9MP: Brilliant Plan Now For The Execution

If I had to describe my thoughts about the Ninth Malaysia Plan (9MP) in one word it would be “brilliant”. By identifying human capital as the driver of the future and allocating 20% of the budget towards its development, the Plan shows that our planners realise Malaysia’s future lies in its human capital and in science and technology, thereby emulating Finland and India and not China or Vietnam.

Technopreneurship and biotechnology and information and communications technology (ICT) firms are clear winners in the 9MP. The new focus on productivity and competitiveness is admirable and the use of ICT in government and the private sector will definitely drive up productivity, which has been one reason for the continued growth of the US economy.

In developing human capital we need to focus on the quality of our people and not worry about quantity. We will never match the sheer numbers from India, which will produce almost 1 million ICT professionals in the next 5 years. Malaysia will only produce an additional 120,000 technology workers but if we ensure that they are of a very high calibre then this workforce is more than adequate for us to compete in the k-economy. We must ensure that they have all the necessary competences and skills necessary to match the requirements of technology oriented firms and are capable of conducting research and development at the highest levels.

Another important element of developing our human capital is the need to ensure that educators and academics themselves have the requisite skills and knowledge to educate students. Thus greater effort must be expended by the Ministry of Education and Ministry of Higher Education to train teachers and academics on the latest technologies and teaching methods as well as improving their knowledge of science and technology. Additionally their language skills must also be improved to ensure that knowledge is properly communicated to students.

The increase in R&D spending to 1.5% of GDP is very promising. Although it is still far from the levels spent by Finland (3.5%) and Sweden (4.3%), it is edging closer to American (2.5%) and European Union (2%) spending. Naturally the quantum will be smaller because of our smaller economy, but it is a very good start. However, the Plan envisages that 70% of R&D spending will be by the private sector. This can be achieved if government linked companies; multinational companies and MSC status companies increase their spending. The Plan recognises that collaboration between the government, universities and the private sector is the key to R&D success and although this is a challenge, it is doable if all stakeholders cooperate and move forward.

The largest spend on ICT is for the computerisation of government agencies with a budget of RM 5.7 billion, an increase of 170% over the 8MP. This is a huge budget and indicates the intention of the government to improve on its own productivity. However, bids for government contracts have often been done through consortiums, many of whom are just groups of companies cobbled together to tender for projects. When such consortiums win tenders they pass on the work to technology companies who are only paid a small portion of the tender, sometimes as little as 10%. Often the work performed is of poor quality and many projects have floundered or failed completely such as the Telemedicine project, once a major MSC Flagship.

We must not allow this to happen again because improper use of funds cheats the taxpayer and does not achieve the very productivity that was hoped will happen. It also means unscrupulous characters and companies will benefit at the expense of real technology firms who need the work to grow their companies and contribute to R&D as desired by the government. The government must ensure equitable access to contracts by real companies based purely on ability and quality and not on dubious connections or networks. The old methods must be discarded if we are to truly benefit from the Plan.

Technopreneur development is clearly recognised in the Plan and this bodes well for the future. The collaboration between academia, government, semi-government agencies such as MDC and Malaysian Biotechnology Corporation (MBC), the private sector and industry organisations like Technopreneurs Association of Malaysia (TeAM) is necessary to ensure proper development of Technopreneurs and potential Technopreneurs from institutes of higher education. There has already been a lot of effort from these parties but now it is time to take this to a higher level by incorporating Technopreneurship programs at all levels from schools and tertiary institutes to the many incubators being formed in different states. The quality of such programs should be benchmarked with similar programs in the USA like the Stanford Technology Ventures Program.

It is also almost embarrassing that Malaysia is not even part of the GEM Consortium which conducts the most extensive entrepreneurial research in the world and releases the Global Entrepreneurship Monitor (GEM) an annual report on entrepreneurial activity in many of the world’s leading economies. Singapore and Thailand are part of GEM but despite the interest shown by MDC last year the level of interest in the government has been very low. If we want to be part of the k-economy and truly want to develop Technopreneurship then there is no question that we must be part of GEM as this enables us to better understand levels of entrepreneurship, problems faced and the future potential for entrepreneurship in the country. I am hopeful that we will join the consortium very soon.

Finally and importantly there is clear recognition in the Plan on the need for pre-seed, seed and early stage funding for technology ventures. However, other than Malaysian Venture Capital Management (Mavcap), which funds pre-seed (under the innovative Cradle program) and early stage ventures, few if any VC funds support early stage ventures and this has been one factor that has held back the development of more technology firms and research in new technologies. In the new economy firms need adequate funds to develop prototypes, do more R&D and invest in human capital before they can be successful.

In the West, Angel Investors and early stage VC funds have played major roles in developing the world’s most successful technology firms from Google to Sun Microsystems to Amgen (currently the world’s most successful biotech firm). Major VC firms like Kleiner Perkins and Draper Fisher Jurvetson have all been extremely successful in funding early stage ventures but most VC firms in Asia including Malaysia are more risk averse and prefer to fund later stage ventures. Thus adequate funds under the 9MP should be directed towards seed and early stage ventures to ensure that there is a pool of firms that can grow into successful ventures.

The 9MP is the right Plan for the right time and our planners have been spot-on in identifying what needs to be done for the future. Now everything depends on getting the execution right, equitably. If the government can get this right, then the future is very bright indeed for Malaysia, despite the emergence of India or China or for that matter anyone else.

10 April 2006

China - A powerful economic threat

I just returned from a trip to Australia and I must say that it really opened my eyes to the real threat posed by the emergence of the powerful Chinese economic machine. China is no longer an emerging economy, it is in fact the single largest threat to the economies of South East Asia especially Malaysia.

I remember in previous overseas trips from Europe to America to Australia, Malaysian made products were available in many shopping centres. Now, everything is made in China. I could not find a single Malaysian made consumer item in any of the shopping centres in Australia.

The threat of China is not only as a low cost producer. Vietnam, Myanmar, Indonesia and India are also low cost producers, yet there are very few products from these nations on sale. Other than being a low cost producer, China is also savvy at marketing its products. Chinese companies now dominate the garments industry and if one studies historical trends, most nations, including Malaysia, moved from garments to higher value products in 10 to 20 years. This time span is even shorter today. China has also started moving into electronics and higher value products.

What does this have to do with the New Economy?

Consider Singapore. It has been moving aggressively into high end manufacturing especially electronics over the last 10 to 15 years. Today it is a successful electronics manufacturing centre for American and European multinationals. It is also in technical recession due to the slump in electronics. The first response of all these multinationals? Close down the plants and move to low cost nations, preferably China.

Even the tax and financial incentives offered to these MNCs are never enough to keep them if labour and operational costs make the difference between profitability and liquidation. The ultimate goal of all nations is to increase the per capita income of its citizens and keep GDP growing at reasonable rates. The time will come when labour and operational costs are too high and companies move along.

It is happening in Singapore, soon it will happen in Malaysia. We are fortunate to have lower costs than Singapore, but the message of Dato Craig Barret CEO of Intel is clear. At present he is satisfied that the benefits of Penang and its lower costs still justify continuity of the Intel facility in Malaysia, however, the hidden message is that if there is a more compelling reason to move then he will do it. The corporate mantra of MNCs is maintaining profitability. The bottom line is all that matters.

We must learn the Singapore lesson. Too much dependence on a single industry can be crippling especially if that industry can be easily replicated elsewhere. Manufacturing and assembly can be done anywhere by anyone. Malaysia too is very similar to Singapore. Most of the companies in Penang are assembly plants. Statistics prove that we import most of the key components from overseas like Japan and Taiwan and merely reassemble them here for re-export. This is a dangerous situation to be in.

Malaysia is the “Lucky Country”. Just when electronics are in a slump, higher crude oil and palm oil prices will save the nation. When palm oil was down, manufacturing saved the day. How long can we depend on luck and the grace of the Almighty.

It is time for a rethink of overall policy.

We are already a key electronics manufacturing (or more likely assembly) centre with large multinationals like Intel, Dell, Sony and Samsung. However, to ensure that they do not move the facilities elsewhere, we must devise new policies and new businesses.

The New Economy is also about new technologies and designs. Malaysia must move away from assembly to design and development. Intel has started this by announcing that it will set up a Design and Development (D&D) centre in Malaysia to compliment its facility in Penang.

Assembly can be done by anyone even in countries with low education levels. However for D&D there is a requirement for higher levels of education especially in electronics and engineering. Malaysia has among the highest literacy rates in Asia, yet the number of high quality engineers and science graduates is very low.

Malaysia needs to emphasise policies and incentives to move higher up the value chain. Although the Government has been talking about this, nothing concrete has been done and Foreign Direct Investments have still been in manufacturing and assembly plants.

Government grants too need to be reviewed. The current grant process emphasises smaller scale R&D and not on the scale required to be a major player in D&D. The Government must take the lead here and set-up special R&D and D&D centres in the major Universities like Universiti Sains Malaysia and the Multimedia University specialising in fields like chip design, robotics, electronics and photonics.

We also need to create training and education with greater emphasis on R&D and D&D. The training must encompass not only University students but also employees of MNCs and other major corporations.

