1. IN SEARCH OF INOVATIVE AND SUSTAINABLE SMALL
AND MEDIUM ENTERPRISES:
ACFTA’s recent impacts and the Future of Small
and Medium Enterprises in Indonesia1
Sanerya Hendrawan
Department of Business Administration
Catholic University of Parahyangan
The integration of ASEAN into the China market through recent
ASEAN-China Free Trade Agreement (ACFTA) has challenged to the most the
resilience of small and medium enterprises (SMEs) in Indonesia. Though claimed by
government top policy makers in the first instance that it benefited much to the
Indonesian industries in the long run, its worse impacts should not be belittled.
Economically, it hits hard most domestic industries where traditionally SMEs hold
dominant share in the country such as garment, foods and drinks, toys, leather. Not
few of them even suffered from bankruptcy, thus worsening the already high level of
existing unemployment in the country. Politically, SMEs have been, and seem to
continue, albeit vaguely and indeterminately, the bastion of indigenous
entrepreneurs. A seemingly gradual downturn of its role in more liberal Indonesia
economy presently may cause further backlash to the government in power.
Given these conditions, it is timely to assess the sobering position of Indonesia
SMEs and to project its future prospects, provided that all the unintended present
impacts of the ACFTA give important lessons to all stakeholders concerned. Within
the limits of this context, this paper frame several issues to be explored. First, what
are important lessons for strengthening Indonesia SMEs from the current impacts of
direct competition with Chinese products entering domestic industries? Second,
what are factors at issue, laying at different levels and sectors, which may be the basis
for SMEs competitive advantages, which are required particularly in confronting
competitive Chinese products? Third, what are obstacles on the road ahead that
may block the healthy growth of Indonesia SMEs?
Different Strategic Position of Indonesia’s Small and Medium Enterprises
Small and medium enterprises in Indonesia come into existence due to
1 Presented in International Seminar: “Sustainability and Innovation in SME Development in the ASEAN
China Free Trade Agreement Era”, 17 November 2011, Catholic University of Parahyangan.

2. different forces at work. Most are the product of a disadvantaged economic situation
of the poor. Either historically or currently shaped, their existence has a certain
unique ethos and patterns of development. Among salient features of this group are
subsistence business ethos; poor knowledge of the market, inadequate technology; if
not traditional, lack of capital, and familial management. Rather than being driven by
genuinely entrepreneurial spirit, their business existence serves more as an economic
outlet for absorbing adversely political impacts of the government’s failure in
economic policies to create full employment.
Then there is an increasing small fraction of SMEs which has grown in recently
liberal economy, particularly in major cities, due to a more entrepreneurial spirit
combined with various business opportunities driven by souring economic growth of
the cities. More and more young entrepreneurs, particularly from growing middle
income groups of the society, are entering into this group. Not only better in terms of
educational background, they also possess better access to global information and
fast business network, thanks mainly to the impressive penetration of the Internet
into different sectors of life, including the business. Some of them are even clustered
around influential creative business communities such as Muslim Young Designer,
Independent Clothing Community in Bandung. The business ethos of this group is
more a reflection of the American Dream-like spirit that stresses on entrepreneurial
ambition and the search of independence and personal actualization. Thus, with
better resources being at their disposal, this group should be positioned to have better
market advantages, not only in confronting similar competitive products
domestically from China or other ASEAN members, but also in penetrating foreign
markets. The future of Indonesian economy should expect much from this group.
Uneven Effects of ACFTA on SMEs Business
It is understandable, given such different strategic position, both groups of
SMEs responded differently to adverse economic impacts of ACFTA integration. The
first group was the most suffering. Their product consist of agricultural products,
including fresh fruits and vegetables; simple manufacturing products such as
garment, footwear, food and beverages. Such products are almost similar to Chinese.
