| TRANSFORMING
MALAYSIA INTO A K-ECONOMY |
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| On
2 May, Dr Tengku Mohd Azzman Shariffadeen, President
and CEO of MIMOS erhad, presented on the K-economy to
MASSA (Malaysian South South Association) Members. Here
are excerpts from his speech. |
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| Before
I begin on this topic, let me mention two people and
their theories about evelopment. |
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| The
first person is Thomas Kuhn, the person who wrote the
book The Structure of Scientific Revolutions. The Kuhnian
paradigmatic change process is very popular today but
it wasn't apparent just a fw years ago. |
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| Kuhn
conceived of change as a paradigmatic process whereby
anomalies are perceived by certain minority groups (also
considered heretics.) As they perceive the anomalies,
they create more anomalies by subverting the dominant
way of thinking (the old paradigm.) Eventually, their
way of thinking prevails and there is a paradigm shift.
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| Why
is this paradigmatic shift so important today? |
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| It
is important because it describes our present situation.
A group of heretics is subverting the entire economic,
social and political system to re-create something different,
consistent with their way of thinking. |
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| he
second person that I shall quote from is Joseph Schumpeter,
the economist who conceived the notion of "creative
destruction. We will cover his ideas later on. For now,
let me say that there is a parallel view of development
between Kuhn and Schumpeter. |
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| Why
did we choose the title Transforming Malaysia into a
K-Economy? Simply because we feel that by looking at
Malaysia as a case study, we can draw many lessons and
conclusions which are applicable to other countries
and regions. The structure of our discussion will follow
this outline: |
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a) Present scenario |
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b) What the K-economy is |
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c) What the K-economy is not |
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d) Why the K-economy? |
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e) Benchmarking for competitiveness |
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f) Challenges |
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g) National Initiatives |
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h) The Way Forward for Malaysian Enterprises |
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| THE
PRESENT SCENARIO |
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| The
Internet is here to stay. Not too long ago, when we
started the Internet in Malaysia (as in America), most
companies ignored it. They thought it was only a toy
for researchers. Today, if any one of us ignores the
Internet, it is likely to kill our business. How soon?
Perhaps in not more than five years. More likely, two
years. |
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| Why
is this happening? |
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| Firstly,
there is discontinuity with the past and the present.
he paradigm shift indicates that what is present and
may develop in the future will be completely different
from the past. Heretics are subverting the old system,
the old economy, and replacing it with the new. |
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| Before
the advent of the Internet, there was only one space
of control and that was the space of physical existence,
the space of atoms. With the rise of the Internet, you
have a new space called cyberspace1, which is the space
of bits. To succeed in the new business environment
you need to be able to control both spaces. |
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| The
second part of the scenario is ongoing and pervasive
turbulence. There is a continuous cycle of change driven
by the heretics. For instance, product cycles are now
completed in months, not years. Within months, your
PC is obsolete, within months your software is obsolete.
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| ext,
there is what Joseph Schumpeter terms "creative destruction.
Heretics (called entrepreneurs by Schumpeter) re agents
of change, of economic development and renewal. They
destroy (or deconstruct) old businesses and all that
is supported by the old economy, including political
and social institutions. After they deconstruct, they
then reconstruct.2 |
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| Finally,
this change is producing new and unexpected competitors
for businesses. There are web enterprises which are
re-packaging products using both physical and virtual
media and they are creating new kinds of economic value
and ealth. |
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| WHAT
THE K-ECONOMY IS |
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| The
K-economy is simply an economy possessing or promoting
ew industries created by the production, distribution
and use of knowledge and information. |
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| In
other words, compared with the old economy where land,
labour and capital were the drivers, the K-economy is
driven y knowledge content and information content.
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K-economy operates on the principle that investments
in knowledge provide "increasing returns.3 What do increasing
returns produce? They can produce huge monopolies |
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Microsoft4 , which could threaten national economies.
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| The
K-economy is also characterised by the need for continuous
learning. Knowledge is learning and learning never stops.