We need to work closely with major Universities like Massachusetts Institute of Technology, Oxford and other European and Japanese Universities that specialise in R&D and D&D. The current foreign Universities in Malaysia concentrate on the usual IT and business courses and this is a dire waste of the resources of these Universities.

The Government must take the lead to invite the major research based Universities to Malaysia and set-up special Departments and Faculties solely based on research. Funds must be provided for research and this will attract talent from overseas to move their research to Malaysia. Research funding is a major concern of all researchers and if the Malaysian Government is willing to fund high-level research based on our needs then we can attract the best brains to Malaysia. The spill over effect of this is the education of the Malaysian population.

Malaysia is an attractive place to work and research but we must be very focused and targeted in the type of research being done. Semiconductor technology is the key to keeping the massive electronics industry in Malaysia and we should work towards producing very high value chips not merely assembling them.

In the future we must move from semiconductors to other electronic products.

It is time for us to take the lead in research before nations like Singapore and India attract the best to them. As we speak these nations are plotting their future strategy. We should not be left behind and we should not be followers. We can and must be leaders.

16 August 2001

Time to dig in as venture capital investments dry up

Technopreneurs have to start accepting the fact that venture capital funds are going to be hard to find for a much longer period of time than previously expected. The current scenario of poor economic fundamentals as well as the War on Terrorism has created a very poor investment climate and the additional uncertainty of technology investments has all but scared most venture capital funds and investors away from this region.

Recently the Softbank Emerging Markets Fund (SBEM), a joint investment fund between Softbank Corporation and International Finance Corporation of the World Bank shut its doors permanently. SBEM, which was started in deep controversy because of the involvement of the World Bank in risky investments, was supposed to draw on the US$200mil fund to invest in ICT start-ups in the emerging markets covering South Asia, Eastern Europe, Africa, Middle East and Latin America. It had an office in Kuala Lumpur but has not disclosed if it has indeed made any investments in Malaysia.

It is clear that poor sentiments have not only affected Technopreneurs but also the financiers themselves. It is ironic that the very same investors who used to question the survivability of their potential investments go belly-up themselves.

SBEM is not the only casualty though the first one in Malaysia. Many American and European Venture firms have also shut down due to inappropriate losses in their investments or because they themselves could not secure investors for their funds. Raising investment funds at this time is extremely difficult.

Many existing funds globally are also battling huge losses in investments with the tremendous dips in valuations of technology companies. The inability to list moderately viable investments and difficulty in securing additional rounds of funding are also forcing their investee companies underwater. These are tough times for Venture Capitalists.

On a recent trip to the US, I attended a Venture Capital showcase where two companies were pitching for funds. I was surprised that the amount of funds that they were pitching for were small (USD 1.5 – 5 mil), in exchange for up to 30% of the company. What is even more surprising is that although there were many investors in the room, almost 80 by my estimation, most were Angel investors. In private discussions many were only there out of curiosity and would only invest if the investment was far less risky and the terms exceptionally good.

Many Investors also indicate that they are pulling investments out of Emerging Markets due to higher risks and instead consolidating their focus on either the American or European markets. Some funds have even returned their investors’ money as they are unable to invest them successfully due to poor market sentiments.

In terms of favoured investments, it seems that VCs (Venture Capitalists) are still looking for the Holy Grail though they are more cautious. I have heard the term “Disruptive Technologies” mentioned several times in discussions with Investors although many of them are not exactly clear what these technologies are. It just happens to be the favourite “buzz word” of investors currently as were B2C and B2B previously. Gone are the earlier 2001 favourites of Networking Technology and Photonics.

What does this mean to the Malaysian Technopreneur?

Malaysia got into the act fairly late and by the time we were ready for investors, the NASDAQ crash had badly affected sentiments and investors were starting to consolidate. Thus we missed the first boat.

Now, with the Americans more focused on the war against terrorism than on the economy and with industry after industry falling like tenpins starting with the Airline and Tourism industry, the global economy is heading for a long and painful correction. All earlier optimistic forecasts for recovery in 2002 will need to be reviewed. In a state of war, it is difficult to predict anything and economic forecasts are especially difficult.

The American public has been badly affected by the psychological fears brought on by terrorism and especially this new fear of biological and chemical warfare - anthrax, Ebola virus and sarin gas attacks. This has induced VCs to invest money in security companies and Biometrics technology is getting a lot of attention and funds.

The US economy has been held up by positive consumer sentiment but that is quickly waning. Unless the Corporations start reinvesting in technology and industry, the economy is going to slide into a deeper recession. The American economy unlike Malaysia’s is dependent on firstly the consumer and secondly the corporate sector.

The role of the US Government is minimal and even their finances are dangerously low, thus stifling what they can do. The USD 100 billion proposed injection into the economy may help, provided it is implemented fast before the economy falls too deep into recession, but bureaucratic red tape is expected to delay this. The Federal Reserve has cut interest rates to levels so low at 2.5% that unless the public starts reacting quickly, even low interest rates may not have much effect on the economy. There is still hope but it is good to be prepared for the worst.

Thus Technopreneurs here have much to think about. The American market for technology is flat at best and Europe is sliding. Many Asian economies including Singapore and Taiwan are already in recession. Fortunately for Malaysia we are fairly well insulated and being more diversified with commodities and oil and gas we are in a better position than Singapore, Taiwan or even Korea.

Our economy is also more driven by Government action and Government pump priming will have more effect here than in America or Europe. Our Technopreneurs should therefore focus their efforts on business opportunities in Malaysia and educate Malaysian corporations on the need for technology to compete better in these difficult times. Exporting their services overseas will be especially difficult as even the Indian companies, the experts at technology service exports, are going through a difficult time currently.

It is also an opportune time with Budget 2002 around the corner for the Government to adopt a long-term strategy to counter a global recession. It has done well in the past and there is every reason to expect a good budget although we hope that the Finance Minister (and Prime Minister) will seriously consider the plight of Technopreneurs and ensure that there are enough goodies for the New Economy as well.

As for the search for funds, Technopreneurs should not be too optimistic and should try and build a business that is not dependent on Venture Capital. Prior to 1995 no business was built with such investors in mind and many have been successful. There is no reason why that is not applicable to the New Economy.

Finally, don’t write off VCs. Use this time as an opportunity to get to know them better on a personal basis. Invite them to your office and introduce them to your business. Make them your friends. Then when you are ready, they will be more willing to invest because they know you and your business. Ultimately, relationships still matter in the New Economy.

17 October 2001

Move to K-economy - The 3 Es strategy

The Government has since the mid 90’s embarked on an ambitious policy to migrate the economy from an industrial based economy to a knowledge based economy. Although it could have been better implemented, the Government and the Prime Minister must be commended for their insight and imaginative thinking in embarking on such an arduous journey.

It is never easy to change the mindset of an entire nation. We have done it before by rapidly moving from an agricultural economy to the industrial economy with great success. Now the task is even greater, but not one that is unachievable. The key is in developing a comprehensive end-to-end strategy with execution being a priority. Most strategies fail not for lack of planning or thought but because of poor execution.

The necessary strategies are embodied in the three E’s of Education, Environment & Entrepreneurialism.

Education begins with the very young. We need a comprehensive education policy with computer education from year one. Computer education and familiarisation with the Internet and Information & Communications Technology (ICT) must begin from primary education. The smart schools project while commendable does not provide computer literacy for all children. While some of the brightest in such schools may become computer literate the majority of children will miss out on proper computer education.

We have to accept the fact that the future lies in ICT and Science and Technology. From the medical sciences to robotics and sports, ICT plays a key role. All children that progress to tertiary education in the future must possess more than merely a cursory knowledge of computers. Thus they must start at a very young age.

Computer education must be a compulsory examinable subject like Maths and Science from year One. All schools must be equipped with computer labs adequate for the school’s population. Education must include both software and hardware. Students should take apart computers, study what each part is about and put them together again. This will also enable the recycling of old computers. They should also learn programming, coding and analysis of computers. A curious and creative culture needs to be inculcated into the young.

To do this there must be a program to train teachers firstly in the art of computer education and then in the software and hardware aspects itself. Teacher Training Centres should include programs conducted by the major Software and Hardware companies, who I am sure, will be more than willing to assist. Companies like Microsoft, Oracle, SAP, IBM and Hewlett Packard will probably even sponsor such programs as the education of the young provides further avenue for branding and awareness of their products. All of these companies also have funds for social programmes.

Then there is the need to educate the public. The Government should encourage the provision of classes under the Human Resources Development Fund for such education, subsidised by the Fund. Tertiary institutions that conduct classes on computer education for the masses should be tax exempt to enable them to provide cheaper classes. The government may also want to consider other incentives like Investment Tax allowances for such organisations.

Education can include free computer courses conducted either on television or over the Internet. For example Barnes and Noble (www.bn.com) an Internet books website has a Barnes & Noble University where visitors to the site can take many different courses free online. With the advent of Broadband our local Universities like Uniten can provide simple courses free online. Even without broadband, simplified courses can still be conducted online. Many major software companies already provide such courses online including online examinations. With the Internet, education knows no bounds. All that is required is for the Government and local Universities to be more imaginative in their thinking and being generous enough to do much of these without cost.

