be ignored. Advanced technologies can go a long way towards helping manufacturers improve demand forecasting, optimize production planning, and tighten inventory control. And adoption is necessary if the AEC is to realize its goal of becoming an economic powerhouse.

A European Union Commission report found that SMEs accounted for 67% of total employment in the EU and generated 58% of GDP in 2013. On the other hand, a 2015 Deloitte report on ASEAN found that SMEs in the member nations employ an even bigger chunk of the work force -- 70% -- but only generate 33% of GDP.

Digitalization can significantly help address that disconnect.

SMEs that have a stable and secure online presence have access to larger markets and more information, which means they have more opportunities to make a profit and to innovate.

At a recent USAID and ASEAN forum on women in technology, one entrepreneur talked about how she was able to ramp up her business by tapping the digital community. When Valenice Balace started Honesty Apps, a B2B tech company that builds customized apps, it took her and her exclusively Philippine-based team more than a few weeks to make one app for a client. But when she got in touch with coders in Vietnam who were well-versed in the code she used for her apps, her team was able to steadily cut the turnaround time from conceptualization to launch of their products. Now, she employs those Vietnam-based coders and her company can build an app in a matter of hours.

More SMEs can experience this exponential growth if they, like Balece, have an online presence that gives them access to a borderless marketplace and talent pool. Many of these small business owners are already worried that economic integration in Southeast Asia will render them powerless, unable to compete with big businesses that have an established regional presence. This doesn’t have to be the case.

If ASEAN nations can come together to build the necessary infrastructure and put in place laws and regulations that will promote the free flow of data across the region and encourage participation in the digital economy, then even a small business run from the kitchen of a stay-at-home mom living in a remote barrio can benefit from the grand project that is the AEC.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.

Greg Navarro is MAP past President and the Managing Partner & CEO of Navarro Amper & Co., the local member firm of Deloitte SEA Ltd. -- a member firm of DeloitteTouche Tohmatsu Limited -- comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.