However, it is not just learning that is important but
the applications of new knowledge. |
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| Finally,
technology development and innovation play an important
role in the K-economy. The technology referred to here
is not just about chips and software. It is also about
how to manage things, how to execute projects. |
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3 The economists among us will understand the constraint
of diminishing returns, the traditional notion of economic
investment. The more you invest in a certain industry,
the less returns you get. But in the new economy you
can get increasing returns. It is a puzzle and until
lately, this was not proven. But if you'd like to go
into the academic side of it, there is actually a person
by the name of Brian Arthur who has proven theoretically
that increasing returns actually converge. He has produced
some mathematical theorems to make that apparent. |
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| 4
Interestingly enough, the US Justice Department believes
that it should break up monopolies. Because America
believes so much in the capitalist system, it also believes
in open competition. This is for us a 'saving period.'
That is, until the next monopoly comes along. But look
at what happened when the baby Bells came into being
from the break-up of AT&T. Instead of contending with
one giant company (AT&T) you have a dozen baby companies
that will eventually become giant companies too. So
if you break up Bill Gates's empire, you might just
get a few very big companies and you have to compete
against all of them. |
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| WHAT
THE K-ECONOMY IS NOT |
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| Please
remember that the K-economy is not me2.com. me2.com
refers to copycats who want to succeed but don't really
know how to do it. Many companies are copycats, they
claim this, they hype that and the share prices of their
companies go up. Is this the real economy? Unfortunately
for us, we do not have the skills yet to distinguish
them from the companies of real value. me2.com is not
good because it destroys the old economy without adding
new value. The growth spiral is not upwards but downwards.
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| Secondly,
these copycat companies may not be sustainable. To be
sustainable there must be good business models, which
are tested and proven. Otherwise it is here today, gone
tomorrow. |
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| Thirdly,
if we create copycat companies (that is, businesses
without real value) they become easy entry points for
foreign competitors. If you create something that cannot
be sustained, others will come along, buy it up, make
it work and then they will own a piece of the action.5
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5 Don't forget that all the Amazons and Yahoos have
always grown by acquisition. They don't develop everything
themselves. They acquire new companies and businesses
through their high market capital: by borrowings and
share swaps. |
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| WHY
THE K-ECONOMY? |
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| Certainly,
we in Malaysia have problems. In 1995, the value-add
per employee in our electronics industry was three times
lower than that of Singapore or Hong Kong. If you compare
that against the US or Japan, it is even worse. |
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| What
is the general value-add per worker per year in the
electronics industry? They say that the minimum for
workers in high tech industries is USD100k per year
per worker. I hear that workers in Silicon Valley have
the value add of USD500k per worker per year. Translated
into RM, it is RM2 million per worker per year! |
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| Have
we achieved those figures in any industry in Malaysia? |
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No. |
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| In
1998, our overall productivity level was 4 times lower
than that of Singapore or Hong Kong. During the years
1996-2000, Malaysia's international competitiveness
ranking worsened. |
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MALAYSIA'S RANKING OF OVERALL COMPETITIVENESS |
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1996 1997 |
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Technology 29 31 |
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Management 15 26 |
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Finance 19 29 |
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Infrastructure 22 26 |
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Source: International Institute for Management Development |
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Figure 1:Malaysia's Ranking of Overall Competitiveness |
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| According
to figures from the World Economic Forum (Figure 1),
we have not fared too well in key areas of competitiveness.
In technology, we have moved down 2 spots, in management
11 spots, in finance 10 spots and in infrastructure
4 spots. Malaysia is slowly sliding downwards. |
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| We
do not fare too well in our ranking of overall competitiveness
either. Ireland and Malaysia used to be neck-to-neck
in terms of competitiveness. Ireland has now moved up
from the 22nd to the 7th position, while we have moved
down to the 25th position. |
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RANKING OF OVERALL COMPETITIVENESS |
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| 1996
2000 |
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USA 1 1 |
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Singapore 2 2 |
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Finland 15 3 |
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Ireland 22 7 |
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Malaysia 23 25 |
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Source: International Institute for Management Development |
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Figure 2: Ranking of Overall Competitiveness |
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| What
did Ireland do that we didn't do? Ireland went into
K-initiatives very heavily. All the software companies
in Ireland develop their own software. They do not do
assembly work like we do here. That is why they can
attain that sort of improvement. |
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| Another
company from Finland, Nokia, is also very successful.