The second “E” is for the Environment. This refers to the creation of a better Environment for the growth and development of ICT in Malaysia, an environment that provides equal opportunities for all Malaysians. One glaring point is the Multimedia Super Corridor itself. By restricting the provision of MSC status to companies located only within the Corridor, we have excluded 95% of the nation. Companies in Pulau Pinang, Johor, the East Coast and Sabah & Sarawak are therefore automatically excluded. The only alternative is for them to move to the Corridor and this not only takes them away from their families but also takes opportunities away from their communities and regions.

There should instead be the creation of clusters of “little” Corridors within each region where MSC companies can be located. Thus Pulau Pinang can have its own MSC Cluster, as can Kuching and Kota Kinabalu. This will encourage greater research and development on a larger scale and helps the development of regional R&D communities and regions. Taken a step further, we should even consider MSC Clusters outside the country. Thus MSC status companies can be located in an MSC Cluster in Silicon Valley, New York, Germany or Japan. Imagine the impact this will have on the development of R&D for the nation. Malaysians can run these companies while enjoying the benefits of contact with and knowledge of foreign experts and foreign institutions.

Other aspects of the Environment are the provision of funds, grants and subsidies for ICT. The subject of funds has always been a thorn in the side of the Government and this must be adequately addressed. Although the Government is taking some action, it must consider if this is adequate towards achieving its goal of creating a knowledge economy. This issue also does not seem to be adequately addressed in the Government’s 8th Master Plan unveiled on Monday.

The Grant schemes are desperately lacking. Many Grant schemes are poorly administered with some taking more than six months for approval. There are also schemes which once approved are never executed. Many of the Grants approved have not been taken up and the reasons for this need to be studied. Contrast this with the Grant schemes of our neighbour, which are often approved in 30 to 60 days with very high adoption rates. In Malaysia, the Government provides, the Administrators procrastinate, the Entrepreneur becomes disillusioned and the Nation loses.

One other aspect sorely felt by Citizens and Businesses alike are the high costs of telecommunications, especially high-speed bandwidth. Malaysia’s lease line costs are among the highest in the region and for a nation embarking on a journey towards the k-economy this is one factor that is holding us back.

For example without Broadband and high bandwidth audio-video education cannot be provided online. While the technology to deliver real-time lectures is currently available, the lack of high-speed access prevents this delivery especially to rural and sub-urban communities, the very communities that need them the most. This will also delay the deployment of e-Government initiatives like Telemedicine to these communities.

The final “E” is for Entrepreneurialism. We need to create a climate suitable for the development of great Entrepreneurs. This also begins with education. Entrepreneurship should be taught from upper secondary through to tertiary education. How many engineers know how to read financial accounts, how many IT graduates can write a business plan and how many biochemists know how to market their discoveries globally?

Whether Entrepreneurs are born or made, everyone can benefit from such knowledge. We don’t have to learn only from mistakes because there is a better way. If every Entrepreneur knows from the beginning that the Cash Flow is the key to financial management, there will be fewer failures and we can create a better educated and smarter Entrepreneur. The success of developing the k-economy depends on the success of Malaysian Entrepreneurs. Without them, there is no k-economy. We must do all that we can to nurture them, educate them and finally assist them in their search for glory.

It is not easy to do what our Government has embarked on. Many lesser Governments would have failed by now especially with the magnitude of the crisis that hit us in 1997-1998. Yet there is a better way and much more that needs to be done. I am confident that we can do it but only if we choose to do so.

25 April 2001

New Economy - Lets get priorities right

It is tough being an Entrepreneur in the New Economy these days. Exactly one year ago it seems everyone wanted to be either a Venture Capitalist or an e-Entrepreneur. Even the Government was emphasising on the need for the people to be more IT literate and to encourage more New Economy entrepreneurs. In 2001, the mood is different. From the e-Economy now it is the k-Economy. What will it be next?

It seems even the Authorities can’t seem to figure out what the future holds for Malaysia. Jargons rule the day. This lack of a long-term focus has not helped Entrepreneurs and it looks like we meander from one jargon to another without a sense of direction or purpose. There is a general malaise in the New Economy front especially within the very Authorities entrusted with the responsibility of taking Malaysia to the forefront of the New Economy in Asia.

This disappointment is widely expressed among e-business circles and especially young Entrepreneurs but surprisingly it is rarely mentioned in the mass media. Am I therefore stirring a hornets’ nest?

The Multimedia Super Corridor (MSC) project is a brilliant idea. To take on the challenge of making Malaysia an electronically enabled and successful nation especially before some of our neighbours even contemplated it was a coup. This was reflected in the enormous publicity generated in the international media and the support given to the project by New Economy leaders from around the world. Many even agreed to join the International Advisory Panel (IAP) to share their ideas on developing this concept as a “greenfield area”.

To create a Silicon Valley in Asia was tantalising to say the least. Added to this was the possibility of obtaining tax breaks and land on the cheap for Research and Development centres for the Asian region. The possible creation of new markets no doubt did not escape their attention either.

Has it been successful? To a degree, yes but not to its true potential. There was so much promise much of which has been lost because of a lack of focus and much politicking.

Let us look at some aspects of what has gone wrong. Firstly, not many companies want to be located within the MSC, specifically in Cyberjaya. Touted as the first purpose built intelligent city in the world, the Multimedia Development Corporation (MDC) now has to resort to pressure to force MSC Status companies to relocate within Cyberjaya. If they do not relocate within a certain timeframe then they will lose their MSC status and with it the benefit of tax free status up to ten years.

If Cyberjaya is such an excellent location why the need for pressure? For companies to relocate their entire office to Cyberjaya, there must be certain benefits and attractions. There is very little at the moment. Travel time to Kuala Lumpur, the hub of business in the Klang Valley takes a good 45 to 60 minutes. One trip to KL takes up half a day and the additional cost of fuel and tolls is a key consideration for start-up companies.

Secondly there is virtually no public transport between KL and Cyberjaya. Thus any employee who needs to travel needs a car or motorcycle. Companies who hire staff have to provide alternate forms of transport. In this day of low unemployment and difficulty in finding IT capable staff, location matters. Why work in Cyberjaya if you can work in KL with all its attractions.

Provision of transport is an additional burden to companies who are already struggling without adequate funds.

Furthermore there is no form of entertainment nor “hangouts” in Cyberjaya. The IT workforce are a different breed of people altogether. There is a greater need to network, interact with fellow technophiles and relax but all the “cool” places are in KL like Bangsar, Bintang Walk & KLCC Suria. There is also a dearth of good restaurants in Cyberjaya.

Perhaps when it is fully developed with the Express Rail Link and Food & Entertainment spots companies will voluntarily move. Therefore the Authorities should work towards this goal of making Cyberjaya a more complete place to live and work in. Lets not speed-track just for the sake of doing things faster. Quality is important too.

When it comes to funds, this is one area that is sorely lacking in Malaysia. In Singapore, the Government has already disbursed RM 3.8 billion and has allocated another RM 3.8 billion for disbursement to IT & Biotech projects. They have even leveraged these funds by encouraging International Venture Capitalists (VCs) to relocate to Singapore and subscribing to these VCs funds. Recently Australia announced the provision of almost RM 5 billion in the “Backing Australia’s Achievements” project, aimed at catapulting Australia ahead in the IT and Biotech fields especially in R&D.

How much has the Malaysian government provided? About RM 130 million to MSC Ventures and RM 300 million to Mayban Ventures and Commerce Ventures. This amount is far too small to be significant in terms of the industry especially for IT and Biotech. Even a small company in Europe spends more on R&D in Biotech alone. In the last budget, our Finance Minister allocated RM 500 million for early stage and start-up funding but nothing more has been heard since then. While our neighbours allocate billions of Ringgit towards the New Economy we only have a few hundred million.

What makes even less sense is that RM 13 to 15 billion will be spent on infrastructure projects this year and even the replanting of rubber trees will be allocated RM 1 billion. One billion for replanting rubber trees!! Now who says the k-economy is the future of this country!

The one other capital raising opportunity is MESDAQ our technology Exchange, but this is languishing in the doldrums. There is no liquidity; it is virtually impossible to trade MESDAQ stocks (just try asking your Remiser to buy you any stock on MESDAQ) and many of the rules are not “Investor Friendly”. Most VCs don't even have MESDAQ on their radar screens. The recently announced Capital Market Masterplan aims to consolidate MESDAQ into the KLSE as one Exchange. This is a very timely announcement, but we hope the implementation does not take too much time. We are already behind.

This begets the question, what has the MSC achieved thus far? There aren’t even any success stories in the New Economy. The only two that come to mind are Jobstreet and Asia Travel Mart, both of which were funded by International VCs out of Singapore. They just happen to be founded by Malaysians. In a country of 23 million, we have only two success stories and even then they are not multibillion-dollar companies like in India or even China.

This article has been written with the intent of getting the attention of the powers that be, to point to them that Malaysians are suffering. Many Entrepreneurs are turning to Singapore and other countries for funding and will leave Malaysia if nothing is done soon. While the Authorities are formulating policies to bring Malaysians from abroad back home, resident Malaysians are leaving for greener pastures overseas. I dare say that few Malaysians will ever leave comfortable jobs overseas to return especially when opportunities and funding are better abroad.

