is Indonesian SMEs actually ready for the AEC 2015 ?
The day of the implementation of the ASEAN Economic Community (AEC) 2015 is only left four months from now. There is little doubt that regional trade and investment liberalisation in the context of AEC 2015 will generate immense competitive challenges for individual member states. Although, the real impacts of the AEC 2015 on the economy of member states, especially on their small and medium enterprises (SMEs) remain a much debated and controversial subject. At least, theoretically, at an aggregate level, the broad benefits that are generated from the AEC 2015 include: improved resource allocation not only between sectors or industries within the member states but also between them; access to new and better technologies, inputs and intermediate goods; economies of scale and scope; greater domestic competition; and the availability of favourable growth externalities, such as the transfer of know. These factors, in turn, influence the level and composition of exports and imports. The change of relative price induced by free trade between member states causes a more efficient reallocation of resources. And more importantly, it also enables the expansion of economic opportunities by enlarging the market size.
Now the question, how is the readiness of SMEs in individual member states? This is particularly an important question for Indonesian SMEs. One way to assess the readiness of local SMEs in Indonesia (as in other member states) is to face the AEC 2015 or their capability to compete not only in regional but also in domestic markets against imported goods, is by examining their export performance. At the regional level, the estimated percentage of exports by SMEs in total exports of individual member states, unfortunately it varies by authors or reports. Official data on SMEs exports in some member states are either not available or difficult to verify. All member states have databases on their SMEs, but mostly on total number of units, total employment created and total output generated; not on total volume or value of exports. So, it is not easy to examine how important these enterprises are for national exports. However, based on limited information sources, mainly research papers and official estimates/assessments, direct contribution made by SMEs to total export earnings in the region is between 20 and 30%. By member states, SMEs in Thailand seem to be the more export-oriented ones, with average share between 30 and 40%, followed by the Philippines and Viet Nam ranging from 20 to 29%, Malaysia 15 to 19% and Singapore around 16%.
Indonesia, as the largest economy with the largest number of SMEs in the region, just started to collect data on export of the enterprises recently, by the State Ministry for Cooperative and SME (Menegkop). From 2001 to 2013 (the latest year that data are available), the growth annual rates of SMEs' total export show an increasing trend. However, these enterprises are still much weaker than large enterprises (LEs) in doing export: in 2013, total exports of SMEs were not more than IDR 90t (approximately US$6.3b) compared to almost IDR 980t (approximately US$68.6b) from LEs, while total number of the first group of enterprises is around 56 million units compared to only 4968 LEs. Within the SMEs, there is variation between sub-categories, which suggests that small enterprises (SEs) may have the least chance to gain the expected benefit of broader market opportunities from the implementation of the AEC 2015, as their export contribution in 2013 are around IDR48t (approximately US$3.3b) compared to medium enterprises (MEs) with IDR 134t (approximately US$9.3b).
There are at least two important features of SMEs in Indonesia which are involved in export activities. First, not all of them sold all of their products abroad; most of them are still very dependent on domestic markets. In other words, if only SMEs with 100% export are counted for, the number of exporting SMEs in Indonesia can be much smaller than they are now. Second, most of exporting SMEs started to service also foreign markets were in fact not self-motivated, but encouraged by e.g. exporting companies or trading houses. These SMEs are better to be considered as indirect-export oriented SMEs. Traders or trading companies usually collect products from or give orders to, regularly or irregularly, SMEs. Many SMEs also do export indirectly via subcontracting systems with LEs in which SMEs manufactured semi products and then finalised by LEs. This system of production link between SMEs and export oriented LEs in Indonesia is common in rattan, furniture and garments.
There are at least two main reasons that many export-oriented SMEs in Indonesia could not conduct export activities directly. First, there are institutional and business constraints where SMEs cannot solve, namely (i) they do not have direct access to export market or no access to information on export market opportunities and requirements; (ii) they are not able to adjust to rapid changes in export market; (iii) high risk in payment and shipment; (iii) time lag in the payment, while the small exporters/producers need daily cash flow very badly; and (iv) high cost for direct export activity. Second, financial problem due to (i) capital owned by SMEs is limited, especially investment capital; and (ii) lack of support from financing and guarantee institution.
Another way to assess the readiness of Indonesian SMEs in facing the AEC 2015 is by examining the utilisation rate of existing free trade agreements (FTAs) by the enterprises. Theoretically, a firm utilising existing FTAs shows its seriousness or is highly motivated to do export, and it can be said that this firm is more ready to face the AEC 2015 than firms which do not use existing FTAs.
