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Will the Digitalization of SMEs save Indonesia from going into recession?

By Carolyn Baytion Sunaryo, MSc, CRMO

To be able to cope with the declining productivity due to the large-scale social distancing imposed by the Indonesian government in various cities since April 2020, enterprising Indonesians have taken over and filled the gap left by traditional businesses. Online ventures seem to be thriving and new products have appeared in the market to meet the needs of the present situation. Some of these businesses are classified as startups. Although many startups born before COVID-19 actually couldn’t survive the current economic recession, the revitalization of the economy may partly depend on the success of these startups.

During the ASEAN-Japan Workshop conducted online by Kyoto Sangyo University of Japan on 26 September 2020 and participated in by ASEAN and Japanese academic researchers, I gave a presentation on “Startups in Indonesia: Overview, Direction, & Risk Management Strategy”. Through research and interviews, my brief study shows that small-and-mediumsized enterprises (SMEs), under which startups are classified, have a crucial and necessary role in the Indonesian economy. In fact, SMEs contributed a total of Rp 8.573.9 trillion which is 57.8% of the gross domestic product (GDP) in 2018.

The article that follows is largely based on my presentation.

According to the katadata.co.id (29 July 2020), KOMINFO (Ministry of Communication and Information Technology) is convinced that startups will have the opportunity to prevent Indonesia from falling into recession. One way of doing this is to encourage SMEs to adopt technologies such as the “Internet of Things IoT” to maximize sales and make production more efficient.

In a webinar organized by the Jakarta Post on 15 July 2020, Human Resource, Infrastructure and Information (SPPI) Director General of KOMINFO Mr. Ismail, said that the Ministry of Cooperatives is working together with Tokopedia (e-commerce platform and an Indonesia Unicorn with a US$ 7 billion valuation as of 2020) in digitilizing SMEs, and hopefully, will become more competitive and be able to survive. Tokopedia is expected to serve as a marketing “door” for the startups/SMEs, committed to serve as a bridge to bring them to their intended customers.

The government is now targeting its assistance to the Ultra micro-businesses. As of 17 August 2020, a Rp 2.7 million/micro-business of government assistance was distributed to an estimated of 9.1 million recipients to be used as additional capital. Eventually there will be a total of 12 million micro-business recipients all over Indonesia, as reported in Kompas (24 August 2020). Some quarters think that this government effort is not enough. It is only a short-run solution and a comprehensive program should be put in place. Some examples would be the Digital Acceleration Grant by the Singaporean government to fintech companies and Germany’s grant to small business owners with accompanying recruitment, employment support, etc., for new
businesses.

KOMINFO’s hope that SMEs will save Indonesia from falling into recession has been dashed when Finance Minister Sri Mulyani recently announced that Indonesia’s GDP growth for the 3rd Quarter of 2020 is estimated to be minus 2.9 to minus 0.1%. During a press conference, Minister Sri Mulyani said that Indonesia’s economic growth in the 3rd quarter has normalized compared to the 2nd quarter, when the economy was under intense pressure (Kontan.co.id). Most companies are now catching up to recoup unrealized sales during the 2nd and 3rd quarters, and the last quarter is a race to be won. Likewise, during this month of October, LSP Digital
Marketing, together with Gooshi, is on a tour to the provinces to train and certify SMEs in Digital Marketing, with the support of BNSP (National Professional Certification Body). With SMEs’ use of the social media and other digital tools, their products and services in far- flung villages will be able to reach the markets in the cities, and hopefully in other countries as well. The other positive effect of training workers in SMEs in the use of social media and digital tools is that SMEs will attract more young people and encourage them to start their own businesses. This is in line with the government’s target of 4,500-4,900 startups in 2024 (katadata.com, 3 October 2019) that will help provide jobs for Indonesia’s young people, aged 30 years old and below, comprising more than half of its total population.