What should the Authorities do? Firstly, its time to climb down from the Ivory Tower and positively engage and listen to local Entrepreneurs. Accept constructive criticism and avoid being defensive.

Refocus on what is really important to Malaysia’s future. Is it the short term Infrastructure and rubber replanting projects, or is Malaysia’s future in IT, the k-Economy and Biotech. If our future lies in IT & Biotech then give this priority and give it the most support, in terms of funds, benefits and personal attention.

Ensure that the best people are there for the industry and not just Civil Servants and PhDs with no Entrepreneurial skills or experience. The top people in the MDC and Energy, Communications & Multimedia Ministry should be the best in the Nation with the support of external experts. Singapore has been successful not because of Singaporeans alone but because they actively source and encourage foreign knowledge workers to be employed in the country. On a per capita basis Singapore probably has more foreign experts than any other country in the world (an educated guess based on the writer’s business experience in Singapore). Malaysia probably has the most unskilled workers per capita (mostly Bangladeshis, Indonesians and Filipinos).

It is time to assist Malaysian Entrepreneurs to become successful global players and not just “Jaguh Kampung” (Village Champions). The Authorities should create the best possible environment for the New Economy. Do it for the nation and for the people, only then will we ever be successful in the New Economy. As they say in ‘New Speak’ - “ don’t just talk the talk, walk the walk as well”.

28 February 2001

Finland a role model for R&D excellence

Finland is a small country by any measure. With a population base of only 5.2 million people it is among the smallest in Europe and only one fifth the size of Malaysia. Like Malaysia, a few decades ago it was also an agricultural economy. The break up of the Soviet Union, its main trading partner, 15 years ago almost caused a major depression with unemployment at 20%. However, they didn’t take this potential economic disaster lying down; they made significant policy shifts, became more innovative and today they are among the most successful nations in the world. The World Economic Forum ranked Finland the most competitive economy in the world in three of the last four years, an amazing achievement for a nation on the verge of crisis just 15 years ago.

How they did this is itself an interesting story but in a gist, instead of taking the normal economic measures of slashing costs and reining in spending they transformed their economy from one based on natural and agricultural resources to a knowledge-based economy (k-economy) and increased their research & development and innovation efforts. Today they are well known as the most innovative economy in Europe and their most famous company is (no prizes here) - Nokia.

Much of the credit for their transformation is due to their R&D capabilities. According to the Washington Post, in 2003 Finland spent 3.5% of their Gross National Product on R&D, bettered only by Sweden with 4.3% and followed by the USA with 2.6% and the European Union with 2%. Their total R&D expenditure was Euro 5 billion (RM 23 billion) in 2003. For a small nation that also provides among the highest social benefits in Europe they allocate a huge amount towards R&D.

Malaysia in contrast spent only 0.69% of its 2002 Gross Domestic Product on R&D according to MASTIC, the Malaysian Science & Technology Information Centre. Total spending amounted to RM 2.5 billion (Euro 543 million). Finland spends almost 10 times what we spend on R&D.

One interesting aspect of Malaysia’s research spending is that the private sector spent RM 1.6 billion on R&D but 80% of this was outsourced to overseas partners with India the largest recipient followed by the USA and UK. This is probably because most of the R&D spending is by multinational companies who seek external R&D expertise. Hence only RM 320 million private sector spend was on local R&D and adding government expenditure only RM 1.2 billion was spent on R&D in Malaysia. True R&D spending within Malaysia is actually only 0.34% of GDP and not really 0.69%.

Finland also has the highest proportion of researchers in Europe, 75,000 or 1.5% of its population and spends more money on research than on capital expenditure. Malaysia in contrast has only 25,000 research personnel or 0.1% of its population and spends far more on capital expenditure than on research.

So what does this mean to Malaysia and our science and technology sector including our new initiatives in Biotechnology and the Life Sciences? How will we achieve our goals of making Malaysia a k-economy and providing employment for future graduates as well as contributing to future economic growth.

Finland’s transformation began with a policy change focusing on high-level science and technology initiatives. It made a conscious shift from agriculture and natural resources to the k-economy by allocating not just funds for research but also for human resource development.

While our government has made all the right ‘noises’ there hasn’t been an equivalent shift into the actual implementation of policy and funds allocation. It is action not words that will create a viable k-economy. The low level of R&D investment at a mere actual 0.34% of GDP will never get us anywhere close to being a k-economy. Instead we must ramp up R&D allocation at least to the EU level of 2% within the next 10 years of the 9th and 10th Malaysia Plans.

It’s not just increasing R&D funding that matters but also the implementation of policy and allocation of funds. This is Malaysia’s Achilles Heel, and where we often falter. We have the planners and policy makers but not the implementers. We can take a cue from the Finns who have three institutions that channel R&D funds.

The first is Tekes, the national technology agency, which supports both basic and applied research. It grants 40% of funds to universities and other research institutions and the balance to business. Tekes is a completely autonomous agency, which is funded by the Finnish government. Its success is owed not just to its independence but also to its clean non-corruptible image (Finland is one of the least corrupt nations in the world). Tekes also works with businesses and assists in their collaboration with universities and research organisations including identifying markets and products before allocating funds.

Interestingly a third of the projects that they fund fail completely but instead of backing off they are actually looking to increase the failure rate because higher failure rates means they are taking risks without which you will never discover newer technologies.

The second organisation is Sitra, the Finnish National Fund for R&D, another politically autonomous organisation, which acts as a venture capitalist and invests in start-ups. It has a huge endowment thanks to the government’s share in Nokia. Almost 90% of the companies that Sitra funds were formerly Tekes funded companies. This is an incentive for us to increase funding for the Cradle program and perhaps also extending funding to more commercially oriented programs.

The third organisation is the Finnish Academy of Science & Letters, which provides funds to the best scientists with the most promising projects. Scientists whose projects are heading nowhere will be cut off from funding. They will not even fund prominent scientists if they cannot prove the validity of their projects so it is again a truly independent organisation.

However, Finland’s performance will not be positive without an education system that is one of the best in Europe. So meritocracy and higher levels of education go hand-in-hand with research excellence. Our government must not allow anyone to detract it from achieving educational excellence, if we are to have a successful k-economy.

Malaysia needs to increase its R&D funds and channel it through independent, politically autonomous organisations like the MDC, which has been hugely successful with the MSC R&D Grant Scheme (MGS). It also has to channel funds for all sectors of research; basic scientific research and commercial research like Cradle and MGS. Reports that MGS may have run out of grant funds will not assist our goal of being a k-economy. The government must ensure that more money is allocated towards successful programs like Cradle and MGS.

We have a proven success story to follow if we want to achieve success in our own goals for a k-economy and developed nation status by 2020. In short we need to allocate a bigger budget towards R&D, we must have independent organisations with capable leaders to implement and channel the funds without political interference and without corruption, we must have meritocracy and excellence in our educational system and we must have the political will to do what is necessary for the future long-term success of the nation. We have the wish but do we have the will? For the sake of our future I hope we do.

1 August 2005

Opportunities in alternative energy research

Six months ago in an article entitled “A sobering experience” I stated that Malaysia should follow a niche strategy in Biotech investing and one of the areas with great potential was Biofuel, made primarily out of palm oil. So I am really pleased at the recent surge in interest in Biodiesel in Malaysia.

The move towards alternative energy has taken Europe by storm. Germany is currently the leader in Biodiesel manufacturing and usage while others like Britain have adopted wind energy as the main alternative. Today the Toyota Prius is one of the best selling cars in the USA thanks to its energy efficient engine, which combines traditional fossil fuels with electricity generated through the braking process. Even fuel cell, wave and solar technology are all seeing far more interest these days. The world is undoubtedly moving towards the use of alternative energy in all aspects of life due to two reasons, environmental, to protect and preserve the environment and commercial because of rising fossil oil prices.

Biodiesel usage in the European Union has increased significantly because of regulations that require EU nations to increase Biodiesel consumption to 2 % of total fuel consumption by end 2005 and to 5.75 % by end 2010. Currently only Germany is close to meeting these regulations underpinned by lower fuel taxes and high usage of diesel vehicles in Germany. In the UK there are also tax benefits in using Biodiesel but delivery of Biofuel to the public is limited, as most of the petrol stations have not converted to cater to Biodiesel. This is bound to change as the government is committed to meeting EU requirements.

While environmental concerns drive government policy on fuel consumption, commercial factors have driven consumers to seek cheaper fuels like Biodiesel. At the recent peak of US$71 per barrel of crude oil, petrol prices surged to historic highs in most Western nations. In the US petrol prices rose to almost US$ 3.00 a gallon (about 4 litres) while in Britain they rose to almost £ 1.00 a litre. Imagine paying RM 7.00 a litre for petrol and you will realise the pain that this is causing consumers and business.

According to the International Energy Agency, the transport sector will see the largest rise in oil consumption in the next 25 years accounting for 3 times as much as all other sectors put together including industry and power generation. Yes, while everyone can fly these days, they also lead to higher fuel consumption in the transport sector. The Agency also believes that low oil prices are no longer possible in future due to huge underinvestment by oil companies and the possibility of dwindling oil reserves globally. Just to keep up with oil demand for the next 25 years, oil companies have to invest up to US$ 3.5 trillion through to 2030. This is very unlikely based on past investment records.

