| BUSINESSWEEK ONLINE : FEBRUARY 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- ASIAN COVER STORY
Asia Logs On (int'l edition) Across the region, more and more businesses are discovering that they ignore the Net at their peril In late December, Andre Chung was facing a tight deadline. The 25-year-old engineer for Hong Kong toymaker Branford Ltd. needed to find a Chinese factory fast. The exporter of toy xylophones, wooden dinosaurs, and plastic fire trucks wanted to expand its product line to include furniture, and a potential customer was demanding samples and prices by Jan. 1. Aware that more and more Chinese companies have set up Web sites, he decided to search the Internet. But like many other small Hong Kong companies, Branford didn't have access to the Web. So Chung took a 30-minute trip across Victoria Harbor from a gritty part of Kowloon to use a free Internet service that is provided by the Hong Kong Trade Development Council. He spotted the Web site of a Chinese factory in Fujian province, and within days he was negotiating a production agreement. ''The Internet is much more efficient'' than the old way of doing business, which might have left him searching for a supplier for weeks, he explains. Branford, with 20 employees, got the message: Soon it will be going online. Asian manufacturers like Branford are finding that they ignore the Net at their peril. They face pressure to go online from U.S. companies such as Wal-Mart Stores Inc. and Compaq Computer Corp. that want to manage relations with all their suppliers over the Net. Moreover, the recent Asian recession has made them more aware than ever before of the pressing need to cut their costs, increase their efficiency, and stay in touch with their customers. For many Asian companies--facing fresh competition from rivals in Mexico or Eastern Europe that are closer to their partners in the U.S. or Germany--using the Net has become a tool for staying ahead. WARMING UP. Those forces are leading more Asians online. Internet service providers (ISPs) in non-Japan Asia had sales of $1 billion last year, and this figure is forecast to rise 61% annually, growing to $8.2 billion by 2002, says Ravi Sarathy, a telecom, media, and Internet analyst at Lehman Brothers Inc. in Hong Kong. With 10.5 million Net accounts, subscriber growth in non-Japan Asia is the fastest in the world, rising 39% a year, says Sarathy. The region is also warming to electronic commerce. From nearly zero last year, online sales will top $15 billion by 2002, says Pete Hitchen, senior Asia-Pacific Internet analyst at International Data Corp. (IDC). Add on the massive amount of transactions between manufacturers and their component suppliers, and that number may jump tenfold, he says. One sure sign that Asia is catching Net fever: Lehman Brothers is underwriting the upcoming initial public offering of Singapore's Pacific Internet, a regional ISP, on NASDAQ. It's the first flotation of an Asian ISP in the U.S. The craze for the Net stands in sharp contrast to Asia's online habits of just a few years ago. In the easy days of the boom, manufacturers didn't have to worry about tracking down every last piece of inventory. But now, a slipup in inventory controls or manufacturing can wipe out precious profits. Hong Kong garment manufacturer Esquel Group has begun using the Net to get instant updates from its mills on the raw materials needed for production as well as the progress of dyeing and weaving. Before the Internet, that took hours. ''Now, because everything is so bad, it is a much more difficult business environment. You have to be more competitive to get business,'' says director K.L. Lee. MIND CONTROL? Asia's growing Net habit presents the region's authoritarian leaders with a conflict. For years, they thought they could contain the Net's freewheeling exchange of ideas and images. In Singapore and China, government-controlled ISPs blocked access to Web sites. Malaysian Prime Minister Mahathir Mohamad targeted billions for a Multimedia Supercorridor to put Malaysia ahead in the Internet race--but thought he could build it without sacrificing his government's control over opposition voices. Now, that vision is being put to the test: Mahathir has started clamping down on critics who use the Net, by requiring cybercafes to register the names of their users. But most governments recognize that this is a battle they can't win. Even so, as staunch an advocate of Asian values as Singapore Senior Minister Lee Kuan Yew conceded in a speech last October: ''We know that it is impossible to censor the Internet effectively.'' Singapore requires ISPs to block some sites, mostly pornographic ones, but there are countless others that Singaporeans can see. DEVELOPMENT