In Search Of New Growth Engines

Now, Asia is eyeing high tech, services, and small business

Ricky Wong is the first to admit that his life as a Hong Kong entrepreneur is hardly thrilling. From his office in the gritty Mong Kok district of Kowloon, Wong works until well after midnight, six days a week. "I don't play mah-jongg. I don't listen to music," explains Wong, 37. "I just like working." With his grind-it-out attitude, Wong is heir to the Asian entrepreneurial tradition made famous by the likes of Hong Kong property magnate Li Ka-shing and Chung Ju Yung, founder of Korean industrial giant Hyundai--tycoons who helped fuel the region's boom in the decades before the 1997 financial crisis.

The similarities end there, however. While the earlier generations of Asian entrepreneurs built wealth in manufacturing, trading, or property, Wong is at the forefront of a sector that was closed to Asia's private businesses just a few years ago: telecommunications. Wong's $125 million City Telecom is Hong Kong's No. 2 provider of both international calls and Internet service, behind only Cable & Wireless HKT, the longtime monopoly formerly known as Hong Kong Telecommunications Ltd. Since the former British colony opened its international telecom market in January, City Telecom has snared market share with cut-rate prices and advanced services. And thanks to surging profits and a successful Nov. 3 Nasdaq listing, Wong this year has nearly doubled his workforce, to 600, just when recession has triggered layoffs throughout Hong Kong.

The rise of entrepreneurs like Wong testifies to an important change in the structure of East Asia's crisis-hit economies. Thus far, the region's economies have been driven by a few key sectors. South Korea and Malaysia have relied on export manufacturing for more than 40% of gross national product. In Hong Kong and Bangkok, property developers and banks account for the lion's share of traded companies. Asian consumers, meanwhile, figured little in the old growth equation. Local financial systems funneled their savings into favored industries, while protectionist policies forced them to pay much more than their Western counterparts for everything from telephone service to electric appliances.

The financial crisis and changes in the global economy have dealt a heavy blow to that economic model. Many of the giant family groups that propelled Asia's Tiger economies in the past are in shambles, as are the banks that supported them. At the same time, Asia's manufacturing base has come under threat by falling world prices and rising competition from Latin America and Eastern Europe.

AMERICAN WAY. So Asian governments are struggling to find new engines of growth for the 21st century. Now, policymakers increasingly see long-neglected service sectors, from the media to health care and retailing, as vital. Governments are investing heavily in science parks, business-training institutes, and small-business incubators in the hopes of stimulating high-tech startups. And recognizing that red tape and coddled cartels hinder job creation, most are deregulating sectors like banking, telecom, and real estate development.

The goal for many Asian leaders is nothing less than replicating the success of the American New Economy. Economies that rely too heavily on manufacturing "are quickly becoming obsolete," says the managing director of Singapore's Economic Development Board, Liew Heng San. Thus Singapore is aggressively planning to turn the island into a research and development center. "The new paradigm is based on knowledge," says Liew.

But change is often painful, and comes with risk. Asia's new economic model will take time to develop fully. It will be years before new small businesses can match the job creation once provided by conglomerates that focused on gross sales and adding production capacity with little regard for the bottom line. And while top leaders are ramming a slew of reforms through their legislatures, many restrictions on competition and foreign ownership remain. Getting bureaucracies to implement new rules where established players still enjoy enormous clout and the rule of law remains weak will be difficult.

Quality of life is an issue as well. Worsening air pollution and overcrowding make it increasingly difficult for Asian capitals to attract global talent. Uneven protection of intellectual property acts as a deterrent. Without improvement in these areas, says T.C. Chu of McKinsey & Co. in Hong Kong, Asia "will never become an international center for any knowledge-related industry."

ENCOURAGEMENT. But economic pressures are likely to keep pushing Asia's Tigers in the right direction. It's no coincidence that Hong Kong Chief Executive Tung Chee-hwa, who wants to turn the city into Asia's Internet hub, is now making environmental cleanup a priority. And with foreign banks still wary of extending new credit in Asian emerging markets, governments have little choice but to open up to foreigners. Korea, for example, needs $26 billion just to upgrade its telecom infrastructure.