As long as crude oil prices stay above US$ 56 a barrel, Biodiesel and other forms of Biofuel are commercially viable, provided vegetable oil prices do not rise too much. Currently most of the Biodiesel consumed globally is actually a blend of fossil diesel and Biodiesel, made from rapeseed oil, soy oil or palm oil in 95: 5 (B5) or 90:10 (B10) ratio. It is interesting to note that the first diesel engine built by Rudolph Diesel in 1893 ran on peanut oil, the first ever Biodiesel. Diesel engines are therefore eminently suited to run on Biodiesel.

While Biodiesel from palm oil is the cheapest form of Biofuel, there are several constraints that make it less suitable for use in Western nations. Palm oil based Biodiesel has a relatively high Cold Filter Plugging Point (CFFP) of plus 11 degrees Celsius compared to minus 5 Celsius for rapeseed oil. The melting point is also higher at an average 34 Celsius compared to 5 Celsius for rapeseed. This makes palm oil based Biodiesel unsuitable for use in the colder climates of Western Europe especially in winter. Thus chemical additives are added to the blend to enable usage but this is still not adequate. Hence only the B5 blend is suitable but in Germany the greatest tax relief is obtained from pure Biodiesel, i.e. 100% Biodiesel without any fossil fuel.

This creates an opportunity for alternative fuel technology development and this is where Malaysian technology and research firms can do more. While organisations like the Palm Oil Research Institute of Malaysia (PORIM) have already been doing Biodiesel research there are still many areas of research that are open to private companies and researchers. Making palm oil Biodiesel more suitable for use in Western nations is just one of the possible areas. Other areas include improving the production processes to increase production of Biodiesel from crude palm oil, making the process cheaper or faster or even improving its storage and delivery capability. The holy grail of Biodiesel would be creating pure Biodiesel that could be used in current fossil diesel engines without the need for converters, thus making Biodiesel the true alternative energy fuel of the future.

Research into not just palm oil based but also vegetable oil based fuels is still in its infancy in the West. While other alternatives like fuel cells hold much promise, the reality is that Biodiesel is the one true immediate alternative fuel that’s not just environmentally friendly but perhaps in the near future also commercially viable. We certainly cannot use wind or wave technology for transport and solar energy and fuel cells are still far from becoming a reality but Biodiesel is here today and for the largest palm oil producer in the world this may be the one great opportunity to play a major role in the fuel not of the future but of the present.

17 Oct 2005

A sobering experience

The Malaysian government’s focus on Biotechnology and Agricultural technology (better known as AgBio – agricultural biotechnology in the USA and Europe) has made me naturally more curious about the industry and how developments in America and Europe will affect our national aspirations. Hence, over the last month I attended two conferences, one in San Francisco and another one in London to discover the latest in the industry. It was a very sobering experience indeed.

While research in Biotech and AgBio is very advanced in both countries the funding and exit strategies for these sectors are extremely difficult, so difficult in fact that American companies are looking for funds in Europe and vice versa with minimal success.

In R&D, both American and European companies are at the forefront of many potentially lucrative discoveries in pharmaceuticals, diagnostics and medical devices; from the discovery of antibodies that can penetrate cancer cells and then cause their apoptosis (cell death) to the use of thermal imaging technology for the early detection of lung and thyroid cancers. These are all technologies that may become commercially viable in the next 5 to 10 years and change the course of medical science.

There are even trials being conducted by an American company and the US Ministry of Defence to prevent and even cure deafness. The US military apparently spends up to US$ 2 billion a year on deaf related problems due to wars and artillery training. This company has even managed to regenerate the tiny hair-like organs whose death caused permanent deafness, raising the possibility of reversing deafness caused by old age. Incidentally they won the business plan competition held at the London conference.

Despite these potentially lucrative discoveries VC appetite for Biotech investments has declined rapidly over the last few years. There are only about 15 pure Biotech funds in the European Union versus about 88 in America, however the amount of funds available for investments is 20 times more in America, which makes it very difficult to source VC funding in Europe.

This shortage of funds is due to the lack of an exit opportunity. The only viable markets for a Biotech exit in Europe are the Alternative Investment Market (AIM) in London, Euronext (mainly Brussels and Amsterdam) and possibly the Deutsche Bourse in Germany. However, over the last 5 years there haven’t been any notable Biotech listings in Europe, nothing comparable to the US giants Genentech or Amgen.

Poor exits are not limited to Europe as even in the US exits over the last few years have been tough. Due to the poor performance of many earlier listings investor appetite for Biotech IPOs (Initial Public Offerings) have decreased. As examples three US IPOs in February 2005, Favrille Inc, Icagen and Threshold Pharmaceuticals only managed to price their shares at half the expected price and Favrille Inc, which has a drug for the treatment of non-Hodgkin's lymphoma in Phase III clinical trials (advanced trials), was able to raise only US$ 42 million, a measly sum for a Biotech company.

Compounding the poor IPOs is a poor mergers and acquisitions scenario because the larger pharmaceutical companies have curbed their acquisitions and are instead just licensing drugs or acquiring the patents instead of entire companies. Many pharma companies had to take huge goodwill and asset write-downs when their investments went bust and this had led to a change in strategy.

There is no lack of R&D and interesting research being conducted in both America and Europe but because of the poor environment for exits, funding is a major issue for Biotech companies.

It gets worse for AgBio companies. Interest in AgBio companies is virtually nil because there have been very few successes in AgBio exits. This is compounded by the fact that the major AgBio companies like Monsanto are no longer acquiring companies, so there is no opportunity for VCs to successfully exit such investments. This will be a problem for Malaysia especially because of our focus on AgBio initiatives.

Even G. Steven Burrill of Burrill & Company, one of the advisors to the Malaysian government, admitted that the poor outlook for Biotech and AgBio will last for a while. I also had the opportunity to speak to a Canadian who currently advises the Singaporean and Korean governments on their Biotech initiatives and she was very clear that government investment in the Biotech industry will not bring any financial returns for the next 15 years and anything beyond that is unpredictable.

While all this makes for a very depressing outlook for these industries, the question we must ask is whether there are opportunities within these industries other than drug discovery and pure biotechnology R&D. Fortunately opportunities do exist for Malaysia.

One potentially lucrative opportunity is the outsourcing of clinical trials to what they call “Contract Research Organisations” (CROs). One costly aspect of drug discovery is the numerous clinical trials that have to be performed, not just human clinical trials but also animal and cell trials. Such trials are extremely expensive in America and Europe and it is estimated that it will cost only one tenth of that in Asia, including Malaysia. Our Institute of Medical Research is already well known in Asia so developing this industry in Malaysia is a possibility. India is already moving in this direction.

In AgBio we should focus on increasing yields of agricultural crops including oil palm, cocoa and padi. Such R&D do not always fall within the gambit of genetically modified crops and will help our own agricultural industries to grow further. Another area is Bio Fuel. Oil prices are expected to remain high over the next few years, making it lucrative to develop alternative fuels. While it may not be feasible currently to use palm oil in vehicles, they can be made commercially viable for high volume use in power plants, steel and other heavy industries. Tenaga Nasional has used palm oil before although its efficiency is not equal to gas but with adequate research this can be improved. The high oil price factor and the move to renewable fuels in Western nations bode well for palm oil as a bio fuel.
So, even though the Biotech and AgBio industries are going through a difficult time globally, if Malaysia does want to invest in these industries opportunities do exist, albeit in very niche sectors. A more focused approach is therefore necessary for us to be successful in this area of technology.

4 April 2005

Biotechnology – short term fad, long term future or neither

Prime Minister Dato Seri Abdullah Ahmad Badawi’s recent trip to San Francisco to visit the world’s largest biotechnology event, the BIO 2004 Conference is a clear indication that Malaysia’s fascination with biotechnology is now a real policy initiative. This would no doubt go down well with many biotechnology researchers but it is obvious from several reports that many people indeed do question the viability of Malaysia venturing down this path.

What are the facts about the biotechnology industry that should concern our policy makers? Firstly, there has been a lot of flak directed towards Biovalley, Malaysia’s biotech cluster based in Cyberjaya. Research by the Brookings Institution, a leading American think-tank shows that the success of the United States biotech industry has been centred very much around nine leading biotech centres mainly clustered around the East and West coasts of America which included San Francisco and San Diego on the West Coast and Boston and Raleigh-Durham in the East Coast.

In fact these nine centres accounted for 77 percent of all new biotech firms in the US, 88% of all venture capital for biopharmaceuticals and 96% of the Dollar value of research alliances with pharmaceutical firms. Incidentally 92% of the most active biotech venture capital firms were located in or around these nine centres.

The reason for such an agglomeration of activities around these leading centres is the critical mass of firms and researchers around these centres and also due to the connection these centres have with research Universities like MIT in the East Coast and University of California in the West among others. The centres are not however “organised” clusters like Biovalley but have sprung up over many years due to the formation of research organisations and firms that have spun out of research Universities.

