Could it happen here? Across Asia, from the Chinese clans of Thailand and Taiwan to the chain-smoking day traders of Seoul and the risk-takers clustered in central Tokyo's Bit Valley, optimism about the New Economy abounds. After more than two years of crisis, executives and policymakers are eager for a big payoff from the diffusion of information technology, the spread of the Internet, and the adoption of global business practices. The excited talk in many Asian boardrooms is of the convergence of personal computers, smart phones, and e-commerce, and the huge impact that it will have on the region's productivity and consumer spending.
Small wonder, then, that global investors are snapping up any stocks that smell like an Asian New Economy play, turbocharging bourses around the region. Companies like NTT DoCoMo, the Japanese cell-phone operator, are emerging as savvy ways to bet on the merger of the Net and wireless phone systems. Other big corporations, like Samsung Electronics and Hitachi, are going through the kind of painful but needed restructuring that prevailed in the U.S. in the 1980s. The local corporate appetite for information technology products is rising fast, as shown by the soaring Asian demand for memory chips.
These are the telltale signs of a New Economy in the making. Yet investors should also learn the art of patience as they await the great economic makeover of Asia: The changes working their way through the region will take a long time to reach their full effect. Taken as a whole, East Asia and Japan today still lack the kind of super-liquid and vast capital markets, venture-capital networks, world-class universities, risk-taking culture, restructuring ethos, and high-tech talent pool that set the stage for the amazing run of growth the U.S. has had since the mid-1990s. Some of these factors are at play--but not all of them and none at the same level as in the U.S.
WAR CHEST. Asia must still spend plenty to reach the critical mass needed for a New Economy takeoff. U.S. investment in information technology is now at about 34% of total business investment. The closest Asian rival, Japan, is spending only 20%. Another edge: The market capitalization of all U.S. stocks is roughly $17 trillion, providing a massive war chest for strategic acquisitions and overseas expansion. None of the markets in Asia--even Japanese stocks are worth maybe $4 trillion--comes close to providing that kind of liquidity.
And to suggest that Asia can swiftly dismantle decades-long practices of state intervention and backward financial techniques and end its reliance on export-oriented, manufacturing-focused economies stretches belief. "It's kind of like dreaming about building the space shuttle when you haven't yet figured out how to build an airplane," says Sam Nakane, a Tokyo-based managing partner in charge of e-commerce for PricewaterhouseCoopers.
It's true that deregulation, wholesale restructuring, and disruptive new technologies are starting to have an impact on Asia. The first-round impact of a New Economy-led revival in Asia will involve years of job losses and the destruction of pricing power by established companies before there's any big payoff in higher productivity and faster noninflationary growth.
Many of Asia's leaders support such an overhaul. South Korean President Kim Dae Jung, Hong Kong Chief Executive Tung Chee Hwa, and Singapore Prime Minister Goh Chok Tong all see information technology, telecommunications, and the Internet as the keys to future prosperity. Taiwan, a powerhouse in laptops and motherboards, aims to nearly triple the size of its $4.5 billion software market by 2005. India has similar, if smaller, ambitions.
But the transformation will happen in fits and starts and more deeply in some economies than others. A look at Japan shows the promise of change, as well as the considerable problems that remain. In America in the 1970s and early 1980s, widespread deregulation set the stage for huge innovations and restructuring. That's just starting to happen in Japan, where efforts to deregulate mobile phones, oil importers, and financial services have added $80 billion annually to the economy during the 1990, as prices have fallen. Deregulation of stock commissions has attracted 40 online discount brokers. The Tokyo Stock Exchange's new over-the-counter market and the arrival of Nasdaq-Japan this year are helping high-tech startups to attract capital. Internet heavyweight Softbank and cell-phone giant DoCoMo are global info-tech players.
BURNING QUESTION. Some even see home-court advantages that could make Japan a world leader in info appliances. Personal-computer penetration is only 30% of all households vs. 50% in the U.S. "But mobile-phone penetration is nearly double, and car navigation systems more than triple" that of the U.S., notes Jyusuke Ikegami, director of business planning at Softbank's e-commerce unit. Both could be huge access points for e-commerce in Asia.
