Enhancing SME

Competitiveness in Indonesia

through Digital Engagement

2016

Presented at APO Workshop about Multicountry Observational Study

Mission on SME Development

15 – 19 August 2016, Taipei, Republic of China (ROC)

A Country Paper

Prepared by:

Nita Felia Pambudi, S.Si., S.Kom., MscBA

Business Development Manager

BINUS UNIVERSITY

Jl. K.H. Syahdan no. 9, Jakarta, INDONESIA

[P]: (62 21) 534 5830 ext. 1901

[M]: (62 21) 858 102 64324

Email: npambudi@binus.edu

1

Small and Medium Enterprises in Indonesia at a Glance

As an archipelago country comprising 17,000 islands, Indonesia has a population of 257.6 million

with gross domestic product (GDP) of $861.9 billion and annual GDP growth of 4.8% in 2015 (World

Bank, 2016). After a slowdown in the past four years as a result of the continued weak recovery in

major industrial economies in Asia, Indonesia’s economic reforms to boost growth to 5.2% in 2016

(ADB, 2016). According to a study by US-based global information company IHS Inc., Indonesia is

expected to join the ranks of Asian nations with a GDP exceeding US$1 trillion by 2020.

Small and medium enterprises (SME) in Indonesia have become the backbone of the country’s

economic development. A bit different with general definition of SME, Indonesia government put

micro enterprise in the category of SME (Law of Republic Indonesia no. 20 of 2008 about SMEs);

thus it is better known as Micro, Small, and Medium Enterprises (MSME). However, to simplify the

discussion, the term of SME will be used in this paper overall. The details are as follows.

1. Micro enterprise with net asset not more than 50 million rupiah (exclude land and buildings)

and annual sales of no more than 300 million rupiah

2. Small enterprises with net asset of at least 50 million to 500 million rupiah (exclude land and

buildings) and annual sales of between 300 million and 2.5 billion rupiah

3. Medium enterprises with net asset of at least 500 million to 10 billion rupiah (exclude land

and buildings) and annual sales of between 2.5 billion to 50 billion rupiah

The Challenges of SME in Indonesia

SMEs represent 98.8% of the total number of enterprises in Indonesia and 97.2% of employment

(Mourougane, 2012; RPJMN 2015 - 2019); however it only gives minor contribution to the country’s

GDP as well as investment rate (Table 1).

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Table 1 Selected Indicator of SME Development in Indonesia 2013

Source: Ministry of Cooperatives and SMEs of Republic of Indonesia, 2014

Business Category Number of Companies Employees GDP

Contribution

(%)

Investments

(billion IDR)

Micro Enterprise 55,856,176 (98.8%) 99,859,517 35.81 175,529.1

Small Enterprise 629,418 (1.1%) 4,535,970 9.68 452,790

Medium Enterprise 48,997 (0.1%) 3,262,023 13.59 622,482

Big Business 4,968 (0.01%) 3,150,645 40.92 1,033,071.9

In 2012, The Organisation for Economic Co-operation and Development Productivity reported that

productivity of SMEs in Indonesia is 4% lower than big businesses. This difference is getting bigger

in the following years because a lot of SMEs are still using manual production processes and lack of

access to skillful and knowledgeable people, machine, and IT infrastructure (OECD, 2012).

Furthermore, based on the report of Ministry of SMEs and Cooperatives of Republic of Indonesia

2014, GDP of SMEs showed a downward trend, especially in sectors of SMEs with big number and

dominant labor, namely agriculture and trade. The biggest contribution for GDP from SMEs is mostly

found in the tertiary sector, while the GDP of SMEs in the manufacturing industry is still low.

Furthermore, the participation of SMEs in exports is still low (less than 19.0 per cent) and

contribution in exports continued to decline (Figure 1a and 1b).