Understandably Malaysia cannot wait 50 years for the mere possibility that this may happen; in fact it is almost a certainty that we will never have a successful biotech industry without Government intervention. If ever we want to create a successful industry a critical mass of firms centred around a cluster like Biovalley is probably the way to go.

However, a cluster alone is not enough for success. The Brookings study also clearly shows that some centres are more successful than others because of the availability of venture capital funding for biotechnology. There are many specialist biotech VC firms in America but how many are there in Malaysia, one, two? We also don’t have another pre-requisite for success, a critical mass of highly educated biotechnology science graduates and by this I mean those who have degrees that are world class. We probably have a small number of them but we need a critical mass of possible a few hundred a year at least.

On the economic side, we also need to appreciate the fact that the Biotech industry is not a major economic contributor. According to a US Department of Commerce biotechnology survey in 2003, biotech business amounts to a mere 0.33% of the US GDP and almost 60 % of the firms have less than 50 employees and 90 % have less than 500 employees. The entire biotechnology industry in the US (excluding the multinational pharmaceutical firms) employs only a measly 200,000 people according to the Brookings Institution. By any standards these are all very, very small numbers.

The number of biotech start-ups formed in the US in the last 12 years since 1990 is around 300 or an average of only 25 new firms a year. For a nation the size of the US this is quite an insignificant number.

Another interesting statistic about the biotech industry is that all the biotech firms listed on the New York Stock Exchange collectively did not return a single profitable year in the last 10 years! This is astounding considering the amount of hype that permeates the biotech industry in the media and around the world.

Most discoveries are also ultimately never manufactured or marketed by these research firms, they are instead licensed to the large pharmaceutical firms who take over the manufacturing, marketing and sales of these discoveries and make the real big bucks from the hard work of the few. This is why many firms never obtain real profitability and remain “research firms” not standout biotech or pharmaceutical firms. It is a known fact that the large pharmaceutical companies control the sales and distribution channels which makes it extremely difficult for a newcomer, even one with a significant discovery to market its own product.

I do not wish to dampen the enthusiasm that the Government has for biotech, but these statistics clearly show that the biotech industry is hardly what everyone makes it out to be. If these firms have a tough time surviving in the most entrepreneurial of countries – the USA - what chance do Malaysian firms have?

Furthermore, it may take a decade for biotech firms to show some semblance of success or marketable discovery so our enthusiasm for this industry must be tempered with realism. Should we ignore this industry? No, certainly not, but it is important that we keep it within the right perspective. There is no fast track to success in biotechnology so the Government must look at this as a very long-term developmental project and not one that will bring any sort of immediate returns. In fact it may never bring any economic or financial returns at all, yet the learning and scientific aspects of biotechnology are invaluable.

If the goal of the Government in adopting biotechnology as a national project is to find a new contributor to economic growth or a new industry to take over from manufacturing, then we are in for a painful and dramatic fall. Even in the US decades of biotech research has contributed virtually nothing to its GDP, so I am absolutely sure it will be no different in Malaysia or anywhere else for that matter. It will also not create many jobs for Malaysians.

What it will do for Malaysia is to foster greater interest in science and technology, create the potential for research and development in the life sciences and provide an avenue to generate scientific discoveries from our vast flora and fauna. The possibility that these discoveries will lead to million Ringgit businesses is slim to nothing, but who knows we may get lucky. We must not ignore the industry as it has other benefits but we must be very careful about promoting it as the next big thing, because it isn’t.

21 June 2004

Strategy4Startups: Building a sustainable competitive advantage

The success of any business is dependent on creating a sustainable competitive advantage or sometimes called a competitive edge. But what is a sustainable competitive advantage? Competitive advantage can have many definitions but I prefer a definition that takes two key stakeholders into account – the customer and your competitor. Competitive advantage is an advantage gained over your competitors by offering customers superior value either by offering lower prices or by providing greater benefits and services to justify a higher price. Sustainable competitive advantage is simply being able to maintain your competitive advantage over an indefinite period, and this is a major challenge.

Far too many information and communications technology (ICT) companies have business models without a competitive advantage. For example, there are so many companies doing website designing or portal development that it is almost impossible to develop competitive advantages and hence a successful business, yet every year more and more Technopreneurs join the bandwagon and waste their talent and effort on such businesses. Even in the telecommunications industry especially in voice over Internet protocol (VoIP) services, which provide low cost phone calls, it is also impossible to build any competitive advantage. In these examples anything you can do, your competitor can imitate and it is tough to offer a differentiated service to gain an advantage over the competitor.

Building a competitive advantage requires a clear focus on a differentiated product or service in which you can offer superior value that is not easily imitated by your competitor. It is vital to ensure that in your particular business the barriers to entry for new competitors is high and that you can build long term relationships with customers who will not or cannot switch suppliers easily.

You can build competitive advantages through several sources and these can be divided into internal and external sources. Internal sources of competitive advantage are based on the core competencies, creativity and innovative capability of your firm and human resources. For example, Dell has built a core competency in delivering products fast, custom built and of high quality to meet exacting customer needs. They have mastered the logistics aspect of receiving orders over the Internet or via the telephone; custom building each order to customer specifications, testing the final product to ensure high quality and ensuring the product is delivered within 48 hours. Even if you go to a shop and ask for a custom built computer or server it can take more than 48 hours to build and deliver the product and often there will be quality problems.

Despite its success Dell is still the only computer company to sell computers solely over the Internet and via the telephone. No other computer manufacturer has managed to copy the Dell model and some have avoided it because it will cannibalise their existing channels and relationships and this helps Dell maintain their edge. This gives Dell a unique competitive advantage that is inimitable thus enabling Dell to sustain an edge over rivals almost indefinitely.

The second source of competitive advantage is external and this is found in the process of change. Major changes happen in terms of changing customer demand or tastes, price changes, technological changes, changes in the environment and regulatory changes. Every one of these changes can have a significant impact on the business and hence on your competitive advantage. Unfortunately most companies are either unprepared for change or are unable to respond effectively to change. There are only three things in life that are certain: death, taxes and change. So change will happen and unless you are aware of the changes in your industry, in society and globally, you will not be able to maintain a sustainable competitive advantage.

The telecommunications industry for example is so fluid that it is almost impossible to predict what the industry will be in the next 3 years. However, you can be certain that there will be new products and services not even in existence today that will be the social norm by 2010. For example, the convergence of telecommunications and content will mean that in future there will be one single device that does the job of the mobile phone, the PDA, the iPod, a Blackberry and will also include a mobile TV and radio and even a global positioning system. What will that do to companies still making single devices or companies providing content for single devices? Many companies will fail but a few will be hugely successful if they are creative and innovative and can keep up with these new technologies. Can you build a competitive advantage despite these changes?

Change creates challenges but also opportunities and it can create new competitive advantages for innovative companies that have the ability to exploit these changes. One company that has done this successfully is Skype, the new darling of Internet telephony. Using the Internet as the backbone of its service, Skype offers users the opportunity of making free voice calls and now video conferencing using the computer. While Yahoo! and MSN also offered voice communications over the Internet and have done so for many years, Skype offered not just a better quality service but they also enabled users to call mobile and fixed line telephones for a small fee, something even Yahoo! and MSN could not do. Today it costs just 9 sen a minute to call anyone anywhere in the world and this has huge implications not just for Skype, which was sold for almost RM 12 billion to eBay, but for all global telecommunications firms. How does a telco sustain a competitive advantage in international phone call services with the advent of Skype and other copycat services?

This does not mean that it is not possible to maintain a competitive advantage in a changing world. It only means that all companies must be constantly on the alert and prepared for such revolutionary changes that will affect their industry and their business. Gary Hamel the London Business School academic and author of “Leading the Revolution” believes that we have now “entered the age of revolution where the value of incumbency is being eroded and those companies that embrace discontinuous change will be the winners”. To ensure long-term success, the company must not just have a sustainable competitive advantage but it must be ready and able to embrace change and build new sustainable competitive advantages.

10 April 2006

Strategy4Startups: Creating a sound business strategy

A course in strategic management is a certainty for all undergraduate and Masters level University business programmes, so it is strange that most entrepreneurs and startup company business plans pay very little attention to strategy. In four years of venture capital consulting before my sabbatical, I evaluated around 200 business plans and spoke to many enterprising entrepreneurs but rarely have I even seen or heard much about their corporate or business strategy and not enough about how they intend to build competitive advantage in their business. Even where this is mentioned it is seldom well thought out.

Sun Tzu said in the Art of War, “Strategy is the great work of the organisation. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected”. Thus strategy is “the way” towards survival, the lack of which is the way to extinction. Generally 80% of startups will fail within 3 to 5 years, so having the right strategy is one way to avoid being just another statistic.

In Malaysia, the government linked and multinational corporations spend a lot of money inviting leading American academics, including from Harvard University, to speak to them about the latest in strategic thinking. However, startup companies cannot afford this luxury, hence the lack of real strategic thought in their business. It does not have to be this way. Even startups need strategic thinking to be successful and my next few articles will deal with the issue of strategy for startups. We start by looking at the role of strategy and formulating a basic strategic plan for the business, which is about formulating and implementing plans to position the company within its business domain to create and sustain a long-term competitive advantage over its competitors.

