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| Source: Evermos. The current system discourages small Indonesian businesses from investing in growth. |
As part of the World Economic Forum's Davos Agenda 2021, Evermos, a West Java social-commerce platform for Indonesian Muslim products, has unveiled an paper on helping Indonesian micro, small and medium sized enterprises (MSMEs) increase their competitiveness.
The Davos Agenda 2021 highlighted several of the article's case studies, including one about lyus, a hijab producer in Bandung. Basically, cheaper imported products have made SMEs reluctant to initiate medium- to long-term investments, causing low productivity and inefficient production; this in turn is making them less competitive with global players.
In the case of Iyus, he experienced significant growth from 2015-2017, producing 150,000 headscarves per day. However, this later declined by 80%, largely because of imports flooding the market, some of them illegal. On average, a container of imported goods can contain 250,000 to 450,000 headscarves.
Unfair trading practices in this sector have major implications for retailers like Iyus, who commented that foreign manufacturers observe which products are in high demand, and within six months flood the market with similar but cheaper products.
To increase his competitiveness, Iyus had to innovate. Within six months, he had started production and was turning a profit. However, he noticed that his global competitors use marketing intelligence to gain an unfair advantage and have shortened the product lifecycle of his winning product. Due to time and capital constraints, Iyus is reluctant to expand his business. The situation has created a vicious cycle among SMEs in Indonesia.
This vicious cycle at the SME level creates another parallel vicious cycle that impacts worker welfare. Low productivity at the SMEs reduces their income, which in turn decreases the education levels of their children. This traps the next generation of SMEs into skill shortages and low income.
Considering the long-term impact, people should start switching to buying local products, to increase money velocity and revive the local economy, Evermos said.
Arip Tirta, President of Evermos, said, "If we don't buy local products, SMEs will lose against global value chains. Whenever we buy a local product, we help revive the economy by keeping money in circulation through product owners, vendors, employees, and other related parties. It keeps the economy flowing. Improvements in quality and experience are important, but more important is the need to support local producers and their endeavours."
SMEs have contributed support approximately 97% of employment in Indonesia, absorbing most low-skilled workers. They also contribute to over 60% of Indonesia's GDP and have helped raise the quality of life by helping millions of people out of poverty. However, there is a need to create more products' in more significant quantities and more varieties, Evermos said.
Evermos believes that Indonesia can break the vicious cycle to create a virtuous cycle instead. The company suggested the following solutions:
- Go local or go home. Inspire people to buy local products, even though there are alternative cheaper products.
- Think long-term. Encourage SMEs to think of medium to long-term investment to remain globally competitive.
- Productivity as an engine for growth. Focus on skills training and technology adoption to increase productivity.
- The best offence is defence. Create effective trade policies to protect SMEs, with a more data-driven market intelligence approach.
Another approach is to move away from the heavy reliance on SMEs and focus on improving workforce skills, the company added.