From the given data, it can be seen seen that SMEs in Indonesia still have many challenges, such as

(1) enterpreneurship, management, and technical capacity; (2) financial access; and (3) innovation

capacity, technology adoption, and standard implementation (The Directorate of Cooperatives and

SMEs Empowerment, 2014).

Figure 1a GDP Contribution per SME Scale and Sector

Source: Kementrian Koperasi dan UMKM (2013)

3

Figure 1b SMEs Productivity per SME Scale and Sector

Source: Kementrian Koperasi dan UMKM (2013)

Business Performance and Technology Adoption of SMEs in Indonesia

Similar with any other organizations, SME needs business performance to determine appropriate

measurement and set competitive strategies (Setyawan, 2015). Tambunan (2009) explains SME

business performance in Indonesia usually measured by selling revenue, market growth, and financial

capacities. On the other hand, Tambunan (2009) identifies several key factors to improve SME’s

business performance and competitiveness in Indonesia: human resource, working capital,

management and technological skills. A detail and clear performance measurement with longterm

orientation and business network also has major contributions to SME marketing performance

(Lamprinopoulou and Tregear, 2011).

A research by Setyawan in 2015 about SMEs competitiveness in Indonesia to several SME clusters in

East Java, Indonesia found that level of education, working capital, level of innovation, and business

strategy have positive effect on SME business performance. This finding strengthens the conceptual

framework proposed by Karaev et al. (2007) and Randelli and Lombardi (2013). Setyawan uses

measurements and variables as below.

Level of Education: SME owners years of schools (Jones, 2001)

Working Capital: amount of cash in a period of production in IDR (Klonowski, 2012)

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Business Performance

Level of Education

Working Capital

Level of Innovation

Business Strategy

Level of Innovation: develop a new strategy of promotion, creating new supplier, distribution

network and buyer, enhancing new product to the market (Antonioli et al., 2011)

Business strategy: periodic assessment on business performance, setting business target and

business plan (Benneth and Smith, 2002)

Business performance: percentage growth of SME profitability in the last three years (Cocca

and Alberti, 2010)

Technology has become an essential driving factor for business productivity for several decades

like computers (1980s), software (1990s), and internet (2000s). Currently, digital technologies

emerging such as cloud, smartphones, apps, and data analytics, have a great impact to consumers

and businesses around the world.

Figure 2 SME’s Competitiveness Conceptual Framework

Source: Karaev et al. (2007); Randelli and Lombardi (2013); and writer analysis (2016)

Intuitively, digital technology adoption will increase business performance. SMEs in Indonesia might

gain benefits from digital absorption such as increase cost efficiency, gain new customers, their

customers, improve business processes, and expanding market. Thus, the writer propose an updated

competitiveness framework in this paper as shown in figure 2.

Level of Digital

Engagement

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Digital Engagement of SMEs in Indonesia

Indonesia is one of the biggest digital market share in Southeast Asia. According to We Are Social’s

compendium of world digital stats (2016), Indonesia now has 88.1 million active internet users, up 15

percent over the past 12 months. As a country with 43% smartphone owners, Indonesia still put

Blackberry’s BBM at top of the list of active social platforms (19%); 4% to 5% above Facebook and

WhatsApp consecutively. BBM is not only cheaper than traditional text messaging, but also allows

Indonesians to engage in ecommerce on a large scale (TechinAsia, 2016). Furthermore, sixty two

percent of Indonesian people utilize social media in buying decision making process.

Deloitte Access Economics commissioned by Google reveals that three quarters of Indonesia’s SMEs

are missing out on most of the benefits of digital technologies since their businesses are still running

offline. The digital engagement of SMEs in Indonesia are shown in details in Table 2.

Table 2 Online Business Engagement Type and Digital Adoption % Comparison

Source: Stancombe Research and Planning, Deloitte Access Economics (2015); writer analysis (2016)

Online

Business

Engagement

Type

Access to broadband/

computer/

smartphone/ website

Social Media

Involvement

E-commerce

Capabilities

(order/ payment/

etc.)