As of 2013, the ASEAN and its member states were involved in over 90 FTAs. While many of these FTAs are already in full effect (e.g. those with China, Japan, South Korea, Australia and New Zealand, and India), others are either still under negotiations or in the early stages of discussion with trading partners. In addition to an internal FTA among the member states (ASEAN Free Trade Area, or AFTA), which was upgraded to the ASEAN Trade in Goods Agreement (ATIGA) in 2010, ASEAN and its member states are also party to numerous bilateral and regional FTAs, as well as participating in other regional trade arrangements beyond that of ASEAN, such as, inter alia, the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP).
FTAs are usually designed, among other things, to facilitate and improve trade and investment flows between the participating countries. However, the extent to which an FTA could increase trade and investment flows would depend largely on the utilisation of this FTA by businesses in the participating countries. All exporters, large and small, are required to follow certain procedures to benefit preferential benefits of such a commercial pact. More specifically, SMEs must be able to meet the so-called Rules of Origin (RoO) requirement, or the terms set out in trade agreements that define how a product’s country of origin should be defined, acquire the CoO from relevant agencies and/or business associations, and, subsequently, submit the CoO to the custom agencies in the importing countries. Economists usually assess the level of usefulness and attractiveness of an FTA by observing the so-called utilisation rate of an FTA, which could be measured through the use of Certificate of Origin (COO) data collected by customs authorities or business association databases.
Although official data on the utilisation of FTAs by businesses, particularly the SMEs, in the region, are scarce, available studies and commentaries made in some member states suggest that these enterprises have not generally taken the advantage from these trade pacts. As in other member states, export-oriented SMEs in Indonesia face a number of barriers and perceived disincentives to trading under FTAs. Despite the active stance of the Indonesian government to encourage local firms, including SMEs, to make use of the country’s existing FTAs, most export-oriented SMEs felt intimidated by the complicated rules and procedures associated with the use of FTAs. In addition, misconceptions about FTAs, complicated trade procedures in the partner countries, unharmonised codes within the ASEAN region, and the difficulty to access the most up-to-date information concerning the regulations dealing with FTAs have become the major disincentives for SMEs in Indonesia to fully participate in these FTAs. The common complaint expressed by many SMEs or even also LEs in Indonesia, about FTAs is the complex bureaucracy and additional costs associated with acquiring the Certificate of Origin (CoO) and the associated Rules of Origin (RoO).
One study (Friawan, 2012) shows that although the total number of CoO issued under the AFTA, Indonesia-Japan Economic Partnership Agreement (EPA), ASEAN-China FTA, ASEAN-Korea FTA, and the ASEAN-India FTA had been on the rise from 26,085 certificates in 2007 to 205,775 certificates in 2010, only 16-17% of Indonesian-based firms were using FTAs pursued by the country and/or ASEAN. The percentage rate for Indonesia was somewhat lower compared to those of Malaysia (24% in 2012), Vietnam (31% in 2011), and Thailand (the above-mentioned 47.3% for 2012).
In overall, there are at least three reasons why the utilisation rates of FTAs are generally low in Indonesia (as also in other member states): (1) the lack of information on FTAs amongst ASEAN-based firms; (2) low margins of preference; and (3) delays and administrative costs associated with documenting and complying with the Rules of Origin (RoO). Other factors contributing to the low use of FTAs includes the existence of other trade-related initiatives, such as the export processing zones and Information Technology Agreements, which provide alternative incentives for exporters, and the non-tariff measures in partner countries that inhibit import, and, accordingly, inhibit the use of FTA preferences.
To conclude, based on limited indicators, i.e. export share of SMEs in total export and utilisation rate of FTAs by local SMEs, Indonesian SMEs in general is still not ready to face the AEC 2015. Even in the past few decades, Indonesian market has been increasingly invaded by imports for all kinds of goods, including goods that Indonesian SMEs traditionally used to have comparative advantages such as furniture, food and beverages, leather products and textile and garments. Many traditional market places in big cities like Jakarta, Surabaya and Bandung which used to sell only local-made products such as cloths and footwear, now already occupied more than 50% by imported similar products. Yet to be seen, may be one year after the implementation of the AEC 2015, whether Indonesian SMEs are benefited from it.