What’s Next 2017: SMEs need to accelerate development to increase digital adoption in Malaysia

• Malaysia's digital investment share of GDP is too low given its GDP per capita
• Digital Free Trade Zone might just be the incentive to accelerate digitisation

"WHAT is surprising is Malaysia is still under par in digital adoption."

This was the conclusion of Nikolai Dobberstein, a partner at global management consulting firm AT Kearney, when he recently spoke at the What's Next conference organised by Digital News Asia.

According to data from Euromonitor, the Economist Intelligence Unit (EIU) and research by AT Kearney itself, Malaysia's digital investment share of GDP is too low given its GDP per capita. Simply put, with their productivity, Malaysian industry should be investing much more in digital.

"This is surprising because Malaysia for the last fifteen years has more than 65% Internet adoption," continued Dobberstein. The deeper question is what are Malaysians doing with all that time on the Net.

Not spending money, it seems. Online conversion rate of B2C marketplaces in Malaysia is less than 1% and when compared to countries like the US, China and India whose Internet penetration is similar or lower to that of Malaysia. Their conversion rate is around 3%.

"That has to do with the lack of offerings that are seen and the understanding of the value proposition," explained Dobberstein, highlighting that Malaysia's online marketing spend is one-eighth of what it is in India, and one-tenth of Singapore's. "It's quite significantly low."

Another reason is because the SME digital adoption is low. Although SMEs contribute 35% to 40% to the Malaysian GDP, only 20% to 25% of them have an online presence.

"It has to do with the simple fact that they don't perceive the benefits. They think it's very expensive," elucidated Dobberstein.

"They are unfamiliar with it, so it requires quite a bit of education."

A disruption felt around the world

If Malaysia is to take any consolation, it's that companies in general around the world are finding it a challenge to respond.

"It's very clear that no industry feels fully prepared," stated Dobberstein, pointing out that an AT Kerney survey found that even in IT, finance and telecommunications - three industries most at threat of disruption - none of them felt they were even close to "fully prepared".

In general, 85% of production assets are still unconnected while 70% of captured production data goes unused. And even with obvious "slam dunk" technologies to improve productivity like robotics and 3D printing, there still is a lot of room to grow.

This means the future is still very uncertain. "There are certain jobs which will be enhanced, some are augmented, and some will be just be eliminated."

Dobberstein is keen to point out that he is talking beyond conventional labour-intensive or low-level jobs.

For example, H&R Block recently announced they would use IBM Watson's learning capabilities to help in tax preparation. And in 2014, Associated Press began to use “automated journalists” to report on company business earnings. "I think they're actually much better," admitted Dobberstein.

How will all this disrupt the Malaysian IT industry? Dobberstein in particular looked at its impact on BPO companies.

"Fifteen to 25% of jobs are at stake across all countries," he emphasised. And although the quality of replacement jobs will rise, quantitatively there is a clear issue. "For every new management job created (by automation), four will be replaced."

Riding the wave

He admits that just knowing there is an oncoming tidal wave of disruption doesn't mean you know how to avoid it. Worldwide, companies try to keep ahead of the race, spending US$400 billion (RM1.6 trillion) on digital transformation projects. However, 90% of them don't deliver value.

"The challenge doesn't lie in the understanding of what has to get done. This is not complicated stuff conceptually. The problem is in the execution. People underestimate what it takes.

"The important question is not how to innovate with digital but how to innovate in a digital world to deliver a strategy," explained Dobberstein.

He also stressed that there must be a clear business imperative if you were disrupting traditional business worlds. And companies need to be agile in order to be clear on how they are faster in decision-making and in the midst of all this, be more tolerant of failure.

"This is hard for Asian companies to do," said Dobberstein, explaining that 70% of change management efforts fail.

"It requires skills and change management skills are hard to come by."

Forcing acceleration into digitisation

Two obvious reasons why Malaysia hasn't fully embraced the digital revolution is because IT talents are scarce in Malaysia, and because labour costs are low. "That doesn't force a lot of companies here in Malaysia to move on and digitise."

However, it's not all doom and gloom. "All the ingredients in Malaysia are there to be very hopeful," he mulls. "We need only to force an acceleration."

He says that investing in education for Malaysian companies would be a positive step forward, but he thinks things need to be even more drastic. There needs to be something that would force players to react.

One such initiative he points to is the recently established Digital Free Trade Zone (DFTZ).

"It forces the shift in what SMEs do so they can be comfortable," said Dobberstein. "On the one hand, it opens a window for SMEs to the rest of the world. On the other hand, it also exposes them much, much more."

"That's the whole idea of the DFTZ."

What’s Next was sponsored by big data and analytics specialist, Fusionex International, Malaysia Digital Economy Corporation (MDEC), Maxis Bhd and Anaplan. Accenture Malaysia was Knowledge Partner, iTrain as Training Partner, Leaderonomics as Leadership Partner, Ansible Malaysia as Digital Partner and Valiram Group as Lifestyle Partner. BFM was the Media Partner.