Digital

Adoption %

Comparison

Offline

Business

No - - 36%

Basic Online

Business

Yes Email only - 37%

Intermediate

Online Business

Yes Social media and

web integration

(live chat, customer

threads)

Low 18%

Advanced

Online Business

Yes Social media and

web integration

High 9%

For SMEs that have e-commerce capabilities, only 12% has basic features of ordering products/

services via website and 10% has online payment features. Other than that, SMEs provide basic

information about their contacts, addresses, and working hours in their website. Deloitte also finds

that 58% offline business comes from micro enterprises. Primary industry including agriculture,

animal farming, forestry, and fisheries have the lowest digital engagement; above 60% of the SMEs

are doing offline and only 6% are doing advanced engagement. On the other hand, construction,

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transportation, communication, and production has more digital penetration and up to 33% SMEs has

social media and e-commerce integration.

Figure 3 Digital engagement based on SME categories

Source: Stancombe Research & Planning, Deloitte Access Economics (2015)

Deloitte Access Economics (2015) publishes several key findings that greater use of digital

technologies such as social media, broadband and e-commerce can deliver significant benefits for

SMEs business performance, including: up to 80% higher growth in revenue, being one-and-a-half

times more likely to increase employment, and being 17 times more likely to be innovative.

Additionaly, McKinsey Global Institute reports that SMEs in Indonesia heavily using web

technologies grow two times as much as others (McKinsey Research, 2015). Therefore, boosting

SMEs digital engagement could increase Indonesia’s annual economic growth by 2% as previously

stated by World Bank Research (2015).

Examples of How Digital Engagement Influences Key Factors Supporting Business

Performance

The writers assume that digital engagement influences each factor supporting business performance.

Through a desk research, two SMEs in Indonesia are used as examples: Brodo Footwear and

8Villages. The first company is established in 2010, and have more than 100 employees in just four

years to produce 4,000 shoes per month. Brodo gain a revenue around US$ 120,000 per year (2015).

The second business, 8Villages, is a hub to connect farmers and give information about agricultural

58,00%

28,00%

21,00%

15,00%

27,00%

43,00%

42,00%

44,00%

14,00%

30,00%

37,00%

41,00%

0% 20% 40% 60% 80% 100%

Offline Business

Basic Online Business

Intermediate Online Business

Advanced Online Business

Micro Enterprises

Small Enterprises

Medium Enterprises

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topics like crop prices, weather forecasts, and farming tips. This company leverages the power of

mobile phones to allow business to engage farmers at scale, capture relevant intelligence, and

generate higher consumer engagement.

Table 3 The example of impact of digital technology adoption in SMEs in Indonesia

Brodo Footwear 8Villages

Level of

Education

Yukka Harlanda (founder), has the

opportunity to study in Bandung

Institute of Technology. As a city of

creativity and innovation, Bandung is

chosen to build Indonesia

digitalpreneur with disruptive mindset.

This type of exposures will increase

knowledge about digital adoption.

Sanny Gaddafi (founder) got his bachelor

degree in dual major program BINUS

University (Jakarta, Indonesia), a private

university that was established in the

foundation of technology. With tech and

entrepreneur exposure from the university,

Sanny met tech startup stakeholders

(national and international) who triggered

him to develop several social networks

(FUPEI, bundagaul.com) during Friendsters

period.

Working

Capital Max. 10% marketing cost for each

sale

Non strategic location for branches

(low cost) and use website and

social media for promoting and

selling customized shoes

Partnership with several shoe

companies in Cibaduyut, Bandung

Actively search for investment and got

it from IMJ FENOX US$ 150,000 in

2013 (convertible notes)

Cost of partnership with several

agribusiness companies

Level of

Innovation First entrance: Kaskus, Facebook,

and Blackberry Messenger. Then,

Brodo switches to offline channel:

store/ distro/ etc.

