Asia's Internet Deficit

The Net is transforming the West, but companies in the East lag behind

Tucked in a gritty side street parallel to a soot-stained highway is one of the hundreds of narrow concrete buildings that pack Tokyo's business districts. On the fifth floor, visitors squeeze into an office filled with partitions, fluorescent lights, and the aroma of industrial-strength coffee. It's Sept. 7, just four days before the tenant,, will launch an electronic marketplace for excess inventory that matches buyers and sellers of clothing, furniture, and other goods. Like thousands of ventures across Asia, the company is trying to tap into an emerging business-to-business market at home and afield.

On the face of it, e-Zaiko, a venture between Mitsui & Co. and Itochu Corp.--two of Japan's largest trading houses--has all the makings of a runaway Internet success: lots of money, access to good technology, and a ready-made list of clients from their keiretsu industrial groups. The company is the first in Japan to create an online market for goods that are often quietly dumped or sold at a loss.

Yet these advantages may not be enough. E-Zaiko must reach thousands of small businesses that don't even have computers, let alone connections to the Internet. It's got to convince skeptical managers that buying and selling online can mean bigger profits. There are also any number of Web infrastructure bottlenecks, including expensive and uneven telecommunications service. Worse, most commercial transactions in Asia still involve cash or letters of credit, and written receipts are often required. A lack of comprehensive credit services also means each e-marketplace buyer and seller must be painstakingly screened, which can take weeks. "It's difficult enough in the real world, but on the Internet, it can be even harder," says Toshi Ishizuka, the 33-year-old-president of e-Zaiko.

No wonder Asia has a yawning Internet gap. While the Net is transforming industries around the world, companies in the region are barely getting started. Only 19% of the Asian companies surveyed by Goldman, Sachs & Co. say their online systems are finished or close to completion. The result: Online transactions by companies in Asia will reach only $30.5 billion this year--a pittance of the $237 billion by U.S.-based companies, and one-fourth as much as businesses in Europe. Forecasters say it isn't going to get better any time soon: By 2005, Asian companies are expected to trade nearly $650 billion online, but Europe will remain twice as large, and the U.S. will be more than three times bigger, according to Goldman Sachs. The Gartner Group says half of the 200 B2B e-marketplaces it tracks in Asia will fail within a year.

Losing control. It's a disparity of enormous import. If Asia continues to lag the West in developing and using the Internet, the region could become simply a manufacturing hub, losing control of its economic fortunes in the process. Asia's best software engineers and technicians already are streaming into Silicon Valley--a brain drain that makes the region even more dependent on Western technology. Add in the financial incentives for working at tech companies in the U.S., and it will take years before the trend is reversed--if ever. "Asia risks not being in control of its destiny," says Lane Leskela, senior industry analyst for Gartner Group Inc.'s e-market intelligence group in Hong Kong. "The Internet is both threatening and liberating, based on whether you make the decisions or they are made for you."

It's going to be tough for Asia to close the gap. Setting up B2B links, whether they are marketplaces where buyers and sellers meet at auction, private connections between suppliers and manufacturers, or software connecting different parts of a company, requires reliable technology. Yet even getting a decent phone connection, let alone a Net linkup, is a challenge in some parts of Asia. Many companies are only just buying computers. Only 20% of the employees in Asian companies are connected to the Net, compared with 65% of U.S. workers, and that Asian number isn't expected to double for another three years.

There are the cultural hurdles, too. While Asia is home to 60% of the world's people--creating the potential for huge pan-Asian e-marketplaces--those people speak hundreds of languages, creating a Web of Babble. Also, the Internet is about giving workers access to information so they can move at Net speed. Yet many managers in Asia cling to the standard corporate practice of doling out information on a need-to-know basis.

Still, the region has tremendous potential as a center for B2B e-commerce. Its hundreds of large manufacturers are keen to automate production of their chips, chemicals, and steel--commodity-style products well-suited to trading online. Asia's conglomerates also have ready-made networks of companies that share financing and infrastructure, such as port facilities, warehouses, and trucking services. And Asia is a world leader in wireless technology, broadband communications, and electronic government, which saves businesses money by streamlining taxes and public-works contract bids. "We're at the beginning of a gold rush," says Steve Burdon, who teaches e-commerce at the University of Technology in Sydney, Australia.