What does Nokia do best? Cellular systems. What was
it doing before? Pulp and paper. Can you imagine a palm
oil company or a rubber company from Malaysia going
into high tech? |
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| National
competitiveness depends on firms. It is not just what
the Prime Minister does that makes the country competitive.
It is what the executives and the CEOs of the companies
also do. |
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first become competitive and then, as a result, the
country becomes competitive. |
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| A
few rhetorical questions for now: How many Malaysian
companies registered profit growth of more than 40%
per annum year on year over the last 10 years? Which
companies experienced decline and re-invented themselves
for the new economy? I don't know of any. |
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| BENCHMARKING
FOR COMPETITIVENESS |
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| We
should look at companies that have done well for themselves
in the new economy. |
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Dell computers, the king of direct selling, realised
very early on that inventory was what killed PC companies.
So they introduced supply chain management and direct
selling. From 1989 to 1999, Dell had a sustained growth
of 71.2% per annum. |
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| Walmart,
the biggest retailer of all, was an early adopter of
supply chain management using even satellite systems.
They turned their data into information, information
into knowledge and used that knowledge to customise
their stores to suit the environment. |
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| They
profiled the population and created stores that suited
the people in that area. Today, Walmart is the biggest
employer with 1.1 million workers. In 1987, its revenue
was only USD12 |
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but by 1999, it had USD137 billion in revenue. |
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| Encyclopaedia
Britannica is yet another example. They were almost
destroyed because they adopted the wrong business model.
But through the web-portal experience they survived.
Britannica woke up and reinvented itself. |
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| Now
let me explain what the giant car companies are doing
with the Automotive Network Exchange (ANX.) It is probably
the biggest exchange to be created in this decade and
it is |
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to connect all relevant suppliers. They can share files,
control supply chains, manage logistics, etc. The ANX
is going to create a gigantic marketplace for all. |
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| CHALLENGES |
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| What
are our challenges in this turbulent environment? |
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| The
first challenge is learning, unlearning and relearning.
Many of us have learnt so much in the old economy, in
the old paradigm, that has become obsolete for the emerging
environment. We have to unlearn and relearn. The learning
part is for our children and grandchildren. They come
into the world fresh, with no assumptions, no pre-conceived
knowledge. They can learn the new paradigm. But for
most of us, the first task is to unlearn. |
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| The
second challenge is to add real value. Where is the
source of value in this turbulent environment? I was
reading Peter Drucker's book Innovation and Entrepreneurship
many years ago and in that book he describes all sorts
of places where you can find sources of value. What
struck me was that changing demographics can be a source
of value. How many Malaysian companies use that in business?
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third challenge is new business models, new relationships
and hierarchies. The old hierarchies have been broken
down (e.g. with ANX.) If you are not in the new hierarchy,
then you don't exist. It doesn't matter if you produce
efficiently because you won't be selling. There would
be no market. So you have to come up with new ideas
about doing business. |
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| The
fourth challenge is increasing returns. How do we address
this so that there is not only one winner but many winners?
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| The
fifth challenge is the gap that will intensify or widen
between the haves and have-nots. Unless we address it
consciously and positively, the whole of society will
break down. The marginalised are not going to sit still
and allow the gap to widen forever. |
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| The
last challenge is that of globalisation. The globalisation
that we have seen so far has introduced few rules to
govern especially the predator and of course, smaller
companies or countries become the prey. This is an economy
where the mighty will get more advantageous positions
and gain first mover advantage. The first mover advantage,
sometimes claimed as first mover rights, will give them
an unfair advantage over others. All this time we say
we want a shared world but that hasn't happened yet. |
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| NATIONAL
INITIATIVES |
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| What
is Malaysia doing to move itself out of the old economy
and into the new? |
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| The
MSC was conceived in 1995 and aimed to leapfrog Malaysia's
development through the creation of an ideal multimedia
environment for world class companies to use as a regional
hub. The National IT Agenda (NITA) was brought into
existence in 1996 and is supposed to be the foundation
for the creation of our own values-based K-society.