In 2013, Brodo uses e-commerce

platform and benefits from the

features of Google Ads and Google

Analytics. Furthermore, it uses

other platforms: Twitter

(feedback), Instagram and Tumblr

(branding), LinkedIn (recruitment)

8Villages uses the power of mobile

phones to connect business with

agricultural communities and target to

engage with more than 10,000 farmers

(where they are, what they are doing,

why they are doing it, and how to

improve them with the company’s

brand)

To engage with farmers, 8Villages

always update the apps and SMS with

various and qualified contents:

financial literacy, entrepreneurship,

new method/ technolgy to improve

productivity, woman empowerment

programs, etc.

Business

Strategy

Monthly evaluation using data

provided by Google and own data to

understand more about inventories,

customers, and online traffic

Monthy evaluation using data analytics

Actively join digital workshop,

bootcamp, demo day to evaluate the

business periodically

Business

Performance Revenue of US$ 120,000 per year Connect with 6,000 farmers in

8

(20% offline sales, and 80% online

sales)

Have four branches in big cities in

Indonesia, namely Jakarta,

Bandung, Bekasi, and Surabaya.

Yogyakarta and Central Java, Indonesia

Joint-venture partnership with the

largest agricultural distributor in

Myanmar

Indonesia’s Government Support for Digital Engagement

SMEs in Indonesia are expected to accelerate the achievement of national objectives for higher

employment, improved living standards and greater international competitiveness. In order to support

and empower Indonesian SMEs, there are five main features of the development policies for SMEs

that stated by the Minister Counselor at the Indonesian Embassy in Ankara, Turkey Mr. Hanif Salim

during the 1st Meeting of the Committee for Economic and Commercial Corporation of the

Organization of Islamic Cooperation (COMCEC) Trade Working Group at Ankara, Turkey (Jingga

and Limantara, 2015). The five main features of the development policies for the SMEs are:

1. improvement of access to technology,

2. improvement of access to finance,

3. improvement of access to market,

4. technology diffusion and commercialization scenarios through business incubation, and

5. provision and creation of conducive environment to support new business ventures, etc.

To support the improvement of access to technolgy for SMEs, there are several key directions of

Indonesia’s government outlined by Deloitte (2015). These digital policies are then mapped by the

writer to the conceptual framework (as shown in Figure 2) in order to show digital engagement trigger

on each factor so later on other stakeholders can play other roles in accelerating the processes.

Table 4 Government key directions in the form of key factors of SME competitiveness

Key Directions

Level of Education Helping all SMEs to be digital businesses. Many government agencies

provide SME support programs, including those targeted at increasing

SME digital engagement. But they are often overlapping and limited in

scale

9

Working Capital Increase broadband access and quality of service to encourage digital

technology adoption by SMEs and improve performance of existing

technologies

Level of Innovation Expanding e-payments. Improving trust in e-commerce payment

platforms, increasing bankability of Indonesian consumers and

businesses and expanding alternative payment systems will

increase the volume of digital transactions

Expanding access to finance. Digital SMEs need a mix of domestic

and international sources of finance which are currently barriers

that reduce their potential for growth

Expanding e-government services. Government services delivered

through online platforms are more cost effective and efficient.

More online government services would build consumer

confidence in online activities and services over time.

Business Strategy Monitor SME monthly through Business Incubator and/ or Accelerator

intensive programs through partnership with universities, venture

capitalists, private companies, and other related stakeholders.

Business Performance For SMEs with basic digital engagement, Deloitte Access Economics

(2015) predicts a revenue increment of 31%. Furthermore, for SMEs

adopt intermediate and advance online connectivity might gain 15%

and 31% extra income respectively.

With the above directions, it is expected to increase SME capacities and competencies in answering

the opportunities and challenges regarding product and market development; thus, strengthen the

resilience of the domestic economy and global competitiveness especially in facing ASEAN

Economic Community.

10

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