Asia has got its work cut out for it if it hopes to mine that gold. While the region will remain a central part of the global economy because its products are essential to businesses everywhere, Asian companies must link up with their clients, including the biggest buyers in the West, or lose billions of dollars in sales. Goldman Sachs forecasts that Asia will maintain a 24% share of global growth through 2005, but only if its share of global online commerce more than doubles, to 16%. That's a long shot, considering the problems that must be solved first. Countries like Taiwan and Singapore also rely heavily on the U.S. to buy their exports. Any slowdown in the U.S. will hurt these economies and their ability to finance capital investments in technology.

In the Net era, Asia's traditional strengths aren't as crucial. Its remarkable growth over the past decades has come partly on the back of a cheap, well-educated workforce. The Net's power to streamline, however, allows companies in higher-wage countries to get more out of their workers, making them more competitive with those in lower-wage countries. The Internet also lets buyers find lower prices outside Asia in Eastern Europe, Latin America, and beyond.

Venture capital shortage. Already, Asian companies are finding themselves outflanked by swifter U.S. rivals. And, if they don't get with it, Asian e-commerce may end up being dominated by outsiders. Look at the threat posed by Asia-Tech in Silicon Valley. The online exchange for computer chips, which opened its virtual doors on Aug. 23, connects more than 100 suppliers in Asia and buyers in the west. Trading companies, including Sanyo Electric Trading Co., provide logistics to smooth cross-border deals. In the first month since launching, about $5 million worth of orders were placed on the site, and one in 10 requests turned into a sale. The company expects that rate to triple when it introduces new services next month to help buyers find chips during shortages, and another to organize customer bids by date, price, and delivery date. Although the suppliers registered on the site are largely Asian, the majority of the profits flows back to the U.S.

Indeed, nearly all the latest B2B software in Asia is imported from U.S. companies like Ariba, i2, and Commerce One. Some Asian customers can't wait to get their hands on the software. Japan's Sony Corp. was so anxious to buy Ariba's e-procurement software that it used the English version before it was translated into Japanese. Ariba says Asia is its hottest region, growing at 15%. Even Softbank Corp., Japan's highest profile Internet investor, relies heavily on U.S. companies like Yahoo! Inc. and E*Trade Group Inc., which it brought to Asia. Now, Softbank is pushing into the B2B sphere by bringing online marketplace builder VerticalNet Inc. from the U.S. to Japan.

It's going to be difficult for Asia to develop its own software foundry. That's mainly because venture capital, the fuel of the New Economy, is in short supply. Money pouring into venture capital funds in Japan--the world's second largest economy--doubled last year and should triple this year, but that's still just one-sixth the amount of venture capital funding in the U.S. market. And just 12% of Japan's venture-capital money was plowed into tech companies, compared with 22% in Britain and 56% in the U.S. Unless that changes in a big way, Asian companies will continue to get their Net technology secondhand.

And as long as that's true, they'll remain behind when it comes to finding uses for the Net throughout their operations. Most Asian managers aren't yet thinking about e-marketplaces, for example. Instead, they tend to view technology simply as a tool for streamlining production. That's partly because they have less experience using Internet technology, and are only slowly realizing that the Net can help wire the entire company, not just the factory floor. But going online is an awesome challenge. For example, buyers have a hard time financing their purchases online because there aren't enough banks wired to the Internet. Yet lining up credit can be arduous. In India, for example, getting a letter of credit can involve up to seven banks and government agencies. New York-based Trade Card is wiring together banks to eliminate these redundancies, but Asia's financial system is "a huge can of worms," says Michael Klausner, Trade Card's vice-president of marketing.