The burning question now, though, is whether deregulation, personal-computer use, and corporate networks will go far enough into the fabric of society and the economy to make a difference. Japanese still pay three times as much for electricity, twice as much for housing, and 30% more for Internet connection fees than Americans. Buying goods online is a novelty and might represent $30 billion in sales by 2003 vs. an expected $200 billion in the U.S., figures Andersen Consulting.
Also, it's hard to say that the "go digital or die" mentality has taken hold among Japanese managers. True, click-and-mortar strategies are all the rage among globally savvy companies such as Sony Corp., which is moving into online banking, and Toyota, whose Gazoo Web site provides consumers information on cars, repairs, and insurance.
MISSING ZEAL. Some innovators such as Japan's biggest office products supplier, Askul, have used the Internet to offer real-time ordering and 24-hour delivery to its clients. It has enjoyed huge savings by setting up a high-tech distribution center near Tokyo Bay. The productivity gains afforded by the Internet will allow its sales to double to $400 million by next March--without adding to its workforce of about a hundred. "We now get customer feedback instantaneously," says Marketing Vice-President Mike Onishi, who says the company plans to go public next year.
Yet what worries Shin Yasunobe, director of the Ministry of International Trade & Industry's electronics policy division, is the absence of such zeal at so many companies. He notes that Japan's business-to-business e-commerce, which should grow to $650 billion by 2003, will still be less than half of the expected U.S. level. Such sectors as chemicals, paper, textiles, and distribution are admittedly short of cash in an economy that will only grow 1% this year. Still, they haven't even started to replace 1980s-era proprietary networks, let alone embrace the Net. As a result, they are missing out on potentially big productivity gains. "They aren't very serious at all," laments Yasunobe.
Another worry, particularly among startups, is finding enough qualified bodies to make a go of it. Japan has plenty of techies. But those in big, established companies such as Toshiba, NEC, and Hitachi aren't yet ready to trade a prestige job for the grueling hours that new companies demand. Yoshikuni Kato, chief operating officer of autobytel-Japan K.K., which launched its auto-selling Web site in November, says his biggest challenge is finding managers willing to take risks. "This is really a speed game, and that's not very Japanese," he says.
Things are moving faster in South Korea, which grew 10% last year with only 1% inflation. By some measures such as Internet usage and online trading, Korea is ahead of Japan. The number of startup companies doubled last year, to 4,700, and the market cap of Korea's tech-laden Kosdaq market jumped thirteenfold, to about $100 billion.
Even chaebol executives are jumping ship in hopes of striking it rich. When Cho Dong Sung, a business professor at Seoul National University, stopped in at yearend parties in December, he was stunned to find out that 30 former students at the chaebol had quit to join startups. Samsung Securities lost a top bond trader and analyst to startup Serome Technology, an Internet phone service provider whose shares have jumped ninetyfold, to $210, since listing last August. "It appears Korea has jumped on the New Economy bandwagon," Cho says.
HEAVY LIFTING REQUIRED. Certainly, the U.S. day-trading craze has taken hold. The value of online trades soared to $480 billion in 1999, or about 38% of total volume. Park Jae Hong, a fireman by trade, spends several hours a day at it and has increased his initial stake fourfold, to $20,000. "Cyber-trading is great," says Park, who has dreams of trading full-time in a few years.
Such enthusiasm for information technology is a definite plus. Yet the kind of heavy lifting needed to restructure the nation's conglomerates--a necessary prelude to the New Economy--hasn't really begun. Last year, South Korea Inc. spent roughly 60% of its operating profits servicing debt loads, the legacy of years of build-and-borrow growth strategies by the chaebol that triggered the crisis in late 1997. Debt service is tying up capital that could go to high-tech investment. Nor has South Korea brought stability to its financial sector and banking system, the circulatory system of any economy, new or old.
Nobody said these countries could reinvent their economies overnight. Yet Asia does have the latecomer luxury of importing only proven Internet business models from the U.S. And as the Internet spreads and its cost drops, then Asian consumers and businesses will have greater access to information about products and prices. That should wear down hidden barriers to free commerce and boost the economy. Right now, though, it's just an intriguing vision. Making it happen on the ground is the hard part.