So thanks to the crisis, the environment has never been more favorable for a transition to a new economy. Banking reform is making it easier for small businesses to obtain loans, while new Nasdaq-style stock exchanges are enabling them to raise equity financing. Red tape that made it difficult to start up small businesses is being reduced. Sweeping telecom deregulation is spurring feverish competition. South Korea, for example, has declared wireless and data networks open to foreign investment. Within a few years, vows Information & Communications Vice-Minister Ahn Byong Yub, "the only role the government will play is to ensure consumer protection and fair competition."

That's the kind of encouragement entrepreneurs have been waiting for. Hundreds of companies like City Telecom have emerged to chase new opportunities in communications. In Seoul, where the government-linked Korea Development Institute is preparing a new 300-page development blueprint, economists are studying ways to copy the success of Dong Dae Mun. Some 2,500 small garment businesses have transformed this old market district into an all-night bazaar for buyers from around North Asia. In Bangkok, an influx of Western superstores is revolutionizing an industry long dominated by family dynasties.

Asia's Internet pioneers are leading the entrepreneurial charge. Singapore's Lai Kok Fung, a 36-year-old engineering PhD and founder of Web startup BuzzCity, is one of many trying to break the stranglehold that state-linked companies have had on the city-state's economy. The firm has a service that sends customers e-mail updates on their favorite Web sites. In Hong Kong, crowds of Net wannabes descend on weekly networking get-togethers sponsored by a group called Internet & Information. Altogether, estimates Boston Consulting Group, online consumer spending amounts to $1.3 billion annually in non-Japan Asia, but could hit $10 billion by 2003.

Multinationals also are having an impact on Asia's consumer economy. Since Korea changed foreign investment rules and lifted zoning restrictions, Seattle retailer Costco Cos. has committed $190 million for five stores by the end of 2000, selling items such as Calvin Klein jeans and Sony TVs for 15% less than local stores. In Thailand, Ford Motor Co. is introducing new services after its takeover of B-Quik, a chain of six body shops that the carmaker plans to expand to 100 next year. France's Casino Guichard Perrachon, which in April took control of Thailand's Big C chain of 20 mass-market retailers, is using its information systems to speed up the delivery of fresh food to its stores. Casino plans to add 15 stores--and 4,500 jobs--in three years.

HOMECOMING. Similar forces are helping some of Asia's fledgling health-care companies. The Hong Kong government, which has run up a big budget deficit to stimulate jobs, wants private companies to shoulder more of the health-care burden. That's good news for Brian D. O'Connor, executive chairman of Hong Kong-based Quality HealthCare Asia Ltd., whose stock price has more than doubled so far this year. In his 200 Hong Kong clinics, O'Connor employs 300 doctors and 350 nurses--and expects to boost staff by nearly 50%.

To create a business environment more hospitable to tech startups, Asian governments are studying the secrets of Silicon Valley. By yearend, Hong Kong will launch its Growth Enterprise Market, modeled on Nasdaq, which caters to startups that lack the profitability required by the main stock exchange. Singapore is also making it easier for high-tech startups to list, producing twice as many initial public offerings this year as last. And to keep talent, companies regionwide are starting to offer more generous stock-option plans. SingTel, where even operators now get options, plans to give such incentives to workers "anywhere we can measure performance," says Chief Executive Lee Hsien Yang.

News of the big changes afoot have reached the thousands of Asians working in high-tech industries of the U.S. Some are starting to return. Take Silicon Valley veteran Patricia Lee, a 29-year-old software engineer. She left Hong Kong to study in California in 1986. Yet in August, the former Apple Computer Inc. employee returned home to join Pacific Convergence Corp., a new company preparing to launch an interactive TV and broadband Internet service. "The whole mentality has changed," says Lee, who says many of her U.S.-based Hong Kong friends are looking to return, too.