Ditto the way Asian companies deal with suppliers. McKinsey & Co. says supply chains in Asia typically involve three or four middlemen--twice as many as in Europe. In Japan, for instance, retailers pay for what they receive and wholesalers eat the cost of missing items. To protect themselves, wholesalers get dozens of workers to unpack boxes, count the contents, and repack the boxes before they are shipped. EXE Technologies, a Dallas-based specialist in warehouse- management software, claims it can boost bottom lines by 30% if retailers, wholesalers, and manufacturers share information using standard Advance Ship Notifications, which are common in the U.S. The ASNs verify what goods are sent to buyers and when, eliminating ambiguity about who pays for what's lost. Yet EXE's director of sales in Japan, Arnold Consengco, says after two years of trying to sell this technology, retailers still don't want to relinquish their advantages over wholesalers, who see the software as a threat to their jobs. "It's an education process to explain the benefits," Consengco says.

The benefits are crystal-clear to some Asian companies. Electronics giant Toshiba Corp. is wiring its procurement systems. Last year, Toshiba and NTT Data, backed by government subsidies, built a network connecting Toshiba and 50 of its 500 suppliers at its Ome factory outside Tokyo. Toshiba, which makes laptops and computer components at the factory, guarantees purchases three months in advance in return for a pledge from suppliers to deliver components on demand. The system will help Toshiba cut 11% off its $17 billion procurement tab by 2003, while helping it earn $4 billion in operating profits by fiscal 2002. That's just at one plant. The snag: Analysts say it will take Toshiba years to roll out the system to all its factories.

One step further. While American rivals are way ahead in using Net technologies, there's actually a bit of good in that. Asian companies can study them and learn from both their successes and mistakes. Dell Computer Corp. is a model for how to Net-ize a company's operations. The PC maker not only sells and procures online. It takes the Internet one step further by allowing its corporate customers to configure their own products and know within seconds what they cost and when they can be delivered. It's almost as if Asian companies have to throw out their old playbooks and learn how to do business all over again. Says Michael Yap, who runs Commerce Exchange, a Singapore service company specializing in Web businesses: "We forgot how the real world worked."

Even when Asian companies have the will to follow in the Americans' footsteps, they often lack the way. Mitsubishi Heavy Industries Ltd., a $27 billion maker of everything from cargo ships to power plants, set up Net connections for its six overseas procurement divisions six months ago. Employees, however, are only allowed to use the Web to find new suppliers. They can't buy goods online because the company still requires written receipts. Ideally, Mitsubishi could make purchases with just a few keystrokes. Yet "half the small companies we buy from aren't even wired," says Frank Sutherland, who works in the overseas procurement office at Mitsubishi Heavy's Yokohama dockyards.

But most small companies in Asia will not catch up until costs of connecting to the Internet come down, which will take years. Asia's telecommunications carriers are being privatized, and that's lowered Internet costs in South Korea, Hong Kong, and Singapore, although logging on in Hong Kong and Seoul is still a third more expensive than in the U.S. Japan is even worse off. Leased lines are three times pricier in Tokyo than in New York, and twice the cost of those in Germany. Meanwhile, the phone system is so underpowered in India most businesses can't even get Internet connections.

With drawbacks like this, companies are looking for creative ways to cope., for instance, isn't waiting for its customers to get wired. For the past few years, CEO Justin Chu has been giving away computers to get customers hooked into their online service. The Hong Kong company, which lets buyers and sellers trade steel electronically, has handed out more than 1,000 PCs to steel mills in China and trained workers to use them. By teaching purchasing managers how to use their new hardware, Asia-Steel has attracted 200,000 tons of steel to its site per month and will make money off commissions and extra services like insurance and logistics.

This kind of commitment is expensive and time-consuming, but it's vital. To make the Internet an indispensable business tool, Asian companies need deep pockets, strong connections between their online and offline businesses, and tremendous skill at translating to the Web the networks of business relationships that make Asia a complicated place to operate. Then managers must be willing to adopt a new mind-set that cuts through corporate bureaucracy and puts efficiency and speed first. But that's a tall order even for the most forward-thinking Asian companies, let alone the vast majority of others. But if companies in the region don't step up to the plate, Asia's digital divide will yawn ever wider. online

For a Q & A with Gartner Group's Lane Leskela, visit