By Dr Rashesh Shrestha, Economist: A recent survey[1] of ASEAN SMEs showed that 8 in 10 have made technology their top investment priority. This is not a surprise given the rapid growth in e-commerce, even before the COVID-19 pandemic. The number of digital consumers nearly tripled between 2015 and 2018, with double-digit growth expected in many ASEAN countries. Now, the pandemic has greatly accelerated the shift towards digitalization and e-commerce. Consumers are becoming more comfortable ordering goods and services online due to lockdowns and social distancing rules, which means SMEs have no choice but to offer services online. For many SMEs, if not all, this transition has taken on existential proportions:  those that do not move online are facing a real threat to survival.

 Even though it has become indispensable, e-commerce will not be a profitable venture for all SMEs. While it provides access to new consumers in online marketplaces, it also brings new competition. In a traditional model, SMEs make use of locational advantage, build long-term personal relationships with their suppliers and customers, and have some control over pricing strategy. These advantages are less relevant in e-commerce - a world of algorithms and optimization.

 The most important consequence of competition is that pricing decisions are out of SMEs hands. In the online marketplace, SMEs are not free to charge the price that is required to cover their costs since there will be numerous other businesses offering a very similar product at a cheaper price. Rather, they will have to sell at the prevailing ‘market price’ if they are to capture any market share. However, the prevailing market price may not be enough to cover the costs for all SMEs. Consequently, those whose costs of production are lower than the market price can be profitable and survive online, but those who do not have low enough costs will be forced to operate at a loss. Such competition will affect SMEs whether or not they choose to embrace e-commerce as their customers will eventually move online, so it is best for SMEs to embrace e-commerce.

 SMEs that decide to enter the online marketplace not only face the regular costs of running a business but also need to face new types of costs, such as: online advertising and customer acquisition (achieving visibility online is very difficult and SMEs need to know how to make themselves stand out); maintaining high ratings (e-commerce is a ratings driven business, rather than personal relationships that were important in the traditional model); managing higher volume trade and inventory, which may need specialized software; handling returns and exchanges, which is very important in online business; dealing with logistics companies; and many more. In order to succeed, SMEs will need to find ways to implement these new strategies while at the same time lowering their costs of running their businesses. These challenges demand a different set of skills.

 Larger enterprises stand to benefit immediately from e-commerce because they can hire workers who are skilled at meeting these challenges. By lowering their costs by optimizing the back-end business processes, large businesses can make a profit even when offering very low prices. The question then is whether small enterprises can compete and thrive online in the presence of giant platforms who not only provide the platforms but also compete for customers. There is an argument to be made for SMEs to focus on niche markets where they can cultivate a group of loyal customers with high quality products that allows them to charge above market prices. However, competition still limits this possibility. Due to the relative ease of entering the online business and serving any customer from any location, competitors will seek to enter profitable market segments, driving down prices. Cost competitiveness will thus be the ultimate arbiter of success.

 In the short-term, skills of the entrepreneurs will be one of the key determining factors for the success of SMEs in online business. Entrepreneurs who have the skills to operate in the digital world will face a lower cost of entering into e-commerce than someone who has to learn these skills anew. The competencies that is required does not only include technical skills such as digital literacy for creating an online store and processing online orders. They will also need to have the necessary interpersonal skills to deal with many customers coming from a much wider geographic location, handle their special requests, or address any problems with the orders. The high volume of transactions needed to make a profit creates a greater demand on cognitive skills necessary to do business optimization, data-driven decision-making (even when the reports themselves are generated by the e-commerce platforms), and management at a larger scale.

The best hope for SMEs is if the skills gap is reduced as much as possible. For existing businesses that want to go digital, the government could provide a ‘digital extension’ service that will support SMEs’ transition to the online marketplace. This service could be provided privately with government support, or entirely run by government, similar to the agricultural extension services for the agricultural sector. Such services can help enhance the skills of the entrepreneurs and improve their competitiveness. Specific technical skills such as digital marketing can be provided to existing workers through upskilling and reskilling programs, which will then support SMEs transition to e-commerce by increasing access to skilled workforce. In the longer-term, creating a skills development system will be necessary to ensure that increased digitalization does not widen the digital divide. This means that public education systems need to be reformed to provide high quality cognitive, socioemotional, and technical skills that will enable SMEs to navigate the digital marketplace.

 SMEs competitiveness in online business also depends on policy and provision of government services, which need to be improved rapidly with SMEs’ interests in mind. Efficiency of infrastructure will be important. For example, bottlenecks in border procedures can interfere with a just-in-time inventory business model designed to lower cost. Thus, for SMEs to make it online, the government needs to increase investment in enabling infrastructure. Likewise, direct financial support will be needed to help SMEs cover costs of going online. Enabling policy will also be crucial. As SMEs compete with one another and with larger businesses, we need to ensure that competition policy does not favor larger businesses by creating fixed costs that only a large-scale operation can cover. Overall, the principle behind any strategy to enhance SME participation in e-commerce should be to ensure that they do not face avoidable disadvantage in their cost structure compared to larger firms.

[1] Source: https://www.uobgroup.com/web-resources/uobgroup/pdf/newsroom/2020/ASEAN-small-businesses-technology-beat-COVID-19.pdf

This opinion piece was  written by ERIA's  Economist, Dr Rashesh Shrestha and has been published in  The Phnom Penh Post,  The Jakarta Post, Borneo Bulletin,  Click here to subscribe to the monthly newsletter.