Our key to economic recovery are the MSMEs. They are on the ground, in communities and form part of the supply chain of the nation when big corporations can’t function since they are all in Mega Manila.
Note: This column originally appeared in The Manila Times on December 8, 2020.
E.F. Schumacher in his seminal 1973 book, “Small Is Beautiful: Economics As If People Mattered,” said, “even today, we are generally told that gigantic organizations are inescapably necessary; but when we look closely, we can notice that as soon as great size has been created, there is often a strenuous attempt to attain smallness within bigness.”
The pandemic has led to the development of a new business model where the huge malls and businesses have to contend with dwindling customers due to minimum health protocols. It used to be that consumers would go to big malls since everything was there. One can do window shopping; eat from the various restaurants inside the mall from fine dining and fast food to bars; do one’s grocery; and if you, by any chance, visit such establishments on a Sunday, there would be a mass. A venue being all-in-one was the norm. But with Covid-19, consumers go to hole-in-the-wall, 24/7 neighborhood groceries, sari-sari (variety) stores and rely on orders made over the internet. The less people visiting a establishment, the more it is patronized by consumers in the new norm because there are no lines to enter the facilities and less exposure to the virus.
Before the pandemic, the barriers to entry were already falling, particularly with the growth of internet companies with very few physical assets such as AirBnB, Grab and the like, creating a sharing economy. The business models evolved due to apps that are readily made that serve as gateways to food delivery services, a similar rise of the “solo chef is under way worldwide” and, even smaller, affordable and functional homes. The immediate impact of the pandemic is the scarcity of products and a disruption of supply chains.
Based on Internet World Stats, there are 4,929,926,187 internet users worldwide with 70 percent found in Asia (51.8 percent), Europe (14.8 percent) and Africa (12.8 percent). Penetration rate is highest in North America at 90.3 percent, Europe (87.2 percent) and Latin America/Caribbean (71.5 percent).
Rethinking ways of working and transforming companies to adapt to the shift caused by the pandemic is crucial. Focus will have to be on shoppers. “Many legacy department stores in the advanced economies are finding themselves on unstable ground with the pressure from not only direct competition but also from small brands and retailers that are taking advantage of their strengths to gain ground.”
How can a small, digitally native brand challenge a multibillion-dollar, traditional retailer? These newcomers are “growing share because they’re engaging with the customer in a way that’s very authentic. By concentrating on a specific product category, a small company can become an expert in that category. This makes it easier to listen to what the customer wants and cater to their needs in creating those products. Since digitally native brands typically start without a physical store footprint, the barriers to entry are lower, and they can spend the majority of their time focused on product, brand and service.”
Experts agree that “brick-and-mortar retail isn’t dead, but it is evolving. As these small, niche brands are gaining success, they are beginning to take next steps using the clicks-to-bricks method. The path of this strategy is to launch with a direct-to-consumer model, build a strong brand presence and accelerate growth through social media connections and a strong social interactive community. Once successful online, the brand’s authenticity and popularity are recognized, and they invest in brick and mortar stores to create a physical presence to stand out from the crowd. With so many stores closing, there are plenty of pop-up or short-term lease locations to choose from. Touch points online allow traction build up, and then, actual stores become a reality as it is able to build loyal consumers.”
And this is where micro, small and medium enterprises (MSMEs) are crucial to the Philippine economy. Per the 2019 List of Establishments of the Philippine Statistics Authority (PSA), a total of 1,000,506 business enterprises are operating in the country. “Of these, 995,745 (99.5 percent) are MSMEs and 4,761 (0.5 percent) are large enterprises. Micro enterprises constitute 89 percent (891,044) of total MSME establishments, followed by small enterprises at 10 percent (99,936) and medium enterprises at 0.5 percent (4,765).”
In terms of sectoral distribution, “[T]he top five industry sectors according to the number of MSMEs in 2019 were: 1) wholesale and retail trade; repair of motor vehicles and motorcycles (462,492); 2) accommodation and food service activities (144,024); 3) manufacturing (115,387); 4) other service activities (65,918); and 5) financial and insurance activities (46,100). These industries accounted for about 83.35 percent of the total number of MSME establishments.”
Geographically, “majority of the MSMEs can be found in the National Capital Region (NCR) with 202,011 (20.2 percent) business establishments; Region 4-A (Calabarzon) with 148,017 (14.8 percent); Region 3 (Central Luzon) with 115,877 (11.6 percent); Region 7 (Central Visayas) with 70,227 (7 percent); and Region 6 (Western Visayas) with 61,513 (6.1 percent). These top five locations accounted for about 59.7 percent of the total number of MSME establishments in the country. Regional concentration of MSMEs is largely associated with economic activity and population size.”
In terms of employment, the MSMEs generated a “total of 5,510,760 jobs or 62.4 percent of the country’s total employment. The micro enterprises produced the biggest share (29.8 percent), closely followed by small enterprises (25.2 percent) while medium enterprises were far behind at 7.4 percent. Meanwhile, large enterprises generated a total of 3,315,575 jobs or 37.6 of the country’s overall employment.”
MSMEs “account for 25 percent of the country’s total exports revenue. It is also estimated that 60 percent of all exporters in the country belong to the MSME category. MSMEs are able to contribute in exports through subcontracting arrangement with large firms or as suppliers to exporting companies.”
As the backbone of the Philippine economy, MSMEs do not get their fair share in the support needed in terms of readily available credit. Based on the report of the Asian Development Bank, “Asia Small and Medium Sized Enterprise Monitor 2020,” bank lending to the MSME sector in the Philippines in 2019 amounted to only $11.6 billion (about P568 billion), which is far below the totals of the Asean-5: Thailand ($218.8 billion), Indonesia ($79.9 billion), Malaysia ($68.1 billion) and Singapore ($58.5 billion).
Our key to economic recovery are the MSMEs. They are on the ground, in communities and form part of the supply chain of the nation when big corporations can’t function since they are all in Mega Manila. And yet, Republic Act 9501, which ended in 2018, has not even been reviewed to evaluate its impact in sustaining the growth of MSMEs. This law mandated banks to allocate 10 percent of their total loan portfolio to MSMEs. But the percentage of Philippine “MSME nonperforming bank loans (NPLs), or overdue loans in the total MSME loan portfolio of banks, is the highest among the Asean-5. The country has a 5.8 percent NPL, followed by Thailand’s 4.7 percent, Singapore’s 4.2 percent and Malaysia’s 3.7 percent. Indonesia has the lowest NPL percentage at 3.6 percent of its MSME loan portfolio. The Bangko Sentral ng Pilipinas (BSP) is carrying out measures to support MSMEs to include incentivized lending, extension of financial relief to borrowers and support for sufficient levels of domestic liquidity and economic activity.”
The vacation rental platform, Airbnb, thought it was the end of their business with Covid-19, but it weathered the storm and is about to go public. Airbnb has recovered more quickly than traditional hotels as travelers seek whole homes in rural areas far from crowds. New unicorns are pursuing IPOs, which is good news to a global slowdown.
The lesson there is to let the national government provide the ecosystem of growth of MSMEs via a credit window, skilling initiative and robust internet to ensure ease of doing business.
Let’s get our act together and ensure MSMEs will see their fruition as we build resilience in the new business models. They will provide the economic impetus needed to reboot.
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