How To Help SMEs Embrace the Digital Economy
On April 15, 2016
By Mitch PaduaNow that the dust has settled from the APEC SME Summit last November, we can now focus on the hard work of strengthening and scaling up our small and medium enterprises.Outside the lure of the world’s top political leaders visiting in Manila, SMEs took the spotlight as key drivers of growth for APEC’s future. Alibaba founder Jack Ma talked about how millions of small businesses have shaped e-commerce in China. President Barack Obama surprised the crowd by moderating a discussion with Aisa Mijeno, a local entrepreneur who developed a lamp powered by a galvanic cell and salt water. SMEs account for 97% of businesses in APEC. Yet, they only account for 35% of exports. One of the key recommendations of the APEC’s Asia Business Advisory Council is to focus on internationalizing SMEs through e-commerce. For Filipino SMEs, this means accelerating the adoption of digital and internet-enabled business models.There’s never been a better time for SMEs to do this than today. Barriers to entry are dropping fast. For example, it used to cost more than P100,000 to create a fully functional online store 5 years ago. Today, because of software-as-a-service solutions, entrepreneurs not only can launch their own branded website but also have a fully functional online store for as low as PhP300 using cloud-based e-commerce engines like TackThis! and Shopify. That’s a more than thirtyfold decrease in costs and that’ll prove to be a game changer for tens of thousands of small business. After setting up a website, marketplaces like Takatack, Lazada, and Zalora open up SMEs to millions of internet users in the Philippines. And with cheap, programmatic advertising on Facebook and Instagram, small businesses can reach a targeted market segment in a way that TV, radio, or print cannot. Yet, we’re still a long way to go in bringing SMEs online. SMEs still face several barriers in using the internet to enable their businesses. The past five years have seen double digit growth in Internet penetration among consumers. The next five will see businesses taking advantage of everything the internet has to offer.Large companies and agile startups who can address these barriers and can deploy a step-change in service quality and cost for the untapped SME market will earn a huge competitive advantage in the years to come. The first barrier is awareness. Out of the 1 million micro, small, and medium enterprises in the Philippines, only 10,000 have websites. Facebook doesn’t disclose the exact numbers of Filipino businesses using Facebook Pages, but we know that most new businesses will start a Facebook page first or advertise goods on their personal Facebook account before even considering their own site. There’s no easy way in growing awareness. In “Alibaba’s World,” a chronicle of the e-commerce giant’s early years, one key strategy the founding team employed was to conduct roadshows in every single major Chinese city to bring exporters to list on Alibaba.com. It was an arduous task. Alibaba managers even had to explain what the internet was. Often, they had to teach factory owners how to use a browser, navigate a website, or write email. This was the 90’s after all! But it was that grassroots-focused, face-to-face educational initiatives that created the early critical mass of supporters. Alibaba wasn’t simply getting people to sign up to a website. They were building a community. It was more like running an election campaign than a slick advertising campaign. Part of driving awareness is educating SMEs about the revenue opportunity of bringing their business online. At Takatack, we’ve seen a 5x increase in traffic and 47x increase in orders as we compare the first quarter of 2016 to the same time last year.The second barrier is the simplicity and ease of use of SME-focused applications. Consumer apps have this all figured out. The man on the street, for instance, can become hooked users on Facebook, Instagram, or WhatsApp in minutes. But when it comes to business applications, it gets complicated. Business apps are fragmented. If you want to start an online store, for instance, there are tons of choices, from TackThis! to Shopify, and WooCommerce to Squarespace. Navigating this landscape can be complex, especially for entrepreneurs without a technical background. As a result, one of the initiatives we have at TackThis! is to offer a concierge service wherein we help the entrepreneur in everything from setting up an online store and taking photos to managing inventory and fulfilling orders. The number of concierge accounts at TackThis has grown 7x this year, indicative of the strong demand from SMEs.This is part of the bigger conversation on the ease of doing business in the Philippines, which has dropped to 165 in the World Bank’s global rankings. It’s easier to start a business in Afghanistan than Manila! Technology obviously plays a key role in solving this. Singapore, for instance, has used technology to link different government agencies in a single window for all business registrations. Imagine doing all registrations at the SEC, DTI, BIR, Pag-Ibig, PhilHealth, SSS, municipality and barangay in one app or browser window. An initiative like that will be a game changer by fundamentally improving the economics and agility of a small business in the Philippines. The third barrier is access to talent and new competencies. Running an e-commerce business can be challenging, but doing cross-border e-commerce with all the export and import regulations can be overwhelming. This isn’t just a Filipino phenomenon. Japan, with 90%+ e-commerce penetration, boasts a healthy local e-commerce industry driven by platforms like Rakuten. But it’s hard for small Japanese businesses to internationalize because of the need to produce English-language websites. The great thing is that the Internet itself is offering SMEs the ability to build their competencies. Talent marketplaces like Freelancer.com and oDesk give small businesses access to skilled professionals without the fixed labor and compliance costs. Finally, access to financing will be one of the biggest challenges in the years to come. We still have a long way to go in streamlining both regulatory and bank processes to bring cheap financial services to SMEs. Fortunately, there are clues from other countries that help us figure out how to innovate around these problems. For example, credit providers have started to use sales and traffic data from Taobao merchants as leading indicators in pricing loans. Providing these services on a piece-meal basis will likely be unprofitable due to the fragmented SME market. As a result, a platform approach will fare better in serving SMEs. For instance, an online marketplace that provides access to selling tools for SMEs can theoretically also offer financial services as they have access to the business’ sales data. Japan’s Rakuten is a great example of this. Not only do they offer a subscription-based online store for their merchants, they create over-the-top services in the form of cards, payment solutions, and a unified loyalty program. These are exciting times for Filipino SMEs. But we’re also at a crossroads. Alibaba’s investment in a controlling stake in Lazada means that small merchants on Taobao can start doing cross-border e-commerce, further flooding the local market with cheap Chinese goods. Whether our local businesses can compete remains a big question mark.In a way, we’ve been at this juncture before and it had profound consequences for our development as a nation. From the 1860s to the 1880s, an explosion of trade created a new merchant class in the Philippines. The technology of that time: steam ships and mass produced books. Majority of our national heroes came to be because their parents had the means to give them educational opportunities in Europe, which kindled a nascent nationalist spirit. Even Andres Bonifacio was an entrepreneur at one point. We imagine him as a bolo-wielding rebel. But in his teenage years, he was making and selling canes and fans. Imagine how much impact a new creative class of digital entrepreneurs can have to the Philippines. A rising, technology-enabled middles class spreads wealth and makes development truly inclusive.