Are Malaysian SMEs falling behind in the digital age?

Are Malaysian SMEs falling

SMEs must catch up to ensure not just their survival but also the sustained economic growth and positive revenue crucial for Malaysia’s future

In Malaysia, 98.5% of the 920,624 business establishments are small and medium enterprises (SMEs), which are essential to the country’s economy. However, despite their importance, SMEs lag significantly behind larger enterprises in digital adoption, as noted by the World Bank. With the rapid advancement of digital technologies like artificial intelligence (AI) transforming industries, it is crucial for SMEs to embrace this shift to ensure sustained economic growth and positive revenue. Bridging this digital gap is not only important but also urgent for the survival and growth of SMEs, which are vital for Malaysia’s economic future.

The Small and Medium Enterprises Association Malaysia (SAMENTA) has pointed out that many SMEs lack IT expertise. According to national secretary Yeoh Seng Hooi, these businesses often rely on their IT departments and vendor recommendations rather than hiring in-house talent to drive digitalisation. He mentioned that digitalisation costs could be offset with matching grants or soft loans. While these financial aids are beneficial for micro, small, and medium enterprises (MSMEs) to establish an online presence, they are not sufficient for implementing customer relationship management (CRM) or manufacturing execution systems (MES).

To tackle this issue, Yeoh encouraged SMEs to lead digitalisation efforts by integrating these tools into their business strategies and understanding the digitalisation process instead of depending on vendors. He noted that there are instances where SMEs invested in enterprise resource planning (ERP) systems that were ineffective. He suggested that system consultants should have a better understanding of SMEs’ businesses and recommend modular strategies that are both scalable and affordable.

The Khazanah Research Institute (KRI) reported that SMEs’ digital adoption mainly involves front-end computing devices and connectivity, with only 44% and 54% using cloud computing and data analytics, respectively.

KRI found that SMEs’ digital adoption is primarily in front-end computing devices and connectivity, with only 44% and 54% using cloud computing and data analytics

Digital Adoption Slowed Down Post-Covid-19

As of 2023 to 2024, 21,591 SMEs have embraced digitalisation through the Malaysia Digital Economy Corp’s (MDEC) 100 Go Digital initiative. MDEC CEO Mahadhir Aziz noted that during the Covid-19 pandemic, SMEs adopted digital solutions and e-commerce as essential strategies for survival amidst lockdowns and social distancing, accelerating their digital adoption.

Post-pandemic, while the initial surge in digital adoption has slowed, the commitment to digital transformation remains strong, highlighting its ongoing importance beyond immediate crisis management. MDEC has been instrumental in enabling SMEs to benefit fully from digital transformation, thereby enhancing their competitiveness and contributing to the digital economy’s overall growth.

Malaysian SMEs face several challenges in implementing digital solutions, including high initial investment costs, limited digital literacy, and resistance to change. To address these issues, MDEC offers financial assistance through grants and subsidies to promote affordable solutions. It also provides skill development programs, partnerships with educational institutions, and consultancy services to help SMEs manage change and innovate.

MDEC supports cybersecurity measures, particularly in rural areas, and helps SMEs integrate new digital solutions with their existing processes. Additionally, MDEC advocates for the development of digital infrastructure to bridge the digital divide. Mahadhir predicted that over the next five years, digitalisation among Malaysian SMEs will experience significant growth and transformation.

These trends indicate a dynamic shift toward a more digitally adept SME sector in Malaysia, bolstered by initiatives from organizations like MDEC to foster digital readiness and competitiveness. In the coming years, Malaysian SMEs are expected to adopt cloud computing, e-commerce growth, AI and automation, mobile solutions, gig economy platforms, cybersecurity measures, data analytics, and sustainability technologies.

Mahadhir also anticipated a prioritization of cybersecurity measures and the use of data analytics to enhance insights and operational efficiency. Additionally, SMEs are expected to adopt sustainability technologies to reduce their environmental footprint.

As of 2023 to 2024, a total of 21,591 SMEs have adopted digitalisation through MDEC 100 Go Digital initiative

SMEs Digital Adoption Challenges

Professor Niaz Asadullah of Monash University emphasized that digital adoption among SMEs drives economic growth and job creation in Malaysia by expanding market reach, boosting productivity, and fostering innovation. He pointed out that access to online marketplaces enables SMEs, particularly those in rural areas, to meet consumer demand across distant locations, which is crucial for SMEs managed by elderly individuals and single mothers. Additionally, digital adoption allows SMEs to engage in the global value chain.