Thus, as the Chinese products with lower prices entering the Indonesian market, they
lost their market share significantly. Higher production costs, lower quality, fewer
product varieties, and low differentiation seem to contribute much to the losing of
their previous advantages in the domestic market. While some went into bankruptcy,
others were making not so easy adjustment in their operations. Unless the
government seriously takes into account their institutional weaknesses and then
provides policy preferences on them through trade renegotiation with China, their
existence will cease. Sooner or later, the forces of regional market ACFTA, which
promotes product specialization as a basis for firms’ competitive advantage, will
drive Indonesia SMS’s out of their own domestic market.
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3. The second group, relying more on creativity, flexibility, and partner
networking, has a wider market room to maneuver. Their products are also more
diversified. In spite of relying more on domestic market, not few of them have a
relatively strong foothold in the neighboring and regional markets. Hence, the
invasion of cheap China’s products into the Indonesia market did destabilize their
existing market grip. But this happened for the time being. Indeed, in the medium
and long term, it would force them to accelerate and further differentiate their
product specialization, more on the basis of competitive rather than comparative
advantages. Firm’s capabilities to capitalize locally and even culturally indigenous
resources and regional and global network, combined with the support of new
business platform such as Internet, should finally determine their successful
adjustment to such internationally competitive environment.
These different conditions of SMEs in responding to adverse impacts of
ACFTA implementation should become a baseline for preferential policies of the
government in the future. Here it is obvious that development assistance and
facilitation should be given differently, with the second group of SMEs getting
focused more on intangible resources based, such as brand development and
international market information; while the first group on tangible resources,
primarily technical and financial assistance and market access. It should also be on
the top priority of government assistance for facilitating both SMEs to easy and cheap
access to E-business infrastructure.
Emerging Creative Small and Medium Enterprises
Albeit long and gradual, the transformation of Indonesian economy,
previously based mostly on the agricultural commodities, into industrial and service
economy has led to the emergence of SMEs sectors that work with relatively much
reliance on knowledge and creativity as the engine of their growth. These sectors,
well known termed ‚creative industry‛ and lately put its development efforts within
the ministry of tourism and creative economy, include fashion and design,
entertainment, and leisure and lifestyle, to mention a few. It is surprising that their
competitive position domestically was not such much affected by the massive entry
of foreign products, particularly from China. This is due to their relatively
differentiated product characteristics and its niche market.
Though it has long existence, SMEs in creative industry is forced to
repositioning themselves in a more significant role recently. New generations of
young entrepreneurs pioneered their establishment and adopt business mindset
which drives continuous innovation, not only in product but also in process. The
formation of distribution outlet (DISTRO) as main marketing channel and its
community marketing strategy they a adopted for effectively communicating with
their customers actually marks their better business skill which are needed for the
prospective growth of this sector in the future.
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4. Combined with relatively sophisticated demands of customers in many
creative industries, that mindset and skills accelerate entrepreneurship learning that
generate further capabilities and core competencies. In a long term evolution of the
firm, as evidenced from many existing medium and big firms, these help firm form
and posses unique competitive advantages, which are required for superior
performance in domestic and international markets. Some previously local and small
firms, including Es Teler 77, Edward Forrer, can be said to belong to this category.
Both started from building strongly local brand with excellent quality products and
supporting services, and then move successfully to national and regional market
through franchise business. Underlying this success is the use of local knowledge and
market intelligence to generate product innovation as well as the tapping of cultural
networks to support regional expansion, such to Singapore and Australia.
Restructuring SMEs Industrial Clusters
Most Indonesia SMEs are located geographically at certain industrial clusters
connecting different firms which operate, to a certain degree, from upstream to
downstream of the value chain. Leather and footwear products, garments, handicraft,
traditional foods and beverages are normally clustered at certain places. With such
characteristics, the entry of foreign-made products caused snowballing effects in the
industrial clusters, thus making the downfall of firms either backward or forward in
the value chain. It cannot be denied that while some industrial clusters faces a steady
downturn, others is still struggling for survival, their future growth of which
depends on new government policies to address existing weaknesses that impeded
regional competitiveness of local products.
Thus unavoidably, a relatively gradual re-clustering and de-clustering either
in previous or new forms of business marked some SMEs industries. In this
connection, some SMEs transformed itself into another business, or others merely
diversified into other lines of product or business while also continuing to market
their present products, but certainly on more efficient and innovative modes. These
different responses are natural, given divergent resources and competencies of SMEs
as well as opportunities available to them. Those SMEs that fell into the first group
above were generally the ones that were directly facing cost-based competitiveness.
