Seeking growth in challenging times
Companies should look at regional market to boost demand and grow sales
THE market has not been favourable for most businesses over the last few years. A weakened ringgit, rising costs, labour shortage and weaker consumer spending are only some of the challenges faced by companies today.
According to SME Association of Malaysia president Datuk Michael Kang, the growth of SMEs didn’t quite hit the mark last year.
However, there are still opportunities for small businesses to thrive in the export market.
“2017 was a challenge, especially for those that were doing domestic business because the cost of labour has been increasing and local purchasing power has gone down,” said Kang.
Companies that export their products and services or those that supply to businesses that have export markets were still doing well.
However, Kang noted that about 95% of Malaysian SMEs are only doing local business. To date, Malaysia has slightly over 900,000 SMEs, which represents close to 99% of the total establishments in the country.
“So on average, a lot of them saw a drop in sales,” said Kang.
One of the main challenges faced by SMEs to grow is the high cost of labour and the delay in automating their operations.
“But those that are doing domestic business, have very low volume, so it is very hard for them to grow and go into automation because they don’t have the resources. But those that are exporting are moving into automation and are already digitising their businesses,” he said.
The inability of SMEs to automate and expand into other markets may be a hindrance for the sector to achieve the growth targets set out in the SME Masterplan aimed at boosting the sector’s contribution to the country’s economy. Under the Masterplan, SMEs are to contribute 41% of Malaysia’s gross domestic product (GDP) by 2020.
SME contribution to the country’s GDP in 2016 was about 36.6%, only a 0.3% increase from 36.3% in 2015. Kang estimated SME contribution to GDP for 2017 to be at about 37%.
While there were a lot of allocations and programmes to boost SME growth last year, there were also a lot of hiccups that impeded their growth such as labour shortage and weak market conditions.
Consequently, the sector did not grow as fast as expected.
This year will still be a challenge, said Kang.
The World Bank expects the country’s economic growth to moderate in the next two years, forecasting growth of 5% for 2018 and 4.8% next year.
“But SMEs can still grow if they move to export and go into the region,” he added.
Various government agencies have been putting in effort to educate local SMEs to go global via an easier route, which is to go digital as it reduces the cost of entry for companies that want to sell their products outside of Malaysia.
More recently, the launch of the Digital Free Trade Zone (DFTZ) platform is expected to help local businesses reach out to a wider market.
“Through the existence of the world’s first DFTZ, the export of SMEs is expected to increase to as much as US$38bil (RM152.4bil), creating 60,000 new jobs by 2025,” said Prime Minister Datuk Seri Najib Tun Razak.
By 2020, Malaysia aims to push SMEs’ share of exports to 23% from 18.6% currently.
Kang noted that the government is keen to help SMEs grow to reach its target of 41% to GDP contribution by 2020.
“So the government will put in a lot of effort in the next few years to achieve that,” remarked Kang.
Note also that the cost of most things have gone up and is expected to continue rising, weighing down on bottomlines and growth. Among the costs that will affect SMEs this year is oil prices, which are likely to go up.
“Labour cost will also increase. A lot of them still need manual labour and foreign workers are very hard to get nowadays and are becoming more expensive. We are expecting another increase in foreign worker levy and then there’s the Employment Insurance System. So cost of labour is definitely increasing. We hope the SMEs can go into automation.
“And this year, we want to try to bring more SMEs to the Asean region. I think Asean is a good market for them to move into because it is not very developed yet,” he says.