CEO Conference 2019: SMEs slow to adopt digital technology, more needs to be done

• Many SMEs realise the benefits of technology but few have adopted it
• Need for many to educate themselves or risk being forced to adapt

IF THE country of Malaysia were a car, then Small and Medium Enterprises or SMEs are the engine that drives the nation forward. This was the view shared by A.T. Kearney partner Nikolai Dobberstein (pic) when he presented his keynote ‘SME Survival in the New World - The Digital Imperative’ during DNA’s CEO Conference 2019 held in partnership with Leaderonomics in Kuala Lumpur.

“SMEs are critical for the growth of Malaysia as they are really driving Gross Domestic Product (GDP) by contributing as much as 37%. They accounted for 66% of total employment in 2017. The vast majority of them are in the services and manufacturing sector. SME Corp’s SME Masterplan aims to raise that contribution up to 42% by 2020,” he said.

But surprisingly digital adoption has been very low among SMEs and that is very worrying as there is a lot at stake for Malaysia as it needs to stay competitive with other countries in the region. Dobberstein notes that much needs to be improved as SMEs only contributed 17% in terms of exports in 2017.

A SME Corp survey in 2018 among some 1,500 respondents, showed that though 80% of them realised the importance of digital adoption their adoption rate was very low. This is especially concerning for SMEs in the manufacturing sector as adoption is very low among leading Asean manufacturers.

While it certainly is not due to the lack of connectivity as SMEs show high usage of PCs, smartphones and Internet connections, the sector needs to devote more to advanced digital technologies to increase their productivity.

Dobberstein says that those that use social media and e-commerce have seen a 26% to 27% increase in productivity.

But apart from finance and accounting, when it comes to back-end business processes, most SMEs don’t leverage on technology in their supply chain management, customer relationship management or order fulfillments.

He sees the adoption of digital technologies as being hampered by five main factors, limiting their preparation for the coming Industry 4.0.

These factors are, low labour costs, no immediate customer demand to incorporate seamless processes, difficulty in finding skilled talents locally, a fragmented supplier ecosystem and unrealistic expectations of delivering returns in the short term.

The truth of the matter is that SMEs are facing competition not just at home but from abroad too. Chinese internet giant Alibaba’s legion of backend suppliers in China are linked to e-commerce player Lazada, closing the gap between foreign and local players.

“SMEs in manufacturing should be worried as low labour costs will not always benefit them. Soon or later high-skill jobs are required and if the industry as a whole does not get its act together, there is a risk that businesses will move away to countries with higher skilled labour,” Dobberstein warned.

Malaysia, for the most part, has been fortunate as the ongoing US-China trade war has kept some manufacturing work in the country but that luck won’t last forever.

So what will it take to drive digital adoption among SMEs? To this end, Dobberstein suggests that SMEs need to take digital very seriously, educating themselves and researching to see what is relevant to them.

“Be clear on your strategy and don’t implement it for the sake of doing something digital. Look at your pain points and work backwards with some use cases,” he advised. He does, however, caution SMEs from endlessly engaging in pilots.

On a national level, he believes that there needs to be more focus on mid-sized SMEs that contribute significantly to the economy. “Give them tailored solutions and business cases for pain-points,” he said.

When the Digital Free Trade Zone (DFTZ) was announced, that opened the doors for foreign players to compete with local SMEs. This development as told by SME Association of Malaysia president Michael Kang had scared many members into trying a digital approach.

Fear of being left behind or not being competitive may be the strongest driving factor to get SMEs to adopt digital.

But if all else fails, though it may seem controversial, Dobberstein believes it may very well be time to force digital adoption onto SMEs. It may sound extreme and there was a reluctance in his voice as he said this, but it may be the only way forward and onward for Malaysia, he opines.

CEO Conference: Malaysia Living Dangerously is sponsored by Telekom Malaysia Bhd as Telecommunications Partner, Malaysian Digital Economy Corporation (MDEC) and Pos Malaysia Bhd as Sponsors. The Malaysian SME Association has endorsed the conference.