The building block of strategic management is a sound strategy for the firm beginning with goals that are simple, consistent and long term. The management team must have a profound understanding of the competitive environment and competitors and be able to objectively appraise the resources of the firm including its human resources, finances and talent pool to determine whether the firm can create a competitive advantage within its chosen domain. Once it has made this determination it needs to have a strategic plan to implement its chosen strategy and build a sustainable competitive advantage.

However, in the ICT space, the competitive environment is in a constant state of flux with new technologies constantly displacing older ones and this state of constructive destruction and constant change also needs to be managed and this is no mean feat. A simple change in technology or regulations can destroy entire companies in a flash and managing this potential for destruction also needs strategic planning and total management commitment. Despite this, strategic management in the ICT industry has many similarities to traditional business and the main strategic ideas are still important for the success of a startup.

The first lesson in strategic management is to determine the corporate strategy of the business. Basically this means deciding what business you want to be in and where you want to do it. Entrepreneurs have many ideas but need to differentiate between ideas and opportunities. The majority of ideas are not opportunities. An opportunity needs to be sustainable and be able to capture value and differentiate the business from others in the industry. Deciding what business to be in also depends on industry attractiveness i.e. is there plenty of scope for growth, profitability and is it possible for you to compete effectively and create competitive advantages within your chosen industry.

Deciding where you want to do this would relate to your knowledge of the market and whether the business is easily scalable nationally, regionally or globally. A web-based or telecommunications product based business may be global but one that requires local implementation like software services may need to grow organically beginning with a local presence.

The second lesson is to determine the business strategy and this relates to the “how” question - how you will achieve your corporate strategy. The main strategies here are whether you have a low cost leadership strategy or a differentiation strategy. A low cost strategy works primarily for commodity type goods and may be appropriate for data centres but most ICT businesses should use a differentiation strategy where some aspect of the service or product or both differentiates your firm from the competition.

Additionally, ICT companies should also use a “focused differentiation” strategy, where you not only differentiate yourself from the competition but also focus on a particular area or niche of the industry. Hence in say, logistics enterprise software, you should focus on a particular sector of the industry like shipping or warehousing and once you have established yourself in the sector only then would you expand into other sectors. This enables you to develop in-depth expertise in the area and also allows you to target a specific customer base. Trying to be everything to everybody in the domain makes strategy formulation and customer targeting as well as product or service development more complex.

Startups need to identify a niche in a particular industry in which they can add value and differentiate themselves from the competition. You have to also identify a particular need or gap in the industry that you can fill or find a problem that you can solve. Building a better mousetrap is not the answer as there are already far too many copycat businesses around. Determining your strategy from the beginning gives you greater focus and understanding and increases your chances of success. But that is only the beginning of a sound business strategy. In upcoming articles we shall explore other aspects of strategy including the different strategic models and how to apply them to a startup business.

27 February 2006

Smart tactics for globalising your business

In my last article I stated the case for Malaysian companies to expand to the West to obtain greater margins and profitability instead of just being focused on Malaysia or the immediate regional countries. I have just returned to Malaysia for a short working holiday and I am even more convinced that Malaysian companies must expand abroad if they wish to continue to grow and prosper. The Malaysian market is increasingly competitive and growth prospects are not excellent. Perhaps this is just the push that technology companies need to seek greener pastures abroad. So here are a few tactics to help you improve your chances of success in globalising your business.

The single biggest cause of failure in globalisation is the lack of high-level management involvement in the entire planning and execution of the globalisation plan. Most companies plan for the process but while the plans are made by the Board or senior management, rarely does a senior member of the management take complete responsibility for the actual execution of the plan and is fully focused on that single endeavour. Globalisation is a major initiative and someone in senior management reporting directly to the CEO and the Board should be fully focused on achieving the targets for going global and taking responsibility for its execution. In fact if there isn’t anyone in senior management who has the necessary experience or expertise in globalisation, then chances are highly likely that the initiative will fail. The only alternative is to hire a very senior person to take on that responsibility. Preferably however, the champion should be someone from the initial founding team of the company itself as that will ensure the passion and culture of the company is carried on in the globalisation effort.

Secondly, that member of the team should relocate to the country where the globalisation effort is focused otherwise no one else will have the passion and the drive to push the business forward. It is also preferable that that person has experience in that market or region, someone who has either studied there or worked there would be ideal, so that he or she understands the culture and how best to work within the market. A complete novice will have a long and painful learning curve and this makes the company’s globalisation effort more difficult. This is a tall order but globalising your business is a very difficult process and understanding the market and culture is vital.

Most globalisation efforts fail because the company depends on an external party to do it for them. This may be channel or joint venture partners, agents or foreign managers. None of them will have the necessary drive or passion to really push the business forward, certainly nothing like that of a founding member of the management team. I personally know of several Malaysian companies who have tried to do this with little success. One of the leading causes of failure is to hire a foreign manager and hope that he can do the job. This is a recipe for failure because even though he may know his market he will not understand your business or your corporate culture and will certainly lack the passion to grow the business.

One key business strategy is to be very focused. Concentrate all your effort on ONE particular market, pick the one market that has the greatest potential for growth and profits and focus ALL your efforts on that market. Many globalisation efforts fail because companies don’t have a focused strategy and spread themselves too thinly by trying to cover too many markets at any one time. While you may have partners in several countries your main effort should have a single country focus and always pick the country with the greatest risk to reward ratio.

Also make sure that the market of focus is huge and gives you the potential to grow and be very profitable in that market. For this to happen the market must be very large with the least direct competition and one in which you have the greatest competitive advantage. Do not enter markets that are very competitive where there are big local players whose competitive advantage is as good or better than yours because as the foreign entry you will never beat them at their game. In such a case it is better to enter a market which may be slightly smaller but one in which you can operate from a position of strength.

Many companies are so excited by China that they are getting their hands burnt by trying to compete with everyone else there. Virtually everyone in the world is attempting to enter the China market making it probably one of the most competitive markets in the world and hence one of the toughest. It is better to be a big fish in a small pond than a small fish in a big pond. Don’t waste your effort and resources competing with everyone else, its better to go elsewhere.

Make sure you have adequate resources and this means not just money but also people and time. Focusing on one market will help you conserve and direct resources to the most profitable market. It is indeed costly to globalise so if you do not have all the necessary resources you have to rethink your strategy.

Globalisation is not for everyone. Some businesses do not have the potential for large-scale operations, culture and business conditions may not suit globalisation or you may not be at the right stage for globalisation. So examine your business thoroughly and make sure you are both ready and able to globalise. Also do not globalise just because it is fashionable or because you are pushed towards globalisation by your investors or shareholders. If you are not ready plan ahead and globalise only when you are sure you can be successful.

14 November 2005

The Creative Destruction of Technology Firms

The term creative destruction in business jargon conjures up different images for different people. To some it may mean that some technologies become outmoded, or certain products are obsolete; to others it conjures up an image of entire businesses being destroyed and replaced by new fangled business models and ideas. In the technology arena, creative destruction potentially is the mugger just waiting around the corner to hit you on the head and relieve you of all your worldly possessions.

Like the mugging you won’t know what hit you or who or maybe if you have a concussion even when. Creative destruction is what made Andy Grove of Intel paranoid and what drives the fear of obsolescence for Bill Gates and Microsoft. You should fear it too, for it can make your entire business fold up in a flash if you are not careful.

The great economist Joseph A. Schumpeter coined the term ‘creative destruction’ in 1942 in his book Capitalism, Socialism and Democracy. It was “the process of mutation…that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. He believed that creative destruction is an essential fact of capitalism, that it strikes not at the margins of profits or outputs of existing firms ‘ but at their foundations and their very lives”.

In “Only the Paranoid Survive”, Grove used the term ‘strategic inflection point’ to describe a time in the life of a business when its fundamentals are about to change. This change can mean an opportunity to rise to new heights or it may signal the beginning of the end. It is also more than just technological change; they are ‘full scale changes in the way business is conducted, so that simply adopting new technologies or fighting the competition the way you used to may be insufficient’. Grove was basically describing ‘creative destruction’ in a technology firm.

Take the iPod for example and how it has revolutionised the music industry. Today it is a fashion tool for young people and the technology-savvy. But its ramifications for the electronic gadget and music industry are profound. The Sony Walkman, that iconic music machine of the 1980s and 90s is no more. No geek would be caught with one today. The iPod has destroyed an icon, all in less than a year. That is true creative destruction. It has also changed the face of how music is sold and delivered. Sales of CDs are down but not music sales as millions of tunes are sold over the Internet for downloading into not just the iPod but also other MP3 players. Soon they will not sell CDs anymore, as all music will be delivered only online.

Even the latest Bose sound systems have hard discs to store music which can be transferred either via the CD or downloaded through the Internet. Enjoying music will never be the same again either.

Creative destruction can happen anywhere and at anytime. The entry of Sony and then Microsoft into the computer gaming industry ended the reign of Atari and has sounded the death knell for Nintendo, although Nintendo still has a fighting chance with new technological developments on the way. Atari and Nintendo were leaders in the gaming industry, which was hugely profitable and had great potential. Unfortunately for them such potential always attracts competition and their worst luck was that it attracted two of the giants of the business world. No one can withstand the entry of such major players. They got mugged and it’s game over for them.