Pacific Convergence will be a tenant in Cyberport, the brainchild of company founder Richard Li, son of Li Ka-shing. The $1.6 billion Cyberport is an industrial park for multimedia companies that will sit on land granted by the government without competitive bidding. Before the crisis hit in 1997, most Hong Kong business leaders doubted the city needed anything to help promote high-tech industry. But the worst recession in the postwar era has shaken the city out of its complacency. "A brand-new infrastructure is necessary for the new age," says Hong Kong Trade Development Council Chairman Victor K. Fung. "We don't have any time to waste."

Cyberport is just one of many grand projects promoted by governments from Taipei to Kuala Lumpur. One of the most ambitious is Korea's Media Valley, which is taking shape on a barren stretch of reclaimed land near the port of Inchon. The government envisions a hub for software, telecom, and multimedia companies, from startups to multinationals. To lure talent from abroad, Seoul promises that foreigners employed in Media Valley will get instant work visas and have access to special low-cost housing.

With its oversized scale, the $30 billion Media Valley scheme is reminiscent of the giant boondoggles--the world's longest building, the world's biggest dam--that epitomized Asia's bubble. But officials behind the project insist Korea has learned from the crisis. Rather than rely on local companies funded by local banks, the government is opening the project to global investors.

BIG JOB. These projects still have their doubters. "Science parks and R&D centers are all good, but not the real answer," says Steve Liddell, CEO of Level 3 Communications Inc. The Denver-based provider of communications services wants to lay cable across the Pacific to hook Asia up to its Internet network. But ownership of such infrastructure is still highly controlled in most of Asia, so companies such as Level 3 must lease their pipes from rivals such as HKT and Singapore Telecom. Rather than pour money into construction projects, Liddell argues, Asian governments should focus on cutting the cost of e-commerce. A high-capacity line from Hong Kong to the U.S. still costs $1.1 million a month, vs. $140,000 for a similar line across the Atlantic.

Such problems show that the task is hardly done. Singapore, for example, has opened its mobile and fixed-line markets--but only to one rival of government-controlled Singapore Telecommunications Ltd. Prices have dropped 30%, but the duopoly doesn't encourage as much innovation as in freer markets--and could eventually hamper new sectors. While Hong Kong's mobile operators launched stock trading via digital cellular phones early this year, for example, Singapore won't have the service until next year. "There are major movements going on," says Richard Slogrove, regional managing director for British Telecommunications PLC. But Asia represents more challenges for foreign companies than Europe, he adds, which "opened its market in one fell swoop." Concedes EDB Chairman Philip Yeo: "We made a mistake by opening up too late in telecom."

Powerful cartels present another roadblock. Just look at the travails of adMart, the online-shopping venture of Hong Kong entrepreneur Jimmy Lai. Supermarkets run by Hutchison Whampoa and Jardine Matheson hold exclusive rights to distribute many name-brand products in the territory. So Lai must sell goods obtained from unauthorized dealers in Malaysia and China. Several embarrassments have resulted. In October, adMart had to offer refunds after it had unwittingly sold counterfeit French wines and Cognac.

OPENING UP. As adMart's woes show, Asia's economic transition will be bumpy. But even if the Establishment players are able to fend off the initial wave of upstarts, competition will keep coming. American e-commerce powerhouses like are likely to hit Asia soon. Increasingly, protectionism won't be viable.

Government restrictions will continue to disappear. With China now ready to enter the World Trade Organization, Taiwan is sure to follow. Already, governments are committed to opening their telecom markets. Business pressure will force many to go beyond WTO rules.

The effects of this transition will be far-reaching. The growth of innovative smaller companies will make economies far less dependent on the patriarch-run giants that fueled much of Asia's growth but also led the region into the crisis. Helped by greater choice and lower prices, demand by Asia's middle class will play a greater role in their countries' economies. The new Asian economy is still in its infancy, and needs lots of nurturing. But if Asians manage the transition well, their countries could become far more dynamic forces in the global economy.

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