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By Julian Matthews
March 31, 2000 -- The flurry of dotcom deals and interest in all-things-Internet in recent weeks prompted a surprise critique from Malaysia's tech-friendly Prime Minister Mahathir Mohamad in mid-March.
At the launch of a joint-venture petrochemical plant, a typical Old Economy manufacturing operation, Mahathir expressed wariness of dotcom companies whose shares have surged in stock markets worldwide. "I hope companies like the Titan Group will not only survive the challenges of the information age, but also survive long after the bubble has burst on the dotcom companies," he said.
The 74-year-old premier said Malaysia welcomed foreign investment but hoped companies would invest in "real businesses" that would outlast Internet-related ones whose true value was suspect.
The criticism seemed incongruous coming from the same person who is the No. 1 salesman of the Multimedia Super Corridor, a multi-billion-ringgit project aimed squarely at New Economy wealth creation. Barely a week later at a conference, Mahathir was ironically back on his pro-tech platform touting a K-economy Masterplan for the country.
Perhaps, the globalization-wary Mahathir just needed to vent. His dotcom diagnosis may be a stab at feverish market forces that the good doctor foresees he will not be able check from impacting the health of the country's economy again. At the height of the Asian currency crisis, the Premier repeatedly blamed foreign speculators for ruining the nation's stellar rise and displayed frustration at the inability to control these "rogue traders".
Malaysia has just emerged from the crisis, only to realize that in the interim, bricks-and-mortar manufacturing quickly went out of style. The world currently values fast-growth startups with little or no profits, on par with traditional businesses that previously rose through slow-and-steady incremental productivity gains built over decades.
The current dotcom frenzy in Asia is reflective of one that struck the U.S. two years ago. Various deals, alliances, partnerships and infrastructure building are being put together hastily out of fear of being left behind. Real-time decision-making is even ignoring the basic tenet of buying into any company—which is simple due diligence.
"The flurry of acquisitions and online-offline marriages is all about seizing opportunities early," says Chin Kwai Fatt, managing director of PricewaterhouseCoopers (PwC) Malaysia. "This is only logical. The market is not looking at fundamentals but the enormous potential to be tapped. This appears to be the best way to compete for some of the cyberspace stardust," he notes.
Chin adds that valuation of dotcom companies defies standard valuations like Return on Investment (ROI). He cites Intel's Andy Grove who, when asked to comment on ROI of e-business, shot back: "Are you crazy? This is Columbus in the New World. What was his ROI?"
Separating the dotcoms from the dotcons
So how does one separate the bull from the bullish, and the dotcoms from the dotcons? "My advice to investors is to assess the attractiveness of the dotcom's business model and its management's ability to execute," says Chin.
He expects that some dotcoms will eventually fail due to poor execution or competition from too many players in the same market space. "A shake-out is inevitable when markets are driven by a worldwide infatuation for Internet stocks and on young startup companies. The entry of established players into the dotcom arena will also pose challenges to these startups. Market differentiation is important in an overcrowded arena--you have to have a product or service that is unique and not easily duplicated."
Azmi Ahmad, head of managed services, Skali.net, the one-stop dotcom service unit of Skali Group, suggests the reason for the many mergers and acquisitions of late could be to acquire ready experience and expertise on the cheap, rather than to take the high road of developing the dotcom in-house. "Every company these days is faced with the question of make or buy. There could be some which just want to ride on the dotcom wave, but I would like to think that the majority of the moves are backed by logical business rationale. The benefits of e-business are very high and should not be understated," he adds.
The fear of having upstart Net players strip away traditional revenue streams is a very real one. Businessmen are less skeptical of the Internet these days, and more open about Web-enabling their existing enterprises.
Adds Azmi: "The question Skali.Net faces now is not 'why should I?' but 'how to?' and for 'how much?' There are many initiatives being implemented by corporations and netpreneurs which are not publicly known since they do not get the airtime. We should see them starting to come onstream from the third quarter of 2000 onwards."
Azmi does not believe the current crop of dotcom players may fold in the near future, but believes there will be some merging in the medium term.