Since Chinese products were more superior in term of cost, then unless their products
are improved to be more differentiated in terms of content and quality, they should
not be able to continue their existing business.
In the long term development of industrial cluster, re-clustering and
de-clustering serves as a mechanism of natural selection that put the most innovative
firms at certain advantage position in the market and drive out others in
disadvantage or force them into bankruptcy. While this may be justified from
classical economic perspective, it should not be the case from the equity perspective.
Most SMEs in Indonesia represent the economic power of the indigenous and hence
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5. become a constant policy priority of the government intervention in the economy.
Any failure in preserving their interests or maintaining its momentum of growth
should result in serious political repercussion in the future. Thus what happened
behind the replacement of industry and trade minister in the recent cabinet reshuffle
should be understood in the context of the minister failure in protecting the interest
of Indonesia SMEs.
Lessons Learned
Seen from the long term perspective, the massive entry of Chinese-made
products into the domestic market should benefit Indonesia SMEs. Albeit painful its
effects temporary, it actually open up greater overseas market for both SME final
products and cheap factors of such as imported raw materials for production outputs.
But this is only the case provided that the government launches right adjustment
policies for addressing temporary disturbance to the existing reality. While this
seems to be taken seriously by the new cabinet, most creative efforts should be
undertaken internally by the SMEs themselves. Here, some lessons from recent
experiences are worth mentioning for any effort to improve the competitive posture
of Indonesia SMEs in the international market, particularly against Chinese products.
First of all, it regards creative and innovative initiatives for entering new
markets. This lesson put heaviest burden on the part of SME owners. Instead of
clinging on traditional ways of doing business such as in design, production, and
marketing, the owner are expected now to be more adept on different tastes and
habits as well as perceptions of international customers. Their business priorities
should be more driven out by ongoing changes of international customers. Secondly,
SMEs should rely its growth more on the basis of internally distinctive resources
rather than externally industrial cluster resources. This hardly means that conducive
industrial cluster is no longer important. But rather, it makes the ultimate
differentiators for long term growth embedded in SMEs themselves. Thirdly, SMEs
needs closer business networking at different sectors, integrating input, process, and
output sides with different actors that finally make their business able to act on
totally. But this only happens if facilitated by right government policies which affect
both its upstream and downstream business actors. Behind all these lessons, the key
to the competitive Indonesia SMEs lies in better human capital.
Creativity and Innovation is Important
It is similar to both big, medium, and small firm that creativity and innovation
play a determining role in driving continuous growth of a firm. But most SMEs are
lack of this capacity. Imitating or copying popular designs and styles, especially those
that already have high market value, almost become the culture of SMEs. While this
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6. is understandable due to the motivation for a quick yield to compensate their cash
shortage, its unintended effects are so obvious that it relatively close learning
opportunities from innovative experiences. Consequently, no learning curve is
obtainable for their sustainable growth in the long run. To thrive in competitive
international market requires more than one generic strategy. Superiority on the basis
of costs (overall cost leadership) should be combined with differentiation in order to
secure long term growth of SMEs. However, differentiation is the result of creativity
and innovation, the implementation of which needs the restructuring of SMEs value
chains, while also necesitating government policy intervention to reduce factor costs.
In this respect, shortening suppy chains, reducing cycle times, deintermediating flow
of goods to reach its final customers are among the most important factors that may
reduce costs significantly.
Resources should be more focused and targeted
One endemic problem which is easily found in much SME operation is serving
almost one single mass market. The consequence is clear; the market becomes
crowded, forcing fiercely inter-competition among them to gain the same customers.
In fact, market is differentiated into different segments with a relatively clear line of
demarcation. Most SME are not relatively aware enough of this fact. They rush easily
into the same highly growing market, and then involve in cut-throat competition
through price during mature and decline stage, and finally bankrupt and change into
another business. This business evolution once happened, for example, in a well
known leather industrial centre in Bandung few years ago. The same pattern should
follow in other industries since factors condition, demands, and related and
supporting business inside their industries have not been so different.
