Global Business Guide Indonesia

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Why Indonesia | Indonesia SMEs: Increased Government Support to Overcome Challenges

Indonesia’s Small and Medium Enterprises (SMEs) sector is currently grappling to overcome a host of tough new challenges. This is most notably in the form of rapid technological development and regional economic integration which have loomed over them for many years but has come into sharp focus with the start of the ASEAN Economic Community (AEC). However, with the Indonesian government now more determined than ever to push the growth of SMEs, the sector could be in a position to turn these challenges into exciting opportunities.

Indonesian SMEs
SMEs are crucial to the economy in terms of sustainable growth and employment. They now face a new reality of being challenged on their home turf through the AEC and thus the requirement to be more competitive and innovative in order to survive.

Since becoming Indonesia's president in 2014, Joko Widodo has shown real commitment to supporting the country’s SME sector. This special government attention is something the sector has merited, being a foremost contributor to Indonesian gross domestic product (GDP) and employment. According to the Cooperatives and SME Ministry, in 2014, Indonesia had 57.9 million SMEs which contributed to around 58.92% of the country’s GDP and absorbed 97.30% of the country’s workforce.

The AEC worry

Indonesian SMEs' impressive contribution to GDP in 2014 was not replicated the following year. In 2015, though the workforce absorption rate stayed at 97%, SMEs' contribution to Indonesian GDP dropped by almost 3% to 56% of total GDP. This could be down to the lacklustre Indonesian and global economy, as well as the fall in oil and commodity prices. While the year 2016 has seen an improvement in the economy and slight recovery in oil and commodity prices, it poses a fresh challenge for Indonesian SMEs in the form of the ASEAN Economic Community (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?).

The AEC, which began at the start of 2016, aims to integrate Southeast Asia’s diverse economies into a single market of over 600 million people. While the AEC opens the doors for Indonesian businesses to penetrate new markets across the region, most of Indonesia’s small and medium businesses are not looking that far. Their concern is safeguarding their domestic market.

As the largest market in the region, it is inevitable that Indonesia will be a major target market for businesses from all sectors across the ASEAN, as well as from countries outside of the region who may decide to set up companies in more investor friendly ASEAN countries like Singapore to access the market as a whole.

Almost half a year into the AEC, Indonesian SMEs are starting to feel the strain of stronger competition. Experts have identified factors such as poor infrastructure, limited access to financing, and the lack of business plan and know-how as issues that hold Indonesia’s SMEs back from being able to successfully compete against their regional counterparts.

Though viewed by some as a late initiative, the government has laid out some interesting programmes to help SMEs cope with the stiff competition. The Cooperatives and SME Ministry, for example, has prepared three programmes to help SMEs, which includes providing training to improve human resources, giving access to low-interest loans and helping businesses improve and maintain product quality.

Jumping onto the digital bandwagon

One of the main areas that the Indonesian government as well as many private parties have been eagerly trying to push SMEs towards is digitalisation. With the market and trade in general becoming increasingly digital, going online is an urgent necessity for Indonesian SMEs. However, it is something they have been slow to do, due to poor internet access and lack of skills in the field (See Indonesia and the Internet; Online & On the Move).

According to a recent report by Deloitte, published in August 2015, around a third of Indonesian SMEs are still operating offline, while another 37% have only basic online capabilities. The study suggested that offline SMEs could boost revenue by up to 140 million IDR by going online and adopting a digital strategy to their business. The introduction of popular online marketplaces such as Tokopedia has helped facilitate small businesses in making the move to sell their products online. SMEs in Indonesia recently have also been able to access training and workshops that help them make use of other popular digital platforms such as Facebook and Instagram for business purposes.

Mr G. N. Putu Sugiarta Yasa
Mr G. N. Putu Sugiarta Yasa
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More of an effort needs to be made in better identifying specific consumer bases as targets for Indonesian products, as this would facilitate the creation of products that meet specific quality requirements and cater to each market’s unique preferences.
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Special government treatment

The issue of the cost of lending to SMEs has been raised repeatedly by President Joko Widodo. On taking office in 2014, the lending rate of government-backed microloans for MSMEs known locally as KUR, was as high as 22% (See Indonesia is Behind the Global Curve on Monetary Policy). The figure was deemed “unfair” and “dangerous” by Vice President Jusuf Kalla and was radically slashed by half in 2015 to 12%. In a bid to further boost SME growth, in January 2016 the government again lowered the lending rate, this time to as low as 9%. The Indonesian government has since this announced plans to further slash the lending rate next year, which will be the third lending rate cut in as many years (See Indonesia's Microfinance Sector Overview: Key Component for Sustainable Growth).

Moreover, the government has also decided to set an ambitious KUR disbursement target of just over 100 trillion IDR – a striking figure when compared to last year’s disbursement target of 30 trillion IDR. The higher target has been met with scepticism by many as it has been well-documented that the government had failed to reach the previous year’s disbursement target.

In order to meet the ambitious target for 2016, the government has ramped up efforts to ensure that the funds reach as many of Indonesia’s over 50 million MSMEs as possible. Coordinating Economics Minister Mr Darmin Nasution said 19 banks will be participating in the programme this year, as well as an additional four multi-finance firms which are expected to disburse at least 1.5 trillion IDR of KUR loans this year.

Another show of the government’s support for the country’s SMEs is the special provision it has made in the regulatory changes on the Negative Investment List, a list of business sectors that are closed for foreign investors (See Indonesia’s New Negative Investment List; A Big Bang?). In a bid to significantly attract foreign investment, the government removed 35 subsectors from the list, allowing for companies in these sectors to be fully-owned by foreign investors. Interestingly, in the revision, the government specified that 19 selected subsectors will be reserved for small-scale firms and cooperatives. It further ruled that 62 areas of business will only be accessible to international investors if they partner with a local SME.

Indonesia’s SMEs are crucial to the economy in terms of sustainable growth and employment. They now face a new reality of being challenged on their home turf through the AEC and thus the requirement to be more competitive and innovative in order to survive. This new paradigm is an opportunity for international investors to take advantage of and start looking to partner with smaller-sized companies to access sectors reserved for this form of cooperation. In addition, the tide of digitalisation will bring about opportunities to work with SMEs for the development of new platforms as well as consulting in areas such as branding and advertising.

Global Business Guide Indonesia - 2016

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)