How Budget 2022 Can Enable The Digital Recovery Of SMEs and Startups

• SMEs need to digitise or die
• Strategies for growth in a tough market

[Ed: An earlier version inadvertantly left out Point 2 of the three points the writer is making. The error is regretted.]

Tomorrow, finance minister Tengku Zafrul Aziz will announce Budget 2022. Over the years this has become a pastime of mine to understand the priorities of the government for the year to come. For the last two budgets, we’ve seen interest in developing the digital economy through various initiatives such as the SME Digitisation Grants, the Digital Skills Register and various incentives for startups.

This year we’re eager to see how the government (our fourth since 2018) is going to help entrepreneurs who run SMEs and startups grow their business in the economic recovery that we hope for in 2022 as we emerge from the pandemic.

Over the last year and a half there have been many schemes and initiatives to help SMEs and Startups weather the storm that is the pandemic. Everything from loan moratoriums, to income subsidies, to grants, to a US$290 million (RM1.2 billion) matching fund were all designed to support Malaysian companies during a very turbulent period.

But that was just to help businesses stay afloat. Budget 2022 needs to provide a framework for SMEs and Startups to thrive as the economy in Malaysia and around the world grows. There are three main components to consider in which we hope to see addressed in the coming announcement.

1. Cash flow is king

For many businesses a lesson learnt from a very brutal year and a half is that cash flow, not necessarily profits are essential to keep businesses afloat. It matters not if your margins are good if you can’t pay your staff and it is pointless to have profits in receivables if you can’t keep the lights on. Cash flow is the life blood of a business.

In this regard, the continuation of grant schemes for SMEs and startups is key, as is the ease of loan applications is important to help businesses continue to grow as the economy opens up. Entities like Cradle Fund and Malaysia Technology Development Corp (MTDC) should increase their commitment to fund and help commercialise startups.

Dana Penjana should continue to provide matching funds with fresh capital from the government to help Malaysian Venture Capital firms invest in Malaysian startups. Having additional cash flow and capital will allow businesses to spend on marketing and product improvements. They will also be able to spend more on digital solutions and improve their offerings to suit the new normal.

Businesses also need to replenish their coffers. The nett result of the pandemic saw many companies deplete their cash reserves or even get into debt. There should be tax incentives for SMEs. Reducing the SME tax rate from 17% to 10% for the next 24 months would be helpful in helping companies shore up their financial position, invest in growth and adopt digital solutions.

The pandemic has been phenomenal for digital adoption by SMEs. It used to be so difficult to get SMEs to try new software or distribution channels. The pandemic has not just made it acceptable but it's now essential in any business.

Digitisation is great because on balance it means lower expenses to operate a business, new ways to sell your product and being able to use the data you collect from your customers to improve.

Its encouraging to see that Prime Minister Ismail Sabri Yaakob in his recent keynote address in the Asean Business Investment Summit 2021 also sees the value of the digitisation of SMEs in saying, “Digitalisation and technological innovation have been embedded in the initiatives and action plans, including in some of the free trade agreements.”

There should also be continued iteration. Adoption of Big Data, Cloud Computing, Artificial Intelligence and the various new technologies of the 4th Industrial Revolution are a must to stay competitive in the region. The government needs to double down on SME digitisation efforts as it builds resilience in businesses. SMEs make up more than 96.5% of businesses which amounts to 40% of GDP in Malaysia so it's important that we help SMEs and startups of all stripes adopt digital solutions and build digital skills.

2. SMEs need to digitise or die

The pandemic has been phenomenal for digital adoption by SMEs. It used to be so difficult to get SMEs to try new software or distribution channels. The pandemic has not just made it acceptable but it's now essential in any business.

Digitisation is great because on balance it means lower expenses to operate a business, new ways to sell your product and being able to use the data you collect from your customers to improve.

It’s encouraging to see that Prime Minister Ismail Sabri Yaakob in his recent keynote address in the Asean Business Investment Summit 2021 also sees the value of the digitisation of SMEs in saying, “Digitalisation and technological innovation have been embedded in the initiatives and action plans, including in some of the free trade agreements.”

There should also be continued iteration. Adoption of Big Data, Cloud Computing, Artificial Intelligence and the various new technologies of the 4th Industrial Revolution are a must to stay competitive in the region. The government needs to double down on SME digitisation efforts as it builds resilience in businesses. SMEs make up 98.5% of businesses which amounts to 40% of GDP in Malaysia so it's important that we help SMEs and startups of all stripes adopt digital solutions and build digital skills.

3. Help the workforce prepare for the jobs that don’t exist yet

800 million jobs globally could be displaced by automation by 2030. This means that in just 8 years SMEs will see a shift in their needs in the marketplace. We need to make sure our graduates and those already in the workforce are prepared for this new paradigm.

We need to have a fierce urgency to invest in the digital readiness of employees. The first bucket of change is in upskilling and reskilling. The private sector is already doing some good work here through training organisations such as Forward School, 42KL, Next Academy, General Assembly and AirAsia Academy. The Malaysian Digital Economy Corporation has been holding on to this torch for years. What we’d be looking for in the budget announcement is further incentives for SMEs to send their employees to learn these skills through these programs. HRDF should have benefits specifically for Digital Skills.

There needs to also be a focus on future generations. We are starting to lag behind our neighbours in terms of training our children with 4IR skills. 65% of children entering primary school education today will be applying for jobs that do not exist today. We need to teach coding in schools immediately to ensure that our future workforce is ready for the economy of tomorrow.

The backbone of the Malaysian Digital Economy

These three focus areas should not only be addressed by policy but by strong messaging that comes from the top down to “Buy Malaysian” and “Back Malaysian.”

We need to help support Malaysian companies - not merely through a few agencies but as a society as a whole. Consumers need to buy Malaysian digital solutions and the government should back more Malaysian companies through funding and the continuation of various programmes from during the pandemic.

The government should develop digital platforms to support SMEs in capturing digital trade opportunities. It's encouraging to see Technology Park Malaysia and the Malaysian Global Innovation & Creativity Centre provide opportunities for new innovations by developing sandbox environments and capacity building opportunities with the private sector. The export of Malaysian technological solutions in drone tech, halal tech and agriculture amongst others should be a national priority.

A report by AlphaBeta that came out over the weekend shares that by 2030 Malaysia’s digital potential could unlock RM257 billion in economic value and 72% of this value will come from technologies that mitigate the impact of the Covid-19 pandemic. SMEs play a critical role in this story. I am glad that the Malaysian Digital Economy Blueprint addresses some of these opportunities and hope we see some of the budget provide more support for this plan.

As we look forward to the announcement of the budget later this week we are eager to see how the government will continue to grow our SMEs and Startups especially when it comes to digital adoption and innovation. In many ways, our digital future is our destiny. 

Aaron Sarma is General Partner, ScaleUp Malaysia and a cofounder of a startup studio, Remote Ventures.