TOOL. Many regulators also figure the Net's commercial payoff outweighs any threat to political order. That's because Internet use so far is not like in the U.S., where consumers drive the innovation. In Asia, business users dominate, representing 51% of those online, according to IDC. Individuals at home make up just 20% of the market (chart), compared with 54% in the U.S. Governments are eager to help such companies, by increasing Net access for both businesses and consumers. Many offer new services such as Internet telephony, or calls connected online. And since the government opened the market in Singapore, the country's two leading ISPs have been engaging in heavy promotion campaigns--with Singapore Telecom dropping charges by as much as 50%. Some of Asia's less developed countries also hope to use the Net to speed development. In Vietnam, where just 15,000 people are online, the government has slashed access charges 40% to make use more affordable. India, with its pool of talented engineers and its democratic system, hopes to become a leader of Asia's emerging Net industry. For years, telecom monopoly VSNL charged its customers a stiff $500 for 500 hours of notoriously slow Net service. But in November, when India opened the market for ISP competition, 10,000 subscribers signed up right away for rival Satyam Infoware's service, even though it is slightly pricier than VSNL's. More ISPs are expected. Says Ravi Sharma, head of marketing for British Telecommunications, which has an Indian joint venture: ''Reaching 10 million Internet users in the next three years will not be [impossible].'' Even so, that implies a growth rate of 66%. Asians are also getting pushed online by Western companies demanding Net literacy from suppliers. ''Those that are further up the food chain say this is the way we are doing business,'' says Steve McKay, head of E-commerce at Andersen Consulting in Hong Kong. U.S. retailer J.C. Penney Co. is setting up an Internet service for all its Asian suppliers. In the PC business, companies such as Compaq now insist that Taiwanese suppliers share data electronically. ''We need information to flow on a real-time basis,'' explains Tony C. Leung, director of Greater China marketing at Compaq. Americans are inspiring imitation. Taiwanese computer makers are forcing their customers to manage complex delivery schedules over the Internet. Hong Kong apparel maker and retailer Esprit Holdings has a two-year-old intranet to communicate with its Asian wholesale customers, who bought $220 million worth of Esprit last year. Nowadays, Esprit is able to process an order in two hours, compared with two days before. ''Savings in efficiency and timing are equally, if not more, important than savings in dollars and cents,'' explains Alva W. Chan, Esprit's chief financial officer. ''A MUST.'' Hard-pressed retailers such as Hong Kong's Giordano Ltd. are using the Internet to get that extra edge in fashion. Giordano buyers send pictures over the Net to their New York designer, who offers an instant critique of the color palette. This has reduced the time that it takes for new apparel to hit the stores. The Internet, says Chairman Peter Lau, ''is now a must.'' And it's becoming available to more companies. Only two years ago, a Hong Kong company that wanted to receive orders electronically and track shipments would have to shell out at least $5,000 for an electronic data interchange (EDI) service, with all of the expensive switches, wiring, and security devices it entailed. Now, the same sort of EDI is being done over the Net for a fraction of the cost. Customers of Arena, a Hong Kong startup, can use the Net to monitor their supply chains, and they pay just $100 a month. Established companies are trying to position themselves, too, with telecom and cable-TV operators taking the lead. Taiwanese cable giant Rebar will launch broadband Internet service early this year. Hong Kong Telecom wants to dominate the local ISP market, having just taken over the second-largest service provider in Hong Kong. Local companies such as Li Ka-shing's Hutchison Telecoms and U.S. players such as America Online Inc. are also coming in. U.S. DETOUR. The newcomers will still face obstacles. For instance, government restrictions still make bandwidth expensive. In Hong Kong the T-1 ''pipes'' needed for international traffic can cost a customer $13,000 a month--compared with just $1,000 in the U.S. Also, there aren't many direct connections within Asia, so most regional traffic must make a costly detour through the U.S. ''The center of the Asian Internet is still in San Jose, [Calif.],'' says Peter Schoppert, founder of Tricast Ltd., which operates online news provider CNET sites in Singapore, Hong Kong, and Taiwan. Singapore