Tessar, the founder of Sirtanio Organik Indonesia — a company that produces organic rice in East Java, Indonesia — recently spoke to the Indonesia Chambers of Commerce (Kadin) about improving his exports.
His company helps farmers grow organic certified rice, which sells for a higher price than regular rice. The demand for organic products has risen over recent years, with increasing health focus by global consumers. However, most of Tessar’s sales are still domestic, with ambitions to expand his business internationally.
That conversation had Kadin thinking of how micro-, small-, and medium-sized enterprises (MSMEs) can better contribute to the nation’s exports. Hence, Kadin collaborated with Boston Consulting Group (BCG) to identify the most promising sectors for this goal and develop potential pathways for the government and industry champions to support MSMEs in priority sectors.
Untapped export potential
MSMEs form the backbone of the Asean economy. With their omnipresence in all business sectors, MSMEs constitute around 97% of total enterprises and employ around 70% of the ASEAN workforce.
Moreover, MSMEs contribute significantly to Asean’s gross domestic product, ranging from 30% to 60% across member countries. Despite their significant contributions, the potential for MSMEs to participate in global value chains (GVCs) remain largely untapped — contributing just 18% of total exports in the region.
One of the key reasons for this discrepancy is the unique challenges MSMEs face when trading across borders compared to large companies. Despite various regional initiatives to enhance trade facilitation, MSMEs still grapple with licensing procedures, regulatory barriers, and high logistics costs, among other issues. These obstacles can be particularly daunting for smaller businesses that often lack the resources, knowledge, and networks to navigate the complexities of international trade.
Focusing on priority sectors
According to BCG’s 2022 Global Trade Model, the value of Asean trade is projected to reach US$3.2 trillion ($4.2 trillion) in 2031, with growth outpacing the global average.
This speed of growth is driven by the diversification of global supply chains in the face of increasing geopolitical tension, and rising manufacturing costs in China. Intra-regional trade will also increase significantly. This promising outlook offers a significant opportunity for MSMEs to grow their international footprint.
There are several sectors where MSMEs have stronger prospects for integration into GVCs. F&B, textile, and wood and paper all represent key priority areas to encourage integration of MSMEs.
The export growth rates of these sectors remain high, and the sectors consist of a large number of MSME suppliers. This makes fertile ground for participation from smaller enterprises. The Asean F&B industry, for instance, is expected to grow at a CAGR of 7% from 2023 to 2028, offering immense opportunities for regional MSMEs.
Growth in these sectors is driven by increasing consumer demand within the region and globally. With its population of more than 600 million citizens, Asean presents a vibrant market for these products.
A growing middle class and even faster-growing mass affluent class amplify this opportunity. These demographics today make up 57 million, or 10% of the population. By 2030, the ranks of Asean’s mass affluent are expected to reach 136 million and represent 21% of the population.
Asean’s abundant natural resources and cultural heritage also provide its MSMEs a competitive advantage that aligns with an increasing global appetite for green products. According to the NYU Stern Center for Sustainable Business, the sales of products marketed as sustainable grew 2.7 times faster than those of conventionally marketed products between 2015 and 2021. In 2022, products marketed as sustainable had a 17% market share, up 3.3% since 2015.
Unleashing export potential
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Successfully tapping into these sectors will require a strategic approach. Local governments and industry partners should work closely with MSMEs to support their efforts in improving inhouse capacities and competencies.
Support for MSMEs could be through mentorship or training programmes that provide MSMEs with know-how on internationalising their products. King Power, Thailand’s leading duty-free shop, worked with Ban Na Kham locals in Sakolnakhon to develop and produce merchandise using their indigo-dyed textile for the UK’s Leicester City Football Club. King Power not only partners its designer team with local crafters, but also provides MSMEs with holistic training in product design, product value-add, packaging, production, and marketing and distribution.
Industry partners could also help by improving MSME market access and providing supportive infrastructure. Amazon’s marketplace platform allows MSMEs to sell their products to consumers worldwide, with MSME products accounting for more than half of all products sold on Amazon. Fulfilment by Amazon handles storage, packaging, and shipping for these smaller sellers, integrating them into Amazon’s global logistics network.
MSMEs also require Asean government support to create more streamlined regional policies to reduce trade barriers and make it easier for MSMEs to engage in cross-border trade. Licensing rules and regulatory environments are the top two barriers for MSMEs seeking to trade across borders.
Digitalisation also represents an important game-changer that MSMEs should be encouraged to embrace. Digital platforms can help MSMEs reach a broader market, reduce transaction costs, and improve competitiveness. Asean’s digital economy is booming, with 460 million Internet users in 2022 and a gross merchandise value of US$200 billion. Leveraging this massive digital potential will allow MSMEs to integrate more effectively into GVCs and increase their export share.
MSMEs are indeed the engine of Asean’s economic growth. However, the potential of these enterprises to capture value in GVCs remains under-realised, due to several key barriers. By identifying key growth sectors and leveraging the opportunities therein, Asean MSMEs can improve their contributions to regional and global trade. Regional cooperation, digitalisation, and capacity-building efforts can aid in this journey, marking a significant step towards Asean’s inclusive and sustainable economic community goal.
Aldi Haryopratomo is vice-chair of the Indonesian Chamber of Commerce and Yulius is managing director and senior partner at Boston Consulting Group (Jakarta)