It has been shown undisputedly that, with customers possessing more access
to information and product choices, then market become so differentiated. The
implication is that SME products should be focused more on narrowly defined
market. This means that instead of mass, specialized market is the source of SME
growth in the future. With this caveat in mind, hence SME limited resources, which
consist in assets and capabilities, should be capitalized more effectively. Competition
from foreign products, including those from China, which invade many domestic
mass markets, would also not be so direct. Thus, survivability, longevity, and growth
are more likely to happen in the long run.
Close and Tight Economic and Social Networking is necessity
In many cases SMEs with fast network have more survivability. This network
comprises business partners and supporting parties both in the upstream and
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7. downstream sides of the business, and as a whole, it forms industry relatedness.
Ideally, this network operate organically that the transaction and flow of goods and
services among parties work efficiently and effectively in terms of time, cost, and
quality. But in reality information asymmetry and exclusively social bonds work
disproportionally to the effect that it puts many SME in disadvantage position in the
market. This can particularly be seen in agribusiness and footwear and leather
industries where important market information such as demand size and real price
are almost exclusively known by downstream parties. Unfortunately, these parties
are also dominated by certain ethnics. The result then is often disastrous to SME
viability.
Hence, a close and tight network, economically and socially, is required.
Cooperative institutions can play facilitating and mediating role in this respect.
Despite the fact that in recent development of a rather liberal Indonesian economy,
cooperative organizations are marginalized, its economic and social dimension of this
institution, which is also strongly justified ideologically, is still powerful enough to
increase the bargaining position of SME in a network of business connecting
downstream and upstream players.
Re-framing the Design of Small and Medium Enterprises Institution
Recently sad experiences of SMEs competitive performance in confronting
Chinese’s low price industrial products should lead to the re-framing of SMEs
institutions. This requires boldly micro initiatives within SME management to change
their organization fundamentals and government policy changes to correct some
existing distortions that produce current disadvantages to SMEs in competitive
regional markets. These two measures should be taken immediately and
systematically, for only five years ahead that are still left for member countries,
including Indonesia, until the full execution of ACFTA applies in the region.
Among the most strategic fundamentals of SME organization that should be
prioritized to deal with include resourcing, supply chain, and market information,
and social capital. To a large degree, these fundamentals are responsible for the cost
inferiority of many SME products in facing Chinese product invasion in domestic
markets. Hence, a significant improvement in these fundamentals should improve
the cost competitiveness of SME products. But this cannot be carried out alone. The
government should support it with policies that lower costs of some important inputs
for production. Time left ahead, up to the full execution of ACFTA in 2016, should be
optimized to correct some distortions that significantly affect input factors.
Efficient Enterprises Resourcing and Differentiation
Many SME products that were hard hit by the entry of Chinese products into
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8. domestic markets are generally similar, such as textile, garments, leather products,
food and beverages. Some of these products are also primary export commodities of
Indonesia. But since many others products still relies heavily on domestic markets,
higher input prices for their production creates cost disadvantages. This is caused by
many factors. But the most important ones are not only higher labor costs in SMEs
operation, but also less modernized manufacturing facilities and smaller batches of
production in upstream partners. Compared with manufacturing facilities in China,
the conditions are indeed different. The volume of production is more massive, while
its production facilities are also more modernized, given the country already long
time more self-reliance on capital goods for certain sectors. Their labors, which
mostly consist of poor peasants from country sides, also accept cheaper wages and
lesser conditions. Together, it makes China products superior in the Indonesian
market.
With such contributing factors to the cost advantage of many China products,
the opportunity for addressing problems of production costs in many Indonesia’s
SME seems to be not much. For the time being, the only feasible solution is through
seeking strategic advantages other than cost basis, such as differentiating its quality,
styles, and designs, or more focusing on certain niche of domestic and international
markets. But for certain other products, especially those which are exclusively tied to
natural resources such as rattan where Indonesia has absolute advantage, the room
for improvement is still widely open, provided that the government also moves in the
same direction through the banning of rattan export.
