AFTER the economic shock of last year threw many businesses off their feet, there has been a growing conversation around the need to build resilience in local SMEs to enable them to endure further and future disruptions.
Businesses have been encouraged to innovate, move online and to automate to capture sales, remain competitive and reduce dependency on manual labour to survive. The government has also emphasised the need for resilience when it revealed a six-pronged plan – resolve, resilience, restart, recovery, revitalise and reform – to get the economy back on track.
To this end, the government has rolled out a series of stimulus packages to help cushion the shock and lay the foundation to revitalise the economy following the implementation of the various phases of the movement control order (MCO) since last March. Measures under these packages range from wage subsidies, loan moratoriums and soft loans aimed at helping SMEs deal with immediate cash flow needs, to grants and incentives to help them digitalise and upgrade skills.
While these measures have been well received, industry observers note that the effectiveness of the economic stimulus packages in helping SMEs build resilience and providing certainty in the direction of future economic development seems to be ambiguous.
In its recent report, Post Covid-19 Recovery: Building SME Resilience, the Institute for Democracy and Economic Affairs (IDEAS) notes that while the measures were timely and helpful in preventing a far more severe economic collapse, these packages comprised mainly of stop-gap measures as the bulk of the allocations were aimed at job and income protection.
“There is insufficient support for a more sustainable long-run recovery and reset of the Malaysian economy, ” it says.
Malaysia’s small businesses bore the brunt of the pandemic with nearly 70% of SMEs reportedly suffering more than a 50% drop in business within one week of the first MCO announcement and 56.56% of firms reported zero revenue during the lockdown.
Besides, 68.9% of SMEs resorted to using their savings to accommodate all operating costs and working capital incurred during the period. IDEAS notes that there were loopholes in the implementation of the stimulus packages that prevented many SMEs from tapping into the initiatives available to sustain themselves through the pandemic. For example, financial institutions were given the liberty to assess and approve applications for working capital relief funds and loans such as the Special Relief Fund. But SMEs found that private banks prioritised existing borrowers or larger firms and many smaller companies could not get the loans.
Additionally, some of the assistance was not targeted, like cash handouts to consumers may have gone towards established online businesses rather than help smaller local retailers. For SMEs who survived the lockdown, regaining consumer confidence and pivoting business activities are the biggest challenges to recover in the mid-to-long run, the think tank says.
“However, despite the gradual opening up of the economy following relaxation of the MCO, the policy focus seems to lag behind in terms of providing certainty in the direction of future economic development. “Studies on the effectiveness of the economic stimulus packages in helping SMEs build resilience in the mid-to-long term are also limited, and therefore unlikely to provide evidence-based insights to policymaking, ” the report adds.
Address gaps Moving forward, there is a need to further reform policy frameworks and redefine terms in order to help SMEs innovate and move up the value chain so that they can build long-term resilience. IDEAS research director Laurence Todd says there is room to increase government spending through measures such as the wage subsidies to continue to prop up small businesses in the short term.
“However, I also think if we increase the spending now to save SMEs, that has to come hand in hand with the other reforms to support longer term recovery, otherwise we will be in the same position in the next shock, ” he says.
IDEAS highlights that Malaysia’s manufacturing sector has contracted since the early 2000s with the share of value-added in gross output of the manufacturing sector stagnating. There has been a lack of structural shift from low value-added and labour-intensive industries to high value-added and knowledge-intensive industries. “SMEs have a strong presence in manufacturing, but they represent the low value-added sub-sectors which have been relatively unproductive compared to the mid or high value-added sub-sectors.
“Their labour-intensive and cost-competitive model may have hampered progress towards automation and reduced their resilience towards external shocks such as Covid-19, ” observes the research unit. The government has intensified efforts to encourage the adoption of IR4.0 technologies among SMEs through various grants and loans, such as the SME Digitalisation Grant, to steer them towards automation.
But Todd notes that SMEs may have limited capacity to take up such assistance, in terms of technical skills and financial capabilities.
During the online launch of the report, Federation of Malaysian Manufacturers (FMM) council member Ter Leong Leng points out that many of these digitalisation efforts did not always align with the needs of businesses. “Many manufacturers are still in IR 2.0 (the second industrial revolution). So, to move towards IR 4.0 is a huge process and a major transformation for them, ” says Ter.
Todd opines that there needs to be assistance for SMEs at the lower end of tech adoption instead of just focusing on IR4.0 technology adoption. This will encourage them to upgrade over time. Similarly, in the services sector, which makes up the bulk of SME employers, the move to e-commerce is not as straightforward.
“Stakeholders are cautious when setting up their business on e-commerce platforms given the high transition costs. Competition among small businesses is intense in these platforms given the pivotal role of brand awareness and advertising.
“However, the business models of retail micro-enterprise and SMEs are unable to absorb the high costs associated with brand building and advertisement. This has led to many firms preferring to stick to their existing brick-and-mortar business models and choosing to close their business entirely during the lockdown, ” says the report.
Some smaller retailers find it onerous to pay the 20%-30% commission fee demanded by the digital platforms due to their narrow profit margins, it adds. Thus, these players have urged the government to offer commission fee waivers. For sustainable pivots, players require substantial capital as it entails a change in their business models.
These include the shift of focus to brand awareness and hiring more tech-savvy talents and policy assistance should reflect these realities.