Startups only became popular in Indonesia around 2010 (Kominfo.go.id) although they first came into existence in 1990s, which coincided with the dot.com bubble. Startups start small with sometimes just two or three founders working together. They are usually listed under SMEs which are classified into three: home industry (ultra-micro enterprises) with one to four employees; small enterprises with 5 to 19 employees; and medium enterprises with 20 to 99 employees (Central Statistics Agency of Indonesia).

Data from Masyarakat Industri Kreatif Teknologi Informasi dan Komunikasi Indonesia (MIKTI; Indonesian Information and Communication Technology Societal Creative Industries) show that there were 992 “startup” companies in 2018. Slightly more than half (53%) were located in Metro Jakarta Area (Jakarta, Bogor, Depok, Tangerang, Bekasi (Jabodetabek); and those that were established between 2013-2018 comprised 61%. Out of th total number, 504 registered as a company. Interestingly, majority of the founders(69%) belong to the Y
Generation, ranging in age from early 20s until late 30s. Almost all of the founders (91%) were male and have bachelor’s degrees. These startups were mostly in e-Commerce (76%); Fintech (12%) and Games (12%).

The latest figures regarding the number of startups in Indonesia are from Startupranking.com. As of 5 July 2020, 1,731 startups have been registered and 80% of them are in the Metro Jakarta area. This total figure might not be accurate though, because a startup may only appear on the ranking if it registers its company. So, it might be that the total number is actually understated. Likewise, the startups that registered are ranked based on its importance in the Internet and social influence. The year 2020 number of startups from Starupranking.com has declined compared to 2,079 Indonesian startups listed on Startupranking.com in 2018 which is the fifth in the world ranking and below Canada which has 2,485 startups listed (12 September 2020, kominfo.go.id).

What distinguishes startups from other SMEs is the reliance on digitalization and technology in operating the business. To illustrate, mamikos.com is an app created by Maria Regina AnggitTut Pinilih and Bayu Syerl that matches those wanting to rent a room and the owners of boarding houses. As students at UGM, Maria and Bayu observed that their schoolmates who were not from Yogyakarta had difficulty looking for the right room to rent during their studies. They quickly went to work by collecting and compiling data on boarding houses in the city with 17 universities. In 2019, after four years of existence, the app has shown that 110,000 boarding house owners in various cities in Indonesia were linked to 8 million boarding room users every month.

Unfortunately, the pandemic has affected their business drastically because classes are now conducted online. But by diversifying their services to include employees looking for accommodations as they are relocated to other cities, they were able to save their business. mamikos.com was ranked 21 on Startupranking.com in August 2020 and as of 12 September 2020, had gone up to rank 18.

Other startups have not been so lucky and funding ceased before they could start earning revenues. Five years ago, on 13 October 2015, the Jakarta Post published an article regarding the Global Entrepreneurship Program Indonesia (GEPI) which helps young entrepreneurs create companies that aim at solving the country’s problems. It was such a bold move on the part of these young men and women who were mostly in their early 20s. Some of those startups cited in the article are no longer in operation, but the impact that their businesses have made on the communities that they have helped remains. This is true for Nusantara Development Initiatives (NDI), a nonprofit organization that teaches women in rural areas how to be solar lamp entrepreneurs. Information on crunchbase.com website shows that this startup has closed. But during NDI’s operation, it provided 22 women with jobs in three villages in Riau. These women sold 3,000 solar lamps and almost 12,000 people benefited. These lamps replaced kerosene and the rural folks saved around US$128,000 in a year plus the freeing up of the atmosphere of 500 tonnes of CO2, as reported in en.wikipedia.org accessed on 30 October 2020.

This is one of the reasons why startups and SMEs need the government and private sectors’ support to help sustain their existence. Starting a business is not easy especially for young people without experience. The failure rate for new businesses, even for those that have been established, is similar to that of the failure rate of startups: around 20% fail in the first year; 34% within two years; 50% on the fifth year; and only 25% will reach up to 15 years (Bobby Chernev at review42.com, accessed on 1 September 2020). To make sure that these startups will be able to scale up (i.e., having regular customers and sales), there should be a support system to assist the founders and their first employees at the beginning of their existence.