The Internet was the greatest mechanism of change in my living memory. It changed not just how business is run but even how products and services are delivered. Today the insurance salesman is no more in the UK as all insurance services are delivered online or via call centres. You can buy all sorts of insurance products online; from home, to travel to motor insurance, all at the click of the mouse. It has so revolutionised the business that even supermarkets sell insurance to their customers, online of course.

Even the call centres owe their flourishing new business to the Internet because cheap international telephone calls were only made possible by Voice over Internet Protocol (or VoIP), a product of the Internet. Thanks to VoIP, the Indian and Malaysian call centres are doing roaring business though at the expense of call centres in the West. Creative destruction is an opportunity to some while destroying the business of others.

So we know that creative destruction can contribute to significant changes in business, but is there anything you can do to prevent the potential destruction of your business? This is especially the case for technology businesses where things can change in the flutter of an eyelid.

Intel is a good example. It is surprising that Intel has managed to last for so long without being overtaken by new technologies or rivals. Perhaps the paranoia that Grove had while CEO and then Chairman of Intel helped him to stay ahead of potential destruction. Beyond paranoia though, Intel had to change and to adapt to the potential new destroyers of its business existence. The Internet was one such potential destroyer because Grove believed that it was possible to build a simple computer that could run on a simple microchip. Using the Internet the networked computer, as it was called, would link up to a mainframe server that would host the data and even the software needed to run all applications. Hence the computer that you own does not need expensive, powerful processors and would put Intel out of business. It has not happened yet, but like he said it is possible.

Intel however, took steps towards managing the potential for destruction. They updated their own genetic makeup to be in tune with the new environment. They also worked closely with customers and potential customers including software and telecommunications firms, advertising and media companies and other firms that could impact on their technology or product.

They also realised the need to rethink their entire corporate organisation structure, to modify it to cater to this new role of cooperation with the above firms. They needed to communicate this to their thousands of employees who needed to know why they were making changes when business was still doing well.

They evolved with the technology. They were always innovating and being creative and spent billions on research and development to keep ahead of the curve and their competitors. Hence whenever AMD came out with a faster chip (which was not often) Intel would exceed their speed in a matter of weeks. Innovation is a key to Intel’s success at keeping creative destruction at bay.

There are a lot of lessons here for Malaysian firms. Local firms must learn to keep ahead of the curve, to be aware of not just what is happening in their industry but also of what could happen in the future. They need to constantly update their management processes to be in tune with the constantly changing environment. They must be prepared to change at a moment’s notice but be able to communicate any change to their employees, as change is difficult for staff to manage.

They must always be aware of what is happening in their industry by being networked into the industry, by attending conferences and exhibitions and by reading all the latest information especially on the Internet. Mostly they must innovate and be willing to spend money on research and development to keep ahead of technological changes. Most of all they must be paranoid about their business and their industry because in this case paranoia will help you to avoid a technological mugging.

8th August 2005

World-Class company still a dream

There is no Malaysian “World Class Company” and this has made our nation’s leaders obsessed with creating or acquiring a few especially during the Tun Mahathir era. We always cite Singapore’s Creative Technologies as a shining example and weep into our teacups because we have nothing to trumpet. Sure, we have Petronas, but that is a national oil company with an absolute monopoly over all our energy resources. We don’t have a truly entrepreneurial Malaysian icon. Korea has its Samsung, Hyundai and LG, China has Haier and Huawei Technologies, India has Infosys and Tata Consulting even the Philippines has San Miguel. Malaysia, well unfortunately we have nothing but a dream.

Yet a world-class company cannot be created out of the figment of the imagination of our nation’s leaders. World-class status is the result of strategic competitive advantage, created through the core competences of companies with truly excellent, innovative management. We fail at the first hurdle because few of our companies come close to creating such competitive advantage, as most are ‘me-too’ businesses with less than the best in management quality. This is no doubt a hard-hitting statement, but I would love to be disproved if anyone can do it.

The concept of a ‘core competence’ is not new, but it was made prominent by two American academics C.K. Prahalad and Gary Hamel in a Harvard Business Review article in 1990. Prahalad and Hamel define core competence as the collective learning in the organisation, the organisation of work and delivery of value and the communication, involvement and a deep commitment to working across organisational boundaries, involving many levels of people and all functions. A core competence also has three characteristics, it provides potential access to a wide variety of markets, it increases perceived customer benefits and it is hard for competitors to imitate.

Three other experts – Kevin P. Coyne, Stephen J.D. Hall, and Patricia G. Clifford - in a 1997 McKinsey Quarterly article define core competence as “…a combination of complementary skills and knowledge bases embedded in a group or team that results in the ability to execute one or more critical processes to a world class standard”.

Clearly, the key to creating a core competence and the ability to deliver a competitive advantage lie in the ability of the management within these organisations. Good management alone is not enough however, as they must also be able to use their knowledge, and the collective learning within the organisation to execute one or more critical process to a world class standard.

This is best explored by looking at several examples.

Coyne, Hall and Clifford used the example of the outstanding financial returns earned by Berkshire Hathaway and the Fidelity Magellan Fund using data publicly available to other stock analysts. The core competence of Warren Buffet and Charlie Munger of Berkshire Hathaway is the innate ability to see what others cannot and to successfully invest using publicly available data. This ability to excel using the same information available to others is a core competency.

Let us take several examples in the technology world. Oracle for example has developed a core competence in database management and virtually every large database system in the world uses Oracle, from financial services to governments. It has created such a competitive advantage that in the last 20 years there have been no real challengers to Oracle in the area of database management.

Core competency can also relate to design development. Apple computers is a classic example of a company that keeps re-inventing itself based on its designs. In terms of being a manufacturer of personal computers, it is just another manufacturer like Dell, HP or Acer, but its ability to come up with unique designs, which it can sell at higher margins and thereby keep ahead of other competitors, is its core competency.

Take the iPod for example. There are numerous brands of MP3 players in the market and many were there even before the iPod but when Apple launched its cute-looking iPods it took the MP3 player market by storm. Today it is the standard for MP3 players; in fact no geek will be without one. In terms of quality or as music equipment, there is no difference with any other player, but in terms of design, it is second to none. That is its core competency and that is the only way in which Apple has excelled all these years.

Speaking of Dell, it is until today the only major personal computer supplier that still delivers profits time and time again and is always exceeding investor expectations. It built up a core competency in designing PCs to order and delivering sales online or via the telephone. When Dell first started selling online, none of the other PC manufacturers were at all concerned that it would be able to make an impact on their sales but it has proven them all wrong and is now the world’s second largest PC manufacturer (after HP) and the most profitable. By selling online it saves on sales commissions to re-sellers and by building on demand it can minimise on storage of excess computers and parts, thus saving on costs and delivering consistently higher margins. While every other PC maker is still stuck in the old way of making and selling PCs, Dell continues to outsell most of them, thanks to its core competency in build to order PCs and online sales.

Core competency is not only about expertise or knowledge; it is also about creating organisational processes that create the greatest possible competitive advantage for your firm. Take Wal-Mart the world’s largest and most successful supermarket chain. Few know that Wal-Mart has one of the most advanced computer systems in the world just to keep track of its stock of goods, to manage its logistics and to ensure that all its supermarkets are well stocked all the time. The size and sophistication of its computer systems is second only to the Pentagon, in fact it could probably run entire governments if need be.

One of the worst experiences for a shopper is to go to a supermarket and find empty shelves. Wal-Mart solved this problem via its highly sophisticated data warehousing and data management system which links all its supermarkets to a central office which is then linked to its storehouses, its in-house trucking service and its suppliers. The sophistication of its system enables it to not just manage its stocks but also keep track of customer preferences on a daily and seasonal basis, track competitor prices, manage deliveries just in time to minimise holding costs and manage its entire logistical process. This is Wal-Mart’s core competence. There are many large supermarket chains in the world from K-Mart to Carrefour to Makro but none of them had such a sophisticated system and never developed this as a core competency until Wal-Mart came along.

Creating a World-Class company is not a matter of government support or venture capital funding or getting listed on an exchange. The government can provide all the assistance it can muster but it will never create a World-Class company, and that is where Malaysia has failed.

Creating a World-Class company demands the creation of a core competency in the firm, whatever that core competency may be. If a Malaysian company wants to challenge the best in the world, then it has to examine its internal capabilities, its people and systems to determine where its core competence is and make that the engine that drives its business towards being the best of breed. Being world class is about being the best in what you do and to be the best, you must know what to be best in and how that can be achieved.

Too many of our companies are mediocre, without the best quality of management and systems. The most important thing to do is to hire the best people in all areas of management yet in virtually 99.9 % of Malaysian firms we will find it hard to say they have the best management in Malaysia if not Asia, and unless that happens we can forget about creating World-Class companies. It certainly is not for lack of talent as there are many Malaysians working overseas or in multinational corporations within Malaysia and doing an excellent job.

First start with the people then with the systems and this can only be achieved by each individual company and not by government support or pressure. Will we ever have a world-class company? It is a definite possibility but it will not be easy to break our culture of mediocrity and our crutches of dependence on the government. Until we do that it will remain but a dream.

Dated: 11 July 2005