“Digitisation simplifies accounting and business procedures, facilitating the monetisation of transactions and generating additional revenue sources for the government,” Niaz explained. He added that by incorporating digital tools and increasing their presence in the digital economy, SMEs can streamline operations, reduce costs, and improve customer engagement, leading to increased sales and business growth, which subsequently creates new job opportunities.

However, Niaz, who also leads the Global Labour Organisation in Southeast Asia, attributed the slow adoption of digital technologies to low digital literacy and a lack of awareness. He noted that despite various government-sponsored digitalisation and automation subsidies for MSMEs, only a small fraction of businesses have developed clear digitalisation strategies. Programs like the SME Business Digitalisation Grant, 100 Go Digital, and SMART Automation Grant offered by MDEC are often underutilized due to the complex application process and the SMEs’ own digital literacy limitations.

To enhance digital transformation, Niaz highlighted the importance of new financial support schemes, including subsidies, grants, low-interest loans, tax incentives, and favorable credit terms. He also stressed the need for government-funded training programs to upskill employees in digital competencies and initiatives to strengthen cybersecurity awareness and protection measures.

Niaz acknowledged that despite existing policies and SME interest in digital transformation, challenges remain. He pointed out that the New Industrial Master Plan 2030 outlines a roadmap for accelerating digital adoption, but the effectiveness and reach of current programs from responsible agencies are still concerns. He emphasized the importance of scrutinizing potential non-users or underserved beneficiaries to understand the low uptake of digital initiatives. To accelerate digital adoption, Niaz suggested improving the governance of existing MDEC schemes and educating SMEs about the economic benefits of these programs. Rationalizing these schemes, particularly where redundancies and overlaps exist, is also critical. He concluded by noting that low productivity remains a significant industry-wide challenge in Malaysia.

Professor Niaz Asadullah highlighted Malaysia’s drop in the Global Competitiveness Index 2022, which reveals significant gaps in research and development (R&D) and productivity among Malaysian SMEs compared to digitally advanced countries like Singapore and South Korea. This disparity stems from lower R&D investment by Malaysian SMEs compared to their ASEAN peers and their limited adoption of complex digital technologies due to technical capability gaps not seen in more advanced economies.

Meanwhile, Associate Professor Dr. Ahmed Razman Abdul Latiff, director of coursework programs at Putra Business School, identified finance as the primary barrier to digital adoption for Malaysian SMEs. Many lack sufficient funds for digitalisation and automation. He suggested that the government should continue providing financial assistance, such as grants or loans, to help SMEs upgrade their operations through digitalisation and automation.

Dr. Razman also stressed the importance of upskilling training programs to improve the workforce’s ability to manage digitised operations. He noted that digital adoption would reduce SMEs’ dependency on foreign workers, as automation would lessen the need for manual labor. However, this shift would create a demand for high and medium technical skill jobs among locals, contributing to job creation. Ultimately, he concluded that increased productivity through digital adoption would further boost Malaysia’s economy.

Urgent Need for Digital Transformation Among SMEs

Tham Lih Chung, CEO of Incite Innovations Sdn Bhd, stressed the critical importance of SMEs embracing digital transformation. He warned that as the business landscape increasingly shifts towards digital, those lagging risk not only survival but also the ability to thrive in a rapidly changing economy.

Tham referenced the Malaysia Economic Monitor February 2023 report, which highlights the performance gap among Malaysian SMEs. While SMEs play a crucial role in the economy, their contribution to economic activity is disproportionate. He called for accelerated digital adoption within the SME sector, emphasizing its importance.

Incite’s database reveals a concerning trend: only one in 20 SMEs in Malaysia has begun digital transformation strategies, and fewer than one in 15 have a dedicated digital strategy team. These statistics signify untapped potential and missed opportunities, leaving Malaysia behind in the digital race despite its per capita income and economic potential. Globally, SMEs contribute up to 40% of GDP in emerging economies and generate seven out of 10 jobs.