In 2016, the Ministry of Communication and Information (KEMEN KOMINFO) set up a program, “Movement of 1,000 Startup Digital” to give birth to companies that are “startups”. In October 2018, 525 startups were established by this time, although this number only referred to the ones that registered, according to Ministry data.

Indonesian state-owned companies are also actively supporting startups. In mid-2018 PT. Telkom’s Program Indigo Creative Nation already had 111 startups in incubation.

Aside from the government sector and state-owned enterprises, the private sector is at the forefront in supporting these startups. At the earliest stage of a startup, the risk for investors is high. So, the only ones willing to provide the early funds are angel investors, who are not looking solely at how much return they will get from their investment, but their primary reason is to have a social impact in the investment that they are making. They choose startups that will promote empowerment of women (one good example is the NDI mentioned earlier), poverty alleviation, environment protection, and other social concerns, among others.

Some of these angel investors are actively involved in GEPI, established in 2011 by 13 prominent business leaders in Indonesia as part of the Global Entrepreneurship Program (GEP) initiated by former Pres. Barrack Obama and former Secretary of State Hillary Clinton. It is considered to be the first accelerator and co-working space in the country. One of its successful startups is Gojek, which it awarded with US $ 10,000 in 2011. Gojek has a valuation of US$ 10 billion dollars as of this year. Gojek is a startup that connects drivers and passengers. The availability of this app enabled the drivers (motorcycle and car) to reach more passengers and provided more income for these drivers. In turn, passengers are able to avail themselves of a cheaper and faster service. This startup provided full-time and part-time jobs for men and women in the informal sector.

GEPI evolved into ANGIN (Angel Investment Network Indonesia). In 2018, ANGIN became the largest investor network in Indonesia and has invested in 35 startups. It was requested to support the programs of UNDP and OXFAM. In addition, it has also received an undisclosed seed funding from 500 startups and three Indonesian investors: Ms. Shinta Kamdani, owner and CEO of Sintesa Group; Mr. Diono Nurjadin, CEO of Cardig International; and Jefry Joe, Managing Director and Co-Founder of Alpha JWC.

In 2020, ANGIN has supported more than 70 startups, which included, crowdfunding Kitabisa; Kargo in logistics; and Burgreens, a vegan restaurant which has some outlets in malls in Jakarta(14 August 2020, www.dealstreetasia.com, accessed 13 September 2020).

One of ANGIN’s socially committed angel investors is Ms. Mariko Asmara Yoshihara, who is of Japanese-Indonesian parentage and married to a Japanese. Ms. Yoshihara is committed to contributing to the Indonesian economy through her involvement in supporting the startups and by encouraging Japanese companies to invest in the country. These are some Japanese venture capitalists that invest in Indonesian startups even at the early stages: CyberAgent Ventures, Genesia Ventures, GREE Ventures (now STRIVE), IMJ Investment Partners, and Ango Ventures.

The drive toward digital transformation of SMEs is an ongoing process. Startups have shown that this is the way to survival and growth. The latest project of the Ministry of Cooperatives and SMEs is the three-week bootcamp for 30 startups that provide services to SMEs in increasing their digitalization capability, as reported by thejakartapost.com on 22 September 2020. Out of the 30, the Top 10 Digital (SMEs) Heroes will be chosen. These top 10 young innovators, who created digital apps to help SMEs develop their businesses and survive during this COVID-19 pandemic, were recognized on 28 October 2020 (Kompas, 30 October 2020). They include: CrediBook (financial services to support the ecosystem of customers, SMEs, and suppliers); chatbiz.id (virtual assistant to assist SMEs to manage its integrated social commerce nonstop for 24-hours); and Krealogi (a digital platform focused on the management of supply chain of SMEs engaged in crafts and fashion, especially those located in the eastern part of Indonesia, and connect them to their strategic partners).

SMEs face enormous economic obstacles, but the solution is just around the corner with digital transformation.

 

Carolyn Baytion Sunaryo, MSc, is the Executive Director of Lembaga Sertifikasi Profesi Manajemen Risiko (LSPMR)(Risk Management Professional Certification Body).

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