It is hard to sustain a K-economy without a K-society.
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| There
are three areas of development within NITA: people development,
infrastructure development and application development.
With the three, we hope to achieve access and equity.
At the end of it all we want a values-based knowledge
society. |
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| The
third initiative, the 5 Strategic Policy Thrusts, was
rolled out in 1998. In order to maintain the integrity
of the nation-state in the face of global forces threatening
to fragment human communities, a convergence model involving
three key sectors is proposed: e-public services, e-economy
and e-community. Greater sharing of information and
knowledge through ICT is anticipated to encourage the
evolution of shared power in governance. E-learning
is the foundation to foster the move towards convergence.
Finally, e-sovereignty will define the way Malaysia
interacts with the global community in an increasingly
borderless world. |
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| Furthermore,
the E-Commerce Masterplan has just been completed while
the K-economy Blueprint due in 2001 will help move Malaysia
from the P (physical) economy to the K-economy. |
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| THE
WAY FORWARD FOR MALAYSIAN ENTERPRISES |
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| To
conclude, let me clarify that I am not suggesting that
we should believe what Kuhn or Schumpeter has said.
I am simply saying that there are people who believe
what they say (call them the heretics) and are using
these theories to make the world move in a certain direction.
Therefore, we must understand these theories simply
in order to protect ourselves. |
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| So,
using Schumpeter's notion of creative destruction as
the theoretical framework for discussion, how do we
address the future? |
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| We
have to build the new (old) economy. Not just build
the new economy but build the old economy in a new way.
The first thing to do is to create and not simply destroy.
Physical businesses must work with webpreneurs because
the two can create new value together. |
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| econdly,
we must cannibalise ourselves before others cannibalise
us. The other day, somebody used the word "compassion.
Is there compassion in this business? Before you get
the sickness of Britannica, I urge you to reinvent yourselves
and do it before the circumstances become too grave.
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| Thirdly,
promote co-opetition, that is, co-operate even with
competitors. I mentioned the car companies just now
(ANX.) Two weeks ago, oil companies revealed that they
were going to create another gigantic portal, even bigger
than the ANX. |
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| Fourth,
build on your core strengths but add new value. Why
dump an old business if you can steamroll it? But do
some more work, some R&D. If you don't have R&D capacity,
just buy it, but only at the beginning of course. Also,
increase knowledge intensity in products and services
and processes, and innovate. |
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| Finally,
think global and act local. Join global exchanges and
avail yourselves of the global market. Enter global
markets, but incorporate local rules, practices and
cultures. Don't try to sell |
| western
content, for instance, to Asian markets without ensuring
cultural compatibility because it may not sell. |
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| Finally,
build and manage your knowledge assets. There is the
internal capacity to learn, produce, capture and to
apply knowledge. Use it. There are also the external
relationships with customers, markets and partners that
have to be considered. |
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| Once
we are able to manage our knowledge base, we can be
on the road to becoming a K-economy. |
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Cyberspace, by the way, is only sixteen years old. William
Gibson invented the word "cyberspace in 1984, and expounded
on it i his sci-fi novel Neuromancer. It means the new
space of virtual control. It is the control of bits
as opposed to the control of atoms. |
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Wat does that mean? Let me explain with the notion of
value chains. Value chains can now be subdivided into
physical and virtual value chains, and these can now
be operated almost independently. Companies like Amazon.com
have proven that you can just deal with the virtual
value chain and leave the world of atoms to others.
Book publishers publish the book in atoms. Amazon.com
produces a logistics system to deliver books to customers
and they may make more money than the publishers do.
This is the concept of deconstruction of the old and
reconstruction of the new economy.1 |
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