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SME Development In Malaysia – Challenges And Solutions
Malaysia Cover Story | 22 May 2013
By: Predeeben Kannan
Articles (10) Profile

Malaysian SMEs have been at the forefront of local economic development, even before the country achieved independence in 1957. What is different now is the development of a serious and concerted Masterplan to ensure the success of the sector. 

Over the years, various organisations were created to develop Small and Medium Enterprises (SMEs) in Malaysia. Leading the pack was the Small and Medium Industries Development Corporation (SMIDEC), with its programmes and assistance for SMEs to achieve their funding and development needs.

Things took a turn for the better in 2007, when the National SME Development Council (NSDC) decided to appoint a single dedicated agency to formulate overall policies and strategies for SMEs and to coordinate programmes across all related Ministries and Agencies. SMIDEC which was tasked to assume this role eventually became known as the Small and Medium Enterprises Corporation Malaysia (SME Corp Malaysia) in October 2009.  It is now the central point of reference for information and advisory services for all SMEs in Malaysia.

The most recent data indicates that SMEs now account for more than 90% of all the establishments in the manufacturing, services and agricultural sector, providing around 65 % of total employment and it is expected that the value added production of SMEs to be around RM120 billion or 50 % of total production in the manufacturing sector by 2020.

So what is the definition of SMEs in the Malaysian context? According to SME Corp, SME’s are defined as:

  1. Manufacturing, Manufacturing-Related Services and Agro-based industries -  Small and medium enterprises in the manufacturing, manufacturing related services and agro-based industries are enterprises with full-time employees not exceeding 150 or with annual sales turnover not exceeding RM25 million.
  2. Services, Primary Agriculture and Information & Communication Technology (ICT) – Small and medium enterprises in the services, primary agriculture and Information & Communication Technology (ICT) sectors are enterprises with full-time employees not exceeding 50 or with annual sales turnover not exceeding RM5 million.

A Long and Winding Road Ahead
It is without doubt that SMEs play a significant role in the development of the Malaysian economy. However, their contribution to the national economy is still relatively small. Much has been done thus far by the government to address this issue. However quite a few of them are still facing a variety of challenges and obstacles that deter further expansion of their businesses.

At the operation level, SMEs have to contend with hindrances in the form of rising raw materials and input costs, increasing overhead costs as well as cashflow restraints.

According to the chief executive officer of SME Corp, Datuk Hafsah Hashim, this has been a significant distraction for SME operations in Malaysia,

 “Based on our survey, it showed that 61% of the total 2,582 respondents indicated that the increase of raw materials and input costs are the main constraints in doing business. Their feedback is consistently reported in the three economic sectors that belong to manufacturing, services and agriculture,” she explained.

She added that the other problem encountered by SMEs is the inability or difficulty in finding access to financing and working capital. Datuk Hafsah added that entrepreneurs do not place much importance on research and development (R&D) because of the hefty amount of investments required to realise it.

“The utilisation of technology which is still relatively low poses another problem or serves as a constraint for entrepreneurs to move forward,” she adds.

Another key element that SMEs need to ensure their success is a solid accounting team to enhance their business growth and sustainability.

“Small businesses with well-developed finance teams achieve faster, more sustainable growth for longer and can attract investment to help them develop,” says the ACCA (the Association of Chartered Certified Accountants).

Rosana Mirkovic, the ACCA’s Head of SME Policy, adds;

“The role of the accountant in an SME setting goes well beyond the basics of bookkeeping. Their role is vital at different stages of an SME’s development. Credit providers, supply chain partners and other stakeholders need a wealth of information from the finance team of an SME. For some investors, the information they require changes after investment to focus on other aspects of the business, such as agreed milestones.”

SMEs also need to ensure successful development of their human resources, especially in the hiring of cheaper labour from overseas.  It has also becoming more challenging for some SMEs as they have been urged to start adjusting and adapting their operations to ready themselves for the inception of the minimum wage for foreign workers, which comes into effect on Jan 1, 2014.

The National Wages Consultative Council (NWCC) had recently issued a statement that SMEs would not have to pay the minimum wage to their foreign workers until after December 31, 2013. In addition, SMEs are not allowed to make any deductions on levies, accommodation and other allowances from the salaries of their foreign workers. The minimum wage for private-sector employees has been set at between RM800 to RM900 per month.

This has put some of the smaller SMEs in a quandary as they would now have to cough up higher wages for their employees. To resolve this issue, SME Corp has continuously advised SMEs to enhance their workers knowledge and skills including their communications skills, increase their competitiveness and embrace innovation as their mantra for continued success as well as increasing worker loyalty to their respective employers.

“Going forward, SMEs are expected to play an increasingly important role for Malaysia to make the quantum leap in growth and to achieve a developed nation status by 2020. Growth is expected to be private sector-led and this will require more participation from the business sector, particularly SMEs,” says Datuk Hasfah.

To realise this vision, the market share of SMEs in the overall GDP of the country would need to be boosted in line with the SME Masterplan (2012-2020) that was introduced to chart the direction and progression of SMEs through six high impact programmes (HIPs).

Vision of a Better Future
Moving forward, SMEs in Malaysia have to embrace the change that is taking place not just in Malaysia, but across the globe. They need to embrace new technologies and innovation. One key technology that can benefit them is the growth of Social Media. This can bring several benefits to SMEs. According to research from leading consultancy Bain and Company, companies that are accessible through social media and engage with consumers openly, encourage these consumers to spend between 20% to 40% more money with them.

In addition to this, companies must not limit their market to just Malaysia, alone. Through the use of web marketing, SMEs can grow at a much faster rate by expanding beyond the local market with limited capital outlay. The challenge lies in the ability of the SMEs to learn new skills and embrace technology faster and more effectively.

The Malaysian Innovation Agency Act 2010 was enacted to enable SMEs to embrace this new phenomenon.  Furthermore, the Special Innovation Unit (UNIK) was established under the Prime Minister’s Department to assist SMEs in innovating for their businesses.  UNIK aims to introduce new technologies to SMEs. Already, UNIK has searched universities and research institutes and identified technologies suitable for adoption by SMEs.

In an age of rapid change and development, remaking the business model for SMEs navigating complex growth markets not only involves adequate adoption of technology but also calls for refocusing on talent management and succession planning in deriving critical sources of competitive advantage that cannot be replicated by competitors, both local ones and those abroad.

Once SMEs have expanded globally, they can compete effectively with foreign companies by developing a contemporary image that reflects their product and target markets. Moreover, flexibility, agility, integration, innovation and speed in all areas will be key to developing their brand and expanding their market share.

Predeeben Kannan is the Managing Editor of Shares Investment Malaysia. He has more than 15 years of senior level experience at various media organisations in Malaysia and Singapore. For more dialogue, please e-mail predeeben@gmail.com
Predeeben Kannan has more than 15 years senior level experience at various media organisations in Malaysia and Singapore. For more dialogue, please e-mail predeeben@gmail.com.

Please click here for more information about this author.

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