Tham noted that digital transformation should not only boost revenue but also reduce the overall cost of doing business. He advocated for an incremental approach to ensure a sustained strategy that becomes part of the company culture, avoiding short-term solutions. Resource allocation is a critical challenge, requiring strategic decision-making tailored to each business’s unique nature and goals.

Established SMEs, according to Tham, have a crucial role in guiding their peers by sharing insights, understanding pain points, and promoting collective growth through digital adoption. Continuous monitoring and testing are essential to focus on digital investments that provide the most value, ensuring a dynamic and effective decision-making process.

Strategies for SMEs Embracing Digital Adoption

Shahril Azwin Zainul Abidin, founder of Azwin Ecosystems PLT, emphasized the importance of digital adoption for Malaysian SMEs, advocating a customized approach that drives growth without causing disruption. Based on his experience, he offered tailored advice for SMEs considering digital adoption.

Firstly, he suggested that SMEs assess their current digital capabilities to identify inefficiencies and prioritize improvements. “Continuously educate yourself about relevant digital technologies through workshops, webinars, or expert consultations to ensure alignment with business goals,” he advised.

Shahril highlighted the importance of integrating digital tools to enhance customer experience and responsibly manage cybersecurity risks. At Azwin Ecosystems, they encourage early education and strict access controls to protect digital assets. Regular audits and hands-on training sessions help his team and clients navigate digital complexities effectively.

Azwin Ecosystems focuses on creating a secure digital environment while leveraging AI and other technologies to improve efficiency and responsiveness. Shahril stressed the need for SMEs to adapt to market changes and engage in continuous learning to maintain competitiveness and relevance.

He underscored the importance of investing in team training to maximize the benefits of digital tools and ensure successful digital adoption. Adapting to rapid technological changes and evolving client needs is crucial, emphasizing continuous learning and adaptation to stay competitive in a dynamic digital landscape.

Shahril also highlighted the significance of embracing change and leveraging opportunities for innovation and growth. He mentioned Azwin Ecosystems’ commitment to ongoing improvement and client-centric innovation, emphasizing their dedication to advancing digital adoption in Malaysia’s SME sector. “By focusing on education, security, and strategic implementation, we empower SMEs to thrive in an increasingly digital economy,” he said.

Embracing Digital Transformation in Malaysia

Nhu Nguyen, CEO and founder of New Digital Sdn Bhd, highlighted the opportunity in Malaysia to utilize the country’s multicultural and multilingual workforce to create a dynamic digital tech team. Observing industry trends and customer feedback, Nguyen recognized that embracing digital technologies was crucial for enhancing customer experiences and gaining a competitive edge.

She identified key challenges, including employee resistance to change, initial technology investment costs, and the need to upskill the workforce. SMEs, in particular, are accustomed to traditional methods and hesitant to adopt new systems. Financial constraints also pose a significant obstacle due to the substantial upfront investment required for digital tools and platforms. Additionally, mastering new technologies involves a steep learning curve, necessitating comprehensive training programs.

Despite these challenges, Nguyen emphasized that automating routine tasks can boost efficiency and productivity, while data analytics can provide deeper insights into market trends and customer behaviors, enabling more informed decision-making and personalized customer experiences.

Based in Penang, New Digital Sdn Bhd provides technologies and digital solutions for cross-border e-commerce in emerging markets. “Our online presence has expanded, reaching a broader audience and driving sales growth. Our multicultural and multilingual digital marketing and tech team has spurred innovation and effectively addressed workforce challenges, enhancing overall operational efficiency,” Nguyen stated.

The company also emphasizes security measures, including firewalls, encryption, and regular security audits to foster a vigilant culture against cyber threats. New Digital’s approach simplifies digital technology adoption by selecting user-friendly platforms and partnering closely with vendors to provide comprehensive support and training. They break down the adoption process into manageable steps to demystify technology and build client confidence.

“Our digital tech team continues to play a pivotal role in overcoming challenges and enhancing cybersecurity measures, leveraging their diverse skill sets and perspectives. By prioritizing affordable yet state-of-the-art technologies, we aim to deliver robust solutions that meet the unique needs of SMEs, empowering them to compete effectively in the digital economy,” Nguyen concluded.

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