Tightening Supply Chain and Broadening Networks
Strong relations among related actors from upstream to downstream sides of
businesses such as in Japan, Taiwan, South Korea, and China are not widely shared
by all SMEs in Indonesia. Except in some sectors such as manufacturing, certain
agricultural sectors like palm oil, relations through Foster Parent scheme (FPS),
Subcontracting, Core Plasma scheme are relatively strong and successful. In many
other sectors such as foods, furniture, and handicrafts these are too weak to be used
by SMEs as a strategic vehicle for their growth and development. Besides, network
between SMEs and R&D institutes or universities are also still less important
compared to networks with large enterprises through subcontracting. This may
indicates that R&D institutes or universities are not yet so important as a source of
technology development, skill upgrading or innovation activities in SMEs.
As said before, cost-based competition with China’s products is no longer
defendable for some SMEs products. So the competitive basis for Indonesia SMEs
should be now shifted to more differentiated products and or focused markets. Here
improvements in quality, design, style, and variety of products, better market
research become paramount. Since this is not easy job for SMEs alone, research
institutions of state and private universities should be involved. Their expertise in
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9. design, profiling consumers, and other skills and knowledge would have a very
much impact on SME competitiveness both in the domestic and international
markets. But this involvement should be put as part of establishing a broader
network of industrial clusters and supporting horizontal and vertical industrial
linkages as well as gaining better opportunities for integration into global production
networks.
Capitalizing Market Information
Generally, Indonesia SMEs lacks market information. This is certainly in
contradiction with the requirement to operate business in today’s global economy,
where information provides firms with the ability to deliver a quality product, on
time, and at competitive price, anywhere in the market. Indeed, information is the
lifeblood of every business, regardless of size. Improvement in information literacy
may lift the isolation of many SMEs from product and market penetration, and many
other market opportunities as well.
With almost fourth fold increase of internet penetrating Indonesia market
during the last five years, information is relatively abundant. The costs of accessing
this information are also decreasing, thank to the rise of different multimedia such as
computer, mobile phone, and other smart devices; and the lowering costs of internet
access. So presently there are no longer significant barriers to access. SMEs should
make effective use of this information particularly to develop new products for
existing markets or new markets for existing products both domestically and
internationally. Other uses are also required in many other aspects of business, all of
which should be aimed at closing the gap of information asymmetry in business
transactions with different partners. To move in this direction, it is of vital
importance for SME to conduct business or market intelligence, however little or
informal it is.
Entering E-Business
Currently liberalized world economy, which is accelerated by E-business
platform, has paved the way for a broader engagement of Indonesia SMEs, both in
domestic and international markets. Despite its small numbers that already entered
this platform, the results of the engagement is relatively encouraging. This could be
seen, to mention a few, in some SMEs of fashion business. In addition to existing
market share in domestic market, their professional products exposure via the
internet also attract international customers. The key to their success seems to lies at
focused market, quality products, rich and stylish designs. Similar success is also seen
in content developers, and handicrafts business. This development should be viewed
as signs of the vast potentials of the E-business platform for SMEs to tap into global
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10. market opportunities.
These potentials are particularly relevant to be considered by the emerging
new generation of young entrepreneurs born from middle class families and matured
in the social economic atmosphere of Indonesia’s liberal economy. Different from the
older generation of entrepreneurs, which were nurtured in the protective and
bureaucratic policy environment of the Old Order Regime and typically forced into
business because of being unaccepted as civil servant in the government bureaucracy
or having strong political clout with top government bureaucrats, the new generation
of entrepreneurs enter into SME businesses because of willing personally to become
businessman. More and more of entrepreneurs of this type with better education
come into SME businesses as society also develops better perception for this
profession. Not only being more adept at international networking, they are also
richer in business ideas and willing eagerly to new things. These are partially
characteristics that in many cases drive significant innovation and success in
business.
Hence, the new generation of entrepreneurs is expected to benefit most from
the increasing penetration of e-business in Indonesian market. Institutions like
TELKOM for example, that develops its own business incubator and information and
communication network through RISTI, should prioritize its corporate social
responsibility (CSR) activities to help them gain cheap access to e-business facilities.
