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The New
Engines Of Growth
By Michael Alan Hamlin
July 26, 1999
I've pretty much given up on the
hope of fundamental corporate restructuring in traditional enterprise
sectors. Our relatively mild economic crisis compared to the rest
of the region and the nascent, but apparent recovery, government
backsliding on market liberalization, and resistance to restructuring
among large, inefficient manufacturers have terminated the rebirth
of these companies.
On top of that, government doesn't
have a clue about potential sources of economic growth. It talks
at length about agriculture, foreign investment, and liberalization,
but foreign investment and liberalization are taking more hits than
they are making, and agriculture remains as hopelessly inefficient
and unproductive as ever. And that's not going to change because
change would require a fundamental reorientation of the administration.
First, it would have to shift from an unenlightened, reactive policy
orientation to an enlightened, proactive orientation. Second, to
do that, it would have to really give a damn.
Fortunately, this doesn't mean that
all is lost. What it does mean is that government will become increasingly
irrelevant to the economy, and that traditional sectors will make
little, if any, contribution to growth. To be fair, this is more
and less the circumstance in most of the rest of the region, too.
But so is the emergence of new engines of growth for the economy.
Those engines of growth are found
mostly in three related sectors, high technology, Internet- and
e-commerce (both business-to-business and business-to-consumer),
and "infocommunications." And these three sectors will
have a profound impact on the business models, operations, and sources
of profitability of all companies.
Throughout Asia, even at the height
of the crisis, revenues and profitability in these three sectors
was growing rapidly. Thanks primarily to the powerhouse U.S. economy,
demand for Philippine-assembled or produced semi-conductors, for
instance, zoomed 36 percent in 1998 and close to another 20 percent
the first quarter of this year. The numbers are even better in the
rest of the region.
Let's jump to infocommunications,
which includes everything from parcel delivery to telecommunications.
In 1998, Globe Telecom returned to profitability while Smart Communications
strengthened its industry-leading position in cellular telephony.
In 1999, it introduced its new digital service, entering direct
competition with Globe. Other cellular service providers haven't
done as well, but they have been plagued by ownership and management
problems.
That brings us to Internet- and e-commerce.
From previous columns, you're (hopefully) aware of the dramatic
growth in Internet usage in the Philippines, which is on par with
growth in Singapore. Unlike Singapore — where government corporations
dominate telecom and Internet service — it has been the private
sector in the Philippines that has been primarily responsible for
this growth. I should note, however, that the Singapore providers
are also involved in joint ventures here, but with private-sector
firms, not government-linked or owned corporations.
Business-to-business Internet- and
e-commerce has grown rapidly in the Philippines principally because
large retailers like SM are forcing suppliers to integrate their
systems to increase efficiency and productivity. Business-to-consumer
Internet-commerce has lagged because government — principally
the BIR — has penalized progress by requiring that all bonafide
transactions be on paper. Most banks won't accept paperless credit
card transactions for this and other reasons, although that's beginning
to change.
Change in fact is likely to accelerate
dramatically as entrepreneurs and innovative firms move to quickly
acquire dominate market share in both retail and services over the
Internet. While skeptics belligerently insist that the market isn't
viable because most people don't have access to the Internet —
or money to spend — there are indications that will change
quickly.
One reason is cable television and
technology convergence. Cable offers the prospect of providing Internet
access at extremely low cost. But why deliver the Internet to folks
who have little expendable income? There must be some reason, you'd
think, for China's recently announced plans to deliver the Internet
to 30 million cable subscribers, most with similarly low levels
of expendable income. And indeed, for countries, the principal benefit
will be educational, as huge masses of the citizenly become technologically
savvy, increasing their value-added as workers, and their potential
for knowledge input.
But as we've noted, in the Philippines
growth has been and apparently has to be driven by the private sector.
And the private sector has to have a return on investment. For the
cable companies, the incremental investment is easily offset by
nominal increases in rates. But how about the "netpreneurs"
that are looking to sell?
Entertainment will be a big beneficiary,
as another distribution channel opens up, and advertising revenues
soar. So, too, will other content providers like newspapers. Ironically,
cable provides these content purveyors the opportunity to dramatically
increase circulation without increasing costs of physical output
— paper and ink — and struggling with diminishing returns
as market share is expanded to increasingly unprofitable customers.
Suddenly, all those unprofitable customers become valuable readers
advertisers want to go after.
Internet-business will grow other
ways as well. Without revealing too much of this "netpreneurs"
strategy, he has plans to install Internet kiosks at consumer finance
companies — pawn shops — throughout the country that will
facilitate the flow of funds domestically and internationally between
not just business and consumers, but between family members. That's
a big part of the reason Citibank, for instance, has taken to calling
itself an Internet company rather than a bank. The cost of an Internet
transaction is a small fraction of the cost of an ATM transaction.
The good news in all of this is that
traditional companies that successfully resist change won't matter
much in terms of economic expansion, but prosperity will still be
attainable because non-traditional firms will take over responsibility
for growth. Of course, successfully resisting change doesn't mean
the traditional companies are safe. They will still lose, and probably
in a bigger way. And if they would get with the program, they could
contribute.
Asia's second economy led by non-traditional
firms is good reason to be optimistic about the future. For anyone
who wants to be where the action is, it's the place to be.
Copyright © 1999 The Events
& Awards Managers of Asia and
Hamlin-Iturralde Corporation. All rights reserved.
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