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Asia's Future (Int'l Edition)


International -- Asian Cover Story

Asia's Future (int'l edition)

It's set for a new technology-driven leap forward, but huge problems remain

Philip Yeo, chairman of Singapore's powerful Economic Development Board, is by training a conservative and a traditionalist. For most of his 14 years at the government agency, Yeo and his team of meticulous technocrats have geared the island's investment policies and education system toward the manufacturing of products that long ago lost their glamour in the U.S., such as chemicals and computer memory chips.

But drop by Yeo's office atop the Raffles City complex in downtown Singapore today, and you'll find a man bubbling with the excitement of a schoolboy. His desk is strewn with well-thumbed copies of pop-science books like The Complete Idiot's Guide to Decoding Your Genes and Sex and the Origins of Death. He wants every school-age Singaporean to study the life sciences. The 54-year-old industrial engineer took time off himself last year to study biotechnology. "Every kid must understand genetics and DNA," says an ebullient Yeo.

Five thousand kilometers away, at the research headquarters of LG Chemical Ltd. in the central South Korean science hub of Taedok, executives are also preoccupied with the future. Like many behemoths controlled by Korean conglomerates, LG Chem had prospered for nearly 30 years by building ever larger plants to produce commodity products, in its case chemicals used to make plastics and building materials.

But LG execs have long since realized that they needed to make a radical shift into advanced technology. The company is investing heavily to catch up with Japan in sectors like state-of-the-art batteries and display screens. Next year its biotech division hopes to hit the U.S. with a new antibiotic for respiratory infections. "We have to be world-standard level in everything--including marketing and organization," says LG Chemical Research Park President Yeo Jong Kee. "Otherwise, we'll have a gloomy future ahead."

East Asia is on the move. In a multitude of ways, companies and governments from Singapore and South Korea to the new technology zones of Shanghai and Ho Chi Minh City are embarking on a quest to find the technologies that will help drive a new wave of economic growth. By virtually every measure, Asia is set to enjoy a wave of technology-led expansion. Capital spending is roaring ahead, with heavy investment in the latest-generation technologies of everything from computers to chipmaking equipment. Salomon Smith Barney estimates that outlays on machinery and equipment in Korea, Singapore, and Taiwan will jump some 50% this year. From Hong Kong's Internet-led boom in the services sector to Taiwan's and Korea's high-tech manufacturing prowess, East Asia is positioning itself for the next leap forward.

The region is still burdened by staggering corporate debts and shaky financial systems, the legacy of old high-growth formulas that ran out of steam. And in some cases, companies have merely taken on the look of an IT company. One example is Hong Kong's Cyberport, a property development dressed up to look like a high-tech incubator. To return to strong, sustainable growth in a new world of tumbling trade barriers and whirlwind technological change, East Asia must get serious about creating industries and business environments that leave the Old Economy and old business styles behind.

It is doing so with considerable vigor. The billions that Singapore, Korea, and Taiwan--as well as chaebol like LG--are budgeting for genetics and other sciences underscore a new appreciation for basic research. From biotech to optical engineering, regional research and development budgets are bulging. In Korea, R&D spending has grown from 1.9% of gross domestic product a decade ago to 2.7% now, with a goal of 3% by 2005, just short of Japan's 3.2%. So far, Asia's heightened embrace of a technology-intensive economy does not show up in broad-brush statistics. In fact, in terms of profits and economic growth, biotech and advanced electronics materials have played a small role in Asia's bounce back. Old standbys like steel, memory chips, petrochemicals, and low-end computer hardware have largely powered the recoveries of Korea, Malaysia, Thailand, and Singapore.

But much of the new competitiveness is based on sharply devalued currencies--an advantage that won't last. Sooner or later, traditional industries are destined to return to supply gluts and plunging prices. The rise of China, with its enormous domestic market and millions of engineers, and the allure it holds for multinationals, is one of many factors that will put strong pressure on the deflated Tigers to find more profitable niches elsewhere.

The good news is that East Asia may now be poised to chart a new course in technology because the crash in regional dot-coms, following closely on the 1997-98 crisis, has prompted a permanent shift in the business mind-set. "Long after the last doomed Internet startups run out of cash," says Donald Hanna, a Hong Kong-based economist for Salomon Smith Barney, "we expect the global IT cycle to contribute importantly to Asian economies and markets."NEW ATTITUDE. With market barriers falling in the face of trade liberalization, "manufacturers now understand that imitation is no good anymore," says Chung Seon Jong, president of Korea's Electronics & Telecommunications Research Institute in Taedok. "They must have their own products." In Korea small high-tech ventures account for only 4.8% of GDP now, but officials expect the sector to grow to 18%, or $130 billion, by 2005, and employ 1.2 million people.

