Asean is poised to become one of the world's big growth markets, led by economies not yet fully tapped such as Vietnam and Myanmar. But small and mid-sized domestic companies fear being left out amid the intensified competition that regional integration will bring.
According to a survey conducted in April and May this year by the Boston Consulting Group (BCG), 80% of the respondents feel domestic small and medium enterprises (SMEs) stand to lose out once Asean integration takes place. About 60% predicted that mid-sized local companies will lose out.
The survey gathered opinions from more than 200 senior government officials and business executives of Asean-based companies including domestic players and multinationals from the US and Europe.
"Domestic SMEs are under serious threat. There are risks that they might fall behind," said Bernd Waltermann, BCG's senior partner and managing director.
"Domestically focused SMEs are perceived to be more at risk. These businesses will have to clearly define their distinct competitive advantage and then relentlessly pursue efforts to build and defend it, especially as they should expect more international competition."
SMEs in Myanmar face major challenges. Wutichai Sermsongsakunchai, chief representative in the Yangon representative office of Krung Thai Bank Plc, said small businesses in Myanmar were no match for their peers from other Asean countries in terms of capital, technology and market intelligence.
"SMEs in Myanmar are encountering several major challenges relating to access to markets, finance and technology," he said. "In addition to typical challenges, SMEs in Myanmar face high transaction costs due to insufficient infrastructure and shortages of electricity which might affect logistics and production costs, especially in summer, which might result in high production costs through the use of generators."
However, the Myanmar government and policymakers understand the challenges well and have been working to improve local SMEs' competitiveness in terms of productivity, quality, technology, financial access and market opportunities, he added.
Most SMEs in Myanmar are in the food and beverage sector, accounting for 66% of all registered small and medium enterprises.
In Asean, the contribution of SMEs to gross domestic product ranges between 30% and 53%, according to Mr Wutichai. The figure is 37% of Thailand and 40% in Vietnam.
In terms of support from the government, Mr Wutichai said small businesses in Myanmar needed a better business environment to develop their products and services along the value chain. This requires adequate infrastructure, better communication services, access to finance and technology, policy and legal improvements.
"Myanmar SMEs also need support in terms of developing a more entrepreneurial mindset, which I believe will be the important factor for SME development in Myanmar," he said.
"If they understand business management and entrepreneurship subjects related to production, accounting and finance, the supply chain, marketing and quality improvements, it will help them to better understand how to do business and survive in the business world. Also, it will help them have a sense of achievement and fulfillment. SME training and education will help them to improve and expand their businesses confidently."
The Myanmar government is committed to improving the business and legal environment for SMEs, including publishing an SME Bill and setting up a dedicated centre for SME development. It has created incentives and reduced business barriers to business operation such as multiple exchange rates, import restrictions, export tax and export/import licensing procedures, Mr Wutichai added.
As well, the government is getting help from international organisations such as the Japan International Cooperation Agency (JICA), the Asian Development Bank and foreign banks to help integrate Myanmar into regional and international markets.
"SMEs in Myanmar cannot escape the common difficulties that SMEs face such as access to finance," said Mr Wutichai. Obtaining a loan or trade finance facility in Myanmar takes from one or two months and banks normally require 30-40% collateral for a one-year loan with an interest rate of 13%, he said.
To improve access to finance, the Small and Medium Industrial Development Bank (SMIDB) has been set up to offer incentive-based financing to local SMEs. The government is also considering allowing commercial banks to extend long-term loans for more than one year and to accept a wider range of collateral.
As well, foreign banks are allowed to engage in microfinance, offering finance to enterprises with fewer than 10 workers or other small firms to improve access to capital.
In Indonesia, most small and medium enterprises appear determined to stay at home where they can tap a huge population base, rather than risk going abroad.
Andrew McBean, a partner with the international consulting firm Grant Thornton, said the Indonesian government still had many challenges to overcome to improve the readiness of the country's small businesses for the AEC, For some the priority is financial support and for others it is protection from competition.
"They need all the support that the government can provide within several constraints from the previous regime," said Mr McBean. "From our perspective, both are needed at the same time for SMEs at Indonesia," he said, acknowledging that protectionism tends to apply in the agricultural and maritime sectors while other industrial sectors need financial support.
"As an analogy, [Indonesian] SMEs' competitiveness is still at the 'diamond in the rough' level. But they surely can survive in facing the level of business competition in the AEC era. They have been tested by many extreme economic situations, such as the financial crisis in 1997, and the impact of the global crisis [of 2008-09]. Their adaptability to the dynamic business climate is extraordinary."
But in order to create sustainable advantages, businesses need to improve their capabilities including the entrepreneurial mindset, as well as management skills in areas of marketing, finance, human resources and operations.
Indonesian SMEs in almost every industrial sector play crucial roles in the country's economic stability. Agriculture, textiles and services sectors are the top three activities in which SMEs operate.
"So far, actions have been taken by the government to assist SMEs such as improving the image of local products on the international market, developing the potential of the creative industry sector, facilitating financial transactions, and providing the needed infrastructure such as civil, IT, and communications," added Mr McBean.
Mr Waltermann of BCG said most SMEs in Indonesia did not see going abroad as a priority as the potential in the large domestic market is sufficiently attractive.
"Most SMEs will be tempted to use their local advantage as insiders and expand into other lines of business locally before they go international," he said.
"In fact, Indonesia is a big market and they still have a way to go into other businesses. As local insiders, they feel they have the advantage as domestic players. Why do I need to explore a new frontier, or unchartered waters if I have the opportunity to do so locally?"
WINNERS AND LOSERS
While SMEs can expect to face challenges, the winners in regional integration are likely to be Asean-based companies that already are operating in Asean countries outside their home bases, as well as multinationals, says BCG.
"Further integration will only make it easier for them to leverage the strong footprint that they already have," said Vincent Chin, a senior partner and managing director with BCG. "They are familiar with the market. From Thailand, this group includes CP (Charoen Pokphand), Thai Beverage, and TUF (Thai Union Frozen Products). These companies will become even stronger in the AEC market."
Another group the survey participants perceive to have an advantage is the traditional multinational firms.
"Multinationals are also able to serve the large, increasingly integrating market. They are active in this market and know how to operate and become even stronger in the AEC environment," he added.
To assist the strugglers, Asean governments have two options. First is protectionism but that will actually go against the goals of the AEC and result in higher costs and lower quality for their own citizens.
"What we hope is that enlightened governments in this region don't go down the protectionism path but rather put in programmes to help SMEs become stronger through productivity and innovation initiatives," said Mr Chin.
Thailand, with its SME support teams, stands out in this regard, as do the governments in Malaysia and Singapore.
"We have a sense of optimism. These governments understand the problems. They are not taking the easy path of protectionism but are actually strengthening the SMEs," he said.
Some SMEs can be part of the supply chain for regional champions such as Japanese and Korean companies, which bring SMEs with them into new markets, added Mr Chin.
Mr Waltermann recommended SMEs partner with international businesses to help them with market access, capability building, and technology expertise.
"The key for all firms to survive will be enhancing their people platforms. The ability to attract, develop and retain top talent will be the key differentiator even in asset-intensive sectors," he said.