The driving force of dotcom mania is the potential of e-commerce. By all analysts' accounts, e-commerce via government-to-business, B2B (business-to-business) and B2C (business-to-consumer) transactions is set to explode in Asia within the next five-year timeframe. Gartner Group projects that the value of B2B e-commerce in the Asia-Pacific region, excluding Japan, will jump from US$9.2 billion in 1999 to an astounding US$995.8 billion in 2004.
"Asia is behind the U.S. but could leapfrog mature economies as access shifts from PC to mobile or wireless devices," says Mark Jarvis, senior vice president of worldwide marketing at Oracle Corp. He estimates that 60 percent of the global supply chain is already in the hands of the North Asian countries of China, Taiwan, South Korea and Japan. "So the world cannot go global without the active participation of Asia. What's more, Asians are smart. They play a game of patience and adopt a wait-and-see attitude first, but jump in deeply when they see the benefits. This is already happening."
Jarvis expects more startups emerging that will copy U.S. business models. "We're likely to see more cyber-conglomerates spring up in Asia as established conglomerates either move online or start up new conglomerates to take over and cannibalize their existing ones. The motivation for the shift is the same as U.S. companies--to get better returns for their shareholders," he adds.
Jarvis notes that Asia could well outrun Europe in the e-commerce race in the near future, especially if infrastructure continues to improve and the various barriers--foreign ownership limitations, online payment modes and banking restrictions--continue to be dismantled.
Oracle is a key supplier of Web-enabling software and claims that all of the top 10 B2C players and nine out of the top 10 B2B players use the Oracle platform to conduct business on the Internet. Among these are Cisco Systems, Amazon.com, Yahoo!, Excite, eBay and Looksmart.
Accelerating the B2B pace in Asia
On the local front, PwC's Chin concedes that e-commerce is still in its infancy.
Although Malaysia was among the region's first to adopt the Internet, its take-up rate has been slow. There are only four ISPs in the country and Internet penetration hovers at about 6 percent; significantly lower than countries like Hong Kong, South Korea, Taiwan and Singapore. Malaysian businesses also appear to be dependent on paper shuffling and physical middlemen to smooth over deals rather than on transparent electronic agents for procurement purposes.
However, Chin believes that projections of exponential e-commerce growth in Malaysia--by one estimate, about US$4.2 million in 1999 jumping to US$47.4 million in 2000—are "not unrealistic".
"Companies here are aware that there are abundant opportunities in electronic payment and procurement systems. What is needed is the courage to turn the business upside down and inside out. The bundling of online commerce with physical interaction--the clicks-and-mortar combination--will likely accelerate e-commerce," he notes.
Skali's Azmi also says the inherent need for human interactions will not disappear. "The physical aspect is still necessary. Even for e-companies, meeting potential partners in person at least once is a norm. But dealing with regular suppliers and customers for B2B need not be done physically. Purchase orders are already now often sent by fax, mail or email. Meetings are generally for major problem solutions or for valuable socializing," he adds.
Security and credit card fraud are oft-cited reasons for not porting existing businesses on the Internet. Although Malaysia was one of the first in the world to adopt a Digital Signature Act in 1997, online verification systems have yet to catch on.
Richard Jacobson, senior Internet analyst at IDC Asia Pacific, says research suggests that electronic payment is not a pre-requisite for e-commerce. "Only a very small percentage of e-commerce transactions currently are direct, such as credit card payments over the Web. Even projections up to 2004 suggest that in Malaysia, direct transactions will constitute only 34 percent of total e-commerce. In order for companies to succeed in the e-commerce world, there must be some level of flexibility and openness. If you restrict your potential customers to just one form of payment, you will be short-changing yourself," he observes.
Although it is early days yet for e-commerce in Asia, the consensus is that companies that immerse their entire organization in the technology and rapidly adopt new economy business practices will stand to gain the most.
The less optimistic analysts predict that some "creative destruction" can be expected along the way. The rush by so many players to get in early in "Internet time", armed with vague projections, will eventually lead to a fall-out, say these analysts.
Already, in mature markets in the U.S., there are signs that a shakeout has begun.
Whether companies will sink or thrive in the current upheaval is anyone's guess. The truth is no one has all the answers. But sitting on one's hands while the world is learning to swim with the New Economy tide may be asking for a drowning.
(Published in CNET Asia, March 3, 2000)
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