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Summary

The Malaysian government's establishment of the Digital Free Trade Zone (DFTZ) outside of China is a clear sign of its intent to empower Malaysian SMEs digitally. But first it will have to convince SMEs to participate in e-commerce, and this is proving incredibly challenging given the low digital maturity of small businesses in Malaysia. However, the government is not finding any short cuts on this – continuous efforts to address SME awareness and readiness are the only way to go.

What is the DFTZ and why does it matter?

The DFTZ is a joint initiative by Malaysian Prime Minister Najib Razak and China's Alibaba Group that aims to help Malaysian SMEs enlarge their businesses via e-commerce and grow their global exports. The cloud-based initiative aims to offer Malaysian SMEs minimal tariffs, speedy and centralized customs clearance, warehousing and fulfillment facility, as well as logistical support to speed up clearance for imports and exports. The hub is set for launch in 2019.

It is the latest step in the Malaysian government's efforts to help increase SMEs' contribution to the nation's GDP. This contribution stands at 36.3%, despite 98.5%, or 890,260 business establishments, being SMEs. Apart from enriching Malaysia's economic mix, the integration of the DFTZ into new and existing infrastructures such as Aeropolis, Kuala Lumpur Internet City, and Port Klang is also viewed as an opportunity to boost trade, logistics, and e-commerce.

The DFTZ states that more than 1,900 SMEs have been introduced and trained to set up their businesses and mini-sites on Alibaba.com so far. The target is for an additional 8,000 during 2018. Several government agencies such as the SME Corporation and Malaysia External Trade Development Corporation will work together in assessing SMEs that are ready to get onboard.

Addressing SME awareness and readiness are intrinsic parts to success in DFTZ

The core reason for SMEs to use the DFTZ is for its skills in e-commerce. However, the low digital maturity of most private sector businesses continues to be the key challenge. According to Malaysia's National eCommerce Strategic Roadmap published in 2014, the GDP contribution from SMEs derived via e-commerce is estimated at only 6%, compared with approximately 15% in some developed countries.

These findings are reflected in Ovum's 2016 survey of Asian SoHos and SMEs. It showed that websites remain rudimentary for most small businesses, with close to two-thirds of SMEs unable to take payments online.

Despite several government agencies being active in empowering SMEs with the know-how to launch and grow online businesses, SMEs won't become export-ready overnight. Adopting digital processes and developing skills to access the DFTZ effectively will take time. Programs to train and onboard SMEs should be realistic and systematic, and also should consider the needs of the majority of SMEs that are outside the industrial heartland of the Klang Valley. Regardless, Malaysia's SMEs will need to rise to the challenge and adapt to increased digitally led competition coming into Malaysia. For this, Malaysia's DFTZ initiative needs to deliver on its promises.

Appendix

Further reading

Helping SMEs Sell Digital: The E-Commerce Opportunity for CSPs, TE0005-001010 (October 2017)

Boosting SME exports via DFTZ. Available from http://www.focusmalaysia.my/Enterprise/boosting-sme-exports-via-dftz[Accessed December 23, 2017].

National eCommerce Strategy Roadmap Overview. Available from http://www.miti.gov.my/miti/resources/Gallery_Walk.pdf [Accessed December 21, 2017].

Author

Hwee-Xian Tan, Senior Analyst, SoHo and SME Research

hweexian.tan@ovum.com

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