wants to change that by installing direct connections with China. Singapore has also passed legislation governing E-commerce, has developed Internet security, and has encouraged business-to-business use of the Internet. Netrust, a company 51%-owned by the government's National Computer Board, provides customers with digital ID cards that allow users to conduct transactions securely online. The cards will soon give Singaporeans access to their credit ratings and retirement funds and will enable citizens to report a change of address electronically to the police, a requirement under local law. Singapore is clearly setting the pace for the region. ''The rush toward setting up policies is because of the strong lead Singapore's government has taken,'' says Joe Sweeney, research director in Hong Kong for GartnerGroup Inc., owner of Dataquest. To keep up, Hong Kong's Chief Executive Tung Chee-hwa has set up a new Information Technology & Broadcasting Bureau to coordinate Net strategy. CUT-RATE CALLS. Hong Kong's latest step: As of Jan. 1, customers can use their regular mobile phones or handsets to make calls overseas that are connected through the Internet. For the customer, who doesn't even have to turn on a computer, it seems like a regular phone call--only a great deal cheaper. Such convenience is vital to making Net telephony work, according to Ryan Hendricks, CEO of Hong Kong startup MagicTel, which charges just 19 cents a minute for calls to the U.S. at peak hours, two-thirds less than Hong Kong Telecom. He predicts that 10% of all Hong Kong calls--200 million minutes annually--will go out over the Net by yearend, compared with just 1% now. Hong Kong wants to promote more such startups through a $100 million venture-capital fund for technology companies. China Internet Corp., a local content provider partially owned by Beijing's Xinhua News Agency, has also established a new fund called Hongkong.com Studios. The $10 million fund, which has no government ties, is investing in startups such as Outblaze, founded in May by 25-year-old Yat Siu and 20-year-old Antony Yip to create free E-mail, message boards, chat rooms, and other services for customers as far away as Sweden. The Hong Kong Gen Xers, with 38 customers so far, have a waiting list of 500 and are desperately adding staff. ''Business is great,'' raves Siu, who studied music at a Vienna conservatory before switching to the Internet world. ONLINE CLINIC. In Taiwan, an industry group wants the legislature to change a dozen laws and pass seven new ones regulating E-commerce. But companies are not waiting for the Taiwan government. In late 1998, Steve Chang, CEO of Trend Micro Inc., a computer-virus fixer that projects $150 million in revenue this year, set up an online ''clinic'' in the Philippines. From there, he has 70 ''E-doctors'' on call to provide customers instant service over the Net, along with constant electronic updates on how to handle new viruses. With 60,000 mostly Japanese ''patients,'' he expects 15% of revenue this year from his online service. ''Within three years, 50% of our revenue will be switched to our Net service,'' he says. For South Korean companies hit hard by the crisis, the Net provides a rare sign of promise. South Korea saw a doubling of Internet use, from 1.6 million users in 1997 to 3.1 million by the end of 1998. The country's five main ISPs had $78 million in revenue last year, and E-commerce sales more than doubled, to $12.6 million, over the same period. The Net's potential has attracted Korean conglomerates such as Samsung Co. It runs three electronic malls, a search engine, and a Web design house. Still, the lack of legislation in most of Asia governing E-commerce transactions remains a hindrance to development of the Net. Bombay's Indiabookshop.com, for instance, is able to take customer orders over the Net. But it is unable to verify credit cards online, since India does not yet have the legal framework to allow encryption: Without encryption, credit-card transactions are not secure. The Indian Parliament is working on passing new laws. Across Asia, businesses are hoping barriers fall soon. They look longingly at the U.S., where online shopping soared at Christmas. Asia ''is on the brink'' of a similar breakthrough, says Jeff Perlman, director of E-commerce at Visa International Asia-Pacific. For manufacturers, that breakthrough has come already. With Asia's Internet Age under way, the race is on to see which governments and companies will make the changes needed to thrive in the new era. By Bruce Einhorn in Hong Kong, with Manjeet Kripalani in Bombay and Michael Shari in Singapore _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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