SMEs and e-commerce; the digital David and Goliath
Read in Indonesian
Throughout the ongoing COVID-19 pandemic, the growth of e-commerce in Indonesia has reached a whopping 91%. This is supported by the growing penetration of the Internet, which had gone from 64% to 73.7% as of December 2020. There are now more people using the Internet, and more people getting comfortable with the concept of online shopping. Online marketplace or e-commerce has come out as the champion in the hearts of Indonesian online shoppers, beating out brand websites and Instagram as the nation’s favourite online shopping platform.
This should not come as a surprise, given that e-commerce sites’ extensive offerings and competitive price are strong incentives for shoppers. We can find practically everything we need there; from international brands to local SMEs offering bespoke products.
In theory, these sites provide a great opportunity for small and new businesses, as these sites give them a platform to reach more customers with minimal costs in comparison to opening up a physical store. As of December 2020, 10.2 million or 16% of the total Indonesian SME population already went digital. Quite a vast improvement, considering that the figure stood at only 13% in early 2020.
From the sellers’ point of view, joining an e-commerce platform also comes with other perks. Saefutdin, who has run his handmade craft business @poohh.handmade since 2015, finally decided to join an e-commerce platform in 2019. According to him, by having an e-commerce presence, it is easier for his business to gain customers’ trust, as there are safety protocols in place to ensure secure transactions. “It is more practical, too, because I do not have to check the delivery fees and customers’ addresses manually,” he added.
Having said that, local SMEs are only responsible for 6%-7% of the products offered in online marketplaces. Imported products are still dominating the market. This leaves room for improvements, especially as SMEs make up 99% of local businesses in Indonesia and are collectively responsible for 60% of the national gross domestic product.
We need SMEs not only to survive, but to thrive, especially since 74.1% of these SME sellers rely on their businesses as their main source of income (World Bank 2021 Survey). And in the age of this pandemic, it means going online and being competitive while doing so.
The government has applied a number of efforts to improve the situation, particularly through the SME digitalisation programme. This programme includes capacity building, business improvements and market access improvements. However, we are still not anywhere near the point we want to be. The government is seeking to have 30 million SMEs going digital by 2023 and eventually being able to export their products through digital platforms.
Unfortunately, the road ahead does not look easy seeing the competitive landscape; there is a predatory pricing practice carried out by foreign sellers that slowly kills local SMEs. This perhaps sheds a light on President Joko Widodo’s recent remarks about “hating foreign products.”
What has been happening is that foreign sellers have started copying SME products and selling them at much lower prices. That is precisely what happened with local Muslim fashion products in 2016-2018.
At the time, the Muslim fashion home industry in the nation was growing exponentially. Then, foreign producers – from China in particular – started noticing this segment’s potential. They started learning about Muslim fashion and its demand in Indonesia, and eventually creating copycat or similar items and sell them at much lower prices. After that, local producers just found it very hard to compete.
The issue is not confined only to the Muslim fashion segment. Kaitlyn Denise, who founded Flashie.id, a hand-crafted cruelty-free lashes brand, confessed that she experiences the effects of the price wars as well. She noted the fact that many of her direct competitors are using fake photos to sell similar – but lower quality – products at much lower prices. “Customers don’t really see brands and quality when it comes to things like that, they see the price,” she continued.
“Price wars,” answered Amelia Bunjamin simply when asked about the challenges of joining an e-commerce platform as a small business. She recently started NUUK Studios, an eco-friendly clothing label, and joined an e-commerce platform right away.
Despite that, she recognises the benefits of joining an online marketplace. Being available on an e-commerce platform makes your product much more easily discoverable by consumers, locally and sometimes regionally. The particular marketplace her brand joined – Shopee – also has network in other Southeast Asian countries, thus making her products available in countries such as Singapore, Malaysia and the Philippines, which is a great draw.
It must be understood that this predatory pricing strategy is structured and requires collaborations between e-commerce platforms, investors and governments of the countries from which the imported products originated.
The Chinese government, for example, has several strategies in place to ensure that their prices remain low. Among them are subsidies to home industries, supporting the businesses’ export duty and logistical assistance. From the investors’ side, large corporations inject funds to e-commerce platforms and allow free delivery discounts and deals. This promotes the growth of imported products within local markets. Products made in China, in particular, make up 30.9% of the total non-oil and gas import throughout 2020.
Clearly, an intervention is needed. Sooner rather than later, as more SMEs may fall victims if such practices continue for too long. If nothing significant is done, the government’s efforts to digitalise SMEs as a growth strategy may end up killing these businesses instead.
One way the government can alleviate the problem is by applying more restrictive import regulations. Such regulations should also extend to regulating the quota of foreign products that are made available on e-commerce platforms. For example, the government may impose a law that keeps the proportion of imported products to a maximum of 30% on e-commerce platforms operating in Indonesia.
As consumers, the first step to creating a meaningful change is to acknowledge that unfair practices exist in the market and that we have the power to change it. Then, a more thoughtful approach to online shopping shall follow.