The shift in attitude is most apparent in once protectionist Asian governments. South Korea, for example, has thrown open its markets for fixed-line and wireless networks. This has unleashed a wave of telecom investment that has dramatically cut costs, enticed companies to introduce ultrafast broadband networks, and spurred some of the world's highest usage of cell phones and the Web. More than half of South Korea's 47 million citizens have cell phones, while 16.4 million have Internet accounts. Some 3 million households have lightning-fast broadband connections to the Net.

The new high-tech entrepreneurial culture is not going to disappear--even if the fast money has. Having been laid off by corporations that promised them lifetime employment, engineers from Seoul to Shanghai have now tasted the sense of accomplishment that a startup can provide. "The dot-com boom has shaken up the establishment and the way people think about their careers," says Thomas G. Lewis, Asia-Pacific chairman for the Boston Consulting Group. What's more, venture capitalists say there is still plenty of money out there to fund new ideas. Thus, whereas most of Asia's best tech entrepreneurs once headed for California and New York to launch their innovations, increasingly they are staying home to do so.

Some sectors may now be as well-positioned as Silicon Valley to produce true breakthroughs. The heavy use of cell phones in Korea, Japan, and China means that a couple of hundred dollars buys a handset stuffed with the latest features. Big home markets are fertile testing grounds for new technologies. Soon, East Asia could rival Scandinavia as a source of innovative wireless multimedia devices, as well as the semiconductors, software, and batteries that power them.

Korean and Taiwanese electronics companies, meanwhile, have already become bigger production bases than Japan for liquid-crystal displays, which are fast becoming ubiquitous on everything from personal computers and mobile phones to automobile dashboards. They are catching up fast in new generations of screens made from flexible materials. Investment in broadband telecom infrastructure across the region means manufacturers could emerge as key players in equipment used in superfast optical-fiber networks.BAD DEBT. There also is tremendous growth potential in enabling old-line mass producers to get more mileage from their technology. James B. Haybyrne, chairman of Hong Kong-based Strategic Thinking Group, advises family-owned manufacturers on how to use their technological knowhow to move into more profitable businesses. One client is Hong Kong-based Kam Yuen's Watch Case Manufactory Ltd., which has been making metal watch casings for 30 years. Now, it has adapted its processes to produce moldings for high-tech telecommunications equipment and has plans to make surgical tools as well. "The ability to acquire and use technology more effectively is going to be a source of productivity improvements and growth," says Haybyrne.

The big winners in Asia's technology race, of course, will be economies that already possess strong engineering bases, high education standards, modern telecom infrastructure, and globally competitive corporations. These include Taiwan, Hong Kong, Korea, Singapore, and, increasingly, China.

It's an open question, though, as to how the rest of the region will fare. Education levels are low. The average Thai completes 6.5 years of schooling. In Indonesia, the dropout rate among poor teenagers has doubled, to 25%, since the crisis. Personal-computer use and Internet access in Southeast Asia lag way behind Japan, Korea, and most of Northeast Asia. What's more, the corporate and financial sectors remain buried in bad debt, which means companies cannot afford to buy the new equipment and technology required to keep pace with better-financed rivals elsewhere in Asia.

But if Indonesia and Thailand now seem at a disadvantage, they still have entrepreneurs who are trying to find their role in global information technology. Learning from the success of India's booming software industry, for example, Vietnam is starting to establish itself as a new source of software programming and animation work for foreign companies (page 60). In Bali, Indonesian entrepreneur Marina Budiman has founded BaliCamp, a compound of Web-linked bungalows overlooking shimmering rice fields, where programmers will produce some $10 million in software this year. Budiman is counting on a pleasant environment, higher than normal wages, and a cadre of skilled professionals to nurture what might be called a silicon paddy in a land known mostly for its beaches. Another such software park is in the works in the Thai tourist mecca of Phuket.

A harder case to judge is Malaysia. Its $3 billion bet on the Multimedia Super Corridor, a brainchild of Prime Minister Mahathir Mohamad, was supposed to provide a New Economy boost with its state-of-the-art labs, fiber-optic networks, and tax-free zones, all designed to attract software and multimedia investments. The project attracted few foreign companies, so Malaysia is now trying to nurture homegrown talent with an incubator in Cyberjaya, the heart of the new tech zone.

Today, that program boasts some 45 startups. One success is Flarestudios.com, a 3-D graphics design house, which says it has produced a completely computer-generated, made-for-television, animated video for EMI that will debut soon on MTV. Yet overall the vaunted Malaysian project hasn't come close to its goal.

Not that this should discourage Asia: An unremitting search for competitive technologies and the creation of a business culture that ensures workers and entrepreneurs can take advantage of them, could usher in a new era of fast growth. True, when viewed from above, Asia seems far from achieving such a transformation. But on the ground, in a host of startups, enlightened conglomerates, and business-savvy research labs, the gritty task of building Asia's high-tech future has begun.By Mark L. Clifford in Hong Kong and Pete Engardio in Singapore, with Daniel Lovering in Bangkok, Frederik Balfour in Cyberjaya, Sheridan Prasso in Hong Kong, and Bureau ReportsReturn to top


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