The prominence of consumer-focused platforms in Indonesia such as Gojek, Tokopedia, and Traveloka have historically eclipsed the MSMEs opportunity in SEA’s largest economy. However, a closer look at the numbers and challenges faced in this promising sector quickly reveals the vast potential for technology platforms to create massive multi-billion-dollar value and impact.

This is why AC Ventures have a core thesis around technology-enabled solutions addressing the MSMEs category and why we strongly urge both entrepreneurs and investors to evaluate more opportunities here.

In this post, I review the key challenges MSMEs face and several examples of how technology-enabled businesses are solving them.

According to the data from the Ministry of Cooperatives and SMEs of The Republic of Indonesia, UMKM (MSMEs) are the engine of growth for the Indonesian Economy, with over 60 million registered MSMEs contributing approximately 61 per cent of the country’s GDP.

Meanwhile, the Central Bureau of Statistics (BPS) in 2018 released, this enormous category employs over 116 million people, which is equivalent to 97 per cent of Indonesia’s labor force.

There is tremendous value in providing solutions to MSMEs and opportunities to tap into Indonesia’s consumer market through these MSMEs. The contribution and significance of MSMEs to the Indonesian economy are far more significant than that of other large economies like India, where the sector forms just 30 per cent of GDP.

This is one reason why MSME-focused technology ventures in Indonesia may emerge as even more valuable businesses than in other more mature emerging markets. 

MSMEs in Indonesia range from micro-enterprises with assets under IDR50 million (~US$3,500), which make up 98 per cent of these businesses, to medium enterprises with IDR500 million – IDR10 billion in assets.

There is great diversity in these businesses, both in terms of scale and nature of industries. While they mostly face similar challenges, the product solutions must be tailored to the size and specific industry, creating an opportunity to generate multiple ventures. 

MSMEs owners face several challenges in their businesses ranging from inefficient sourcing channels for their products, offline management systems prone to human error, lack of access to credit to support or expand their operations, and small sales exposure due to reliance on small physical retail space.

Also Read: BukuWarung rakes in US$60M to build an OS for Indonesia’s 60M MSMEs

These core challenges can be addressed through technology platforms, which can drive lower costs through greater efficiency, minimise dependence on human operation, open up access to financial services and generate higher sales volumes. 

Previously, one of the significant hurdles for technology companies to serve MSMEs was the receptiveness towards adopting technology. While Indonesia had seen massive internet penetration growth, owners were still hesitant to implement technology (often driven by doubts in reliability and an unwillingness to change).

However, COVID-19 placed MSMEs in the position where they needed to adapt, and this has been a critical factor in driving forward the technology adoption of these enterprises. At the end of 2020, 30 per cent of the online consumers in Indonesia are new users providing massive growth in the technology sector such as online payment, e-commerce delivery, e-commerce sales, and online lending.

Fixing fragmented supply chains

According to Euromonitor data, traditional retailers contribute to 70-80 per cent of Indonesia’s US$300 billion retail markets, which is expected to gain another US$120 billion by 2025. Hence, despite the enormous growth of online commerce, most business is still conducted offline and primarily in traditional channels.

Unfortunately, the supply chain connecting these millions of retailers to FMCG Principals and Distributors is highly fragmented, resulting in a myriad of pain points faced by retailers such as low pricing visibility, limited SKUs, unreliable and inefficient delivery (often retailers must shut their store to restock inventory). 

Meanwhile, principals are looking to increase cost efficiencies in product distribution and, more importantly, to expand into new lucrative new markets. Ula is an example of a company that solves both of these issues, bringing reliable delivery, best prices, broad assortments, and financing options to traditional retailers so they can focus on their customers and on growing their business.

Ula opens up access to thousands of retailers without having to incur high distribution costs (such as CAPEX for warehouses or investing in fleets) for principals.

Financing the underbanked MSMEs

Another key pain point for MSMEs is access to credit. There is an estimated financing gap of US$50-70 billion to MSMEs in Indonesia, resulting in over US$130 billion in lost value creation in this sector alone. There are two major roadblocks for MSMEs to get financing.

Firstly, MSMEs are generally not considered creditworthy by the banks since they typically do not have assets that can be used for collateral. Secondly, bank branches are very limited in tier-2 and tier-3 cities, making it harder for MSMEs to even apply for financing.

Also Read: Building trust among young customers: How banks can benefit from open banking

Indonesia had seen numerous fintech players trying to address this issue. However, even with fintech lenders, there is scarce information on which to understand the financial health of their potential borrowers. As a result of this, data from the Financial Services Authority (OJK) in 2020 shows, fintech lending companies only disbursed a total of US$5.0B in 2020, still far from addressing the financing gap.

Historically many of these MSMEs, especially those at micro or warung scale, were run simply on a “product in and out” basis with no inventory or transaction tracking. BukuWarung saw an opportunity to start providing a fundamental ledger app that made it easy for owners to enter sales information and thus provide data around the scale and frequency of transactions at these businesses.

The business has since expanded on its core application to include payments and features that help merchants instantly set up an online store, which contribute to creating a comprehensive, holistic view of the financial health of the businesses.

With these features, Bukuwarung allows MSMEs to make a financial profile that can be used by the banks and/or fintech companies to assess credit risk and thereby bridging the gap for MSMEs to get financial service access.

Expanding sales reach and improving operational efficiencies

For larger SMEs, technology platforms can provide significant benefits such as operational cost savings, more streamlined work processes, a better understanding of customers, and access to additional sales channels. 

Given the nature and scale of these businesses, the software solutions may need to be more comprehensive to address the pain points fully. Sales and implementations often require on-the-ground teams to execute, resulting in longer lead times and a slower scale-up rate.

While the market is sizeable, many investors often pass on these opportunities citing perceived revenue ceiling from subscription fees. Many SMEs are still reluctant to pay material fees for software, unlike in more mature markets. 

The real opportunity here lies in building revenue-generating adjacencies that can be layered onto a platform that has a strong SME user base. This often leads to a more cost-efficient way to scale revenues through downstream and upstream channels for SMEs.

Also Read: How my startup is enabling homemakers make 2x the minimum wage in Jakarta

For example, ESB works with thousands of F&B establishments across Indonesia, providing a complete end-to-end platform managing orders, payments, and inventory. However, they also provide a valuable feature that enables restaurants to offer dine-in contactless ordering for customers, which boosts operational efficiency and has become an essential part of the post-pandemic procedure.

Another feature will connect suppliers directly to the restaurants to reduce stock outs and gain efficiency in waste management. These features represent scalable ways for ESB to increase revenues as their clients grow. 

Another example is Majoo which provides a full suite of digital tools to stand-alone SMEs from hairdressers, laundromats, and general retailers. The full-service platform runs everything from the point of sales to business management and payroll.

Ultimately, to digitalise SMEs, they will augment their revenues by enabling their merchants to set up online stores and connect seamlessly to online marketplaces. 

With Indonesia’s retail market contributing over US$300 billion annually to GDP and MSMEs making up the majority of this, there are substantial value pools to be unlocked through greater digitalisation of these businesses. We are confident that multiple companies will emerge from this sector, tackling different parts of the value chain and problems faced by MSMEs.

These ventures will become valuable businesses themselves and create enormous impact for the broader Indonesian, enabling SMEs to scale up efficiently and rapidly. 

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