Strengthening Social Capital
A more democratic Indonesia, which has marked the country since the end of
New Order Regime, is restructuring the Indonesia economy towards more liberal,
non-discriminate, but remaining equal and prosperous for all segments of the society,
regardless of race or ethnicity. This means that economic division between
indigenous and non-indigenous, which has had strategic implications for economic
policies since independence, is no longer valid. SMEs, which are historically regarded
as representing indigenous economic power, are not put in antagonism with big
businesses in another end of spectrum as non-indigenous or foreign economic power.
Thus politically such division already ends.
Such development should have far reaching implication for the strengthening
of social capital which is required for building up the competitiveness of Indonesian
SMEs. What it means by ‘social capital’ here is the common norms and values
influencing the interaction between individual-social networks, and often
conceptualized into several dimensions comprising social interaction, trust, and
shared vision. These dimensions affect significantly access to and use of knowledge
resources of SMEs and create fair and honest in the interchange of whatever
resources. Evidences indicate that the presence of such dimensions contribute to the
lowering of transaction costs among business actors, thus increasing collective
efficiency, and finally lead to the effective growth of SME industrial cluster.
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11. Entrepreneuring Spirit
The emerging almost forty million middle class of Indonesian recently
provides an impetus for a more optimistic look at the prospective growth of SMEs. As
said before, a new generation of entrepreneurs is born from that circle, with better
education, better appreciation of business profession than previous generation, and
personally willing to enter this profession with zeal. In another word, they are called
by what social capital terms ‘self realization’. This is actually the spirit to encourage
entrepreneurship, innovation, firm creation and spin off; and together with other
social capital elements mentioned before, it becomes the driving forces for the
dynamic of SME industrial cluster in the future.
Strategizing Industrial Cluster
The importance of industrial cluster to enhance competitiveness has been
echoed by Porter in his presentation to President SBY in 2009. But so far the
Indonesian government still has not yet clear, coherent, and stable strategies and
policies. Indeed, rather than stimulate to compete globally, some regulation eroded
the competitiveness of SME industrial clusters. With fewer resources and weaker
bargaining position as compared with large enterprises, SMEs is better organized
collectively in the form of industrial cluster.
As part of cluster development strategies, the government should also
maintain and strengthen the common cultural and religious values of Indonesian
such as collectiveness (gotong royong), familiarity (kekeluargaan). These could serve as
valuable assets that affect productive social networks and the transfer and circulation
of knowledge among actors and in cluster.
Towards Competitive Indonesia SMEs
Disastrous impacts of the ACFTA implementation upon SMEs in Indonesia
should be seen positively for the long development of this sector. It is obvious that if
the government could not correct some of its unclear and incoherent policies, a lot
more of SMEs would be dragged into the brink of collapse. But it is also clear that the
government seems to have taken sobering lessons and consider corrective initiatives.
While the results of these initiatives are still to be waited for some time, the
expectation is very clear; the government is able to ensure that the time left until the
full implementation of ACFTA is used effectively for the building up of SMEs
readiness in facing global free trade.
In tandem with government initiatives, SMEs management should redesign
their business model along the line discussed here, and more importantly change
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12. their traditional and local business mindset into a global one. It is expected that the
new generation of entrepreneurs, who are born in Indonesia’s more liberal and global
climate, are in the position to take the lead.
CURICULUM VITAE
SANERYA HENDRAWAN
Sanerya Hendrawan is currently lecturer at UNPAR, and other state and private universities. He was graduated
his Ph.D. from Katholieke Universiteit Leuven (KUL), Belgium in 1996. He also once studied in European Master
of Public Administration (EMPA) in 1993. His master was obtained from University of Indonesia in 1990, and
doctorandus from Catholic University of Parahyangan in 1982. He already wrote books and articles published
nationally and internationally. While participating in seminars and workshops as speakers, he is also currently
working for several institutions on issues of human capital development in Indonesia. He can be accessed at
sanerya@yahoo.co.uk
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