Thursday, July 2, 2015

Globalization, urbanization and digital tsunami: Grab opportunity

(全球化 城市化 数码海啸: 攫取商机)

Rapid development of digital technology, particularly information and communication technology (ICT) enables movement of information and facilitate communication. Perhaps, biggest impacts of ICT are towards marketing and online business. Question is whether online business (also beneficiary of globalization) is a complement or substitute to traditional bricks-and-mortars business? Then, can Malaysian businesses, especially the small and medium enterprises avoid the threat from foreign online giants while utilizing ICT to expanse their businesses?

Two unique success stories are worth to be analyzed. First is Alibaba/Tao Bao, the first Asian online business that poses big threat (or even possibility to replace) the American giants like Amazon and Ebay. Second is Xiaomi, where their business model is revolutionary and seems being followed by Apple too.

Alibaba/Tao Bao: New Online Giant
“The world’s greatest bazaar” – this was the headline The Economist gave to Alibaba in their article 23rd May 2013.  Subsequent comparisons of Alibaba groups with Amazon and eBay (see Table 1) will prove that Alibaba is indeed “greatest” in term of merchandise volume. For year 2102 comparison – before Alibaba listed public, volume of goods traded through Alibaba is even more than Amazon and eBay combine. However, Amazon still leads in term of revenue while eBay’s profit is the highest.
Table 1: 2012 Financials (US$ billion) Comparison

Net Profit / Loss
Gross Merchandise Volume
- 0.04
(Source: The Economist, 23rd May 2013)
Two prominent companies in Alibaba’s group are Tmall and Taobao. The former facilitates “business-to-consumer (B2C)” while the later engages in “consumer-to-consumer (C2C)” e-commerce business. The Economist reported Tmall capturing 51% of B2C market in China in 2011. Taobao’s C2C China market share is a whopping 90%. No doubt that Alibaba group will change the global landscape of online business and therefore worth further analysis.
A report entitle “E-commerce in China: Taobao” (available at did a SWOT analysis on Taobao. Listed as strength are “lower entry cost”, “accurate market position”, “developed instant message software (WangWang, QQ)” and “safety payment intermediary (Zhifubao)”. Comparing to Malaysia, we also have all of those strength except “market position” where China have huge domestic population. Zalora (Malaysia online business) does have its relative strength like fast delivery (1 to 3 days) and handle their financial transaction and delivery. Yet, Zalora and other Malaysian e-commerce businesses seem restricted to domestic market which is too small for economies of scale. Products sold are also rigidly focused on apparels and electronics while Alibaba’s e-commerce companies even sell islands! Some companies went online as a complement to their brick-and-mortar business. For examples, Tesco, Pakson, Bata and IKEA online segment is an added choice of service for their customers and not for replacing their stores. Generally, it is believe that their in-store sales is far more than their online sales.

Xiaomi’s Business Model
In a workshop, a Chinese daily chief editor stunted the audience with the story of Xiaomi’s business model. Xiaomi smart phones and other telecommunication-related products are sold online directly by the company. Setting a date and exact time for bidding, this business model can do without dealer, brand representative or reseller shops. Imagine all brands do the same. How many big reseller shops will be closed? Will buyers still need to shop at phone kiosks that now mushrooming all over Malaysia? Direct online purchase, whether for smart phone or extended to all retail transactions, will safe distribution cost where its benefit can be passed to consumers for lower selling price. This Xiaomi model may revolutionize business activities but as a result, it can kill off many small and medium (SME) traditional bricks and mortar retail businesses in Malaysia. In contrast, lots of huge benefits are waiting for Malaysian SME and retail businesses if they can tap the global market and reduce operating cost through digital technology, especially online business. However, we must first learn the skill to swim fast enough before digitalization waves drown us.

A recent development may encourage (or scare) our local companies to act faster. Apple Watch was launched for exclusive online sales only. Even though in-store pick up option will be available soon, this Apple Watch online sales method mirrored Xiaomi. If big brand like Apple started to test this business model, who else want to miss out?

Urbanization and Youth
Urbanization moves people from rural to city and from one country to another (usually from relatively lesser developed to more developed). This resulted in concentration of population in city center and thus bring along the issue of high cost of living, inadequate public welfare, concentration of purchasing power and labor supplies. Domestic migration may also cause income inequality between rural and urban and intra-inequality due to urban poverty. Meanwhile, international migration causes brain drain problem and variety of social-political issues.

In September 2013, Datuk Dr. Rahamat Bivi, Director General of Economic Planning Unit highlighted eight challenges on urban development. There are social exclusion (urban poverty and vulnerable group), inadequate social amenities (education and health), inadequate housing (particularly for middle and low income groups), youth unemployment, high cost of living, crime rate, environment (congestion and pollution) and illegal foreign workers. Most of those challenges are affecting Malaysian youth either directly or indirectly.

Table 1 shows that unemployment rate between urban and rural is about the same. Only Negeri Sembilan, Penang and Selangor recorded significant differences. Urban unemployment in Sabah is even higher than rural. All these statistics indirectly indicate stressful living condition in urban and yet 60% of migration in 2010-2011 are from youth age groups of “15 – 24” and “25 – 34”, see Table 2.

Table 1: Unemployment Rate (%)

Year 2012
Average (2000 - 2012)

Negeri Sembilan
Pulau Pinang
Kuala Lumpur

Table 2: Migration (2010 – 2011)
Age group
65 & above
45 - 64
35 - 44
25 - 34
15 -24
1 - 14
(Source: Migration Survey 2011, Department of Statistics Malaysia)

Urbanization helps industrialization and service sector development that are concentrated in urban. In turn, it helps economic growth. However, issue of inequality income distribution, unskilled youth labor, high cost of living, urban safety and other issues will drown youth before they can developed into productive human resources.

Super-City: Solution for Youth Brain Drain to Singapore?
Even thought cities in Malaysia provide lots of job opportunities, wages is relatively too low as compare to Singapore. Addition, cost of living is higher. A Malaysian fresh graduate likely earnings between RM2500 and RM3000 working at metropolitan like Kuala Lumpur, Butterworth and Johor Baharu. Salary at other cities (like Muar, Kajang or even Ipoh) is less than that amount. Compare to Singapore, Malaysian fresh graduate most likely can earn at least S$2000 (equivalent RM5400) and easily increases to S$2500 (RM6750) after few years. Bear in mind Ringgit could depreciate further against Singapore dolor in future and thus, widen this salary gap.

Lunch could cost you at least RM10 in Kuala Lumpur city center but lower to about RM5 in other cities. Cost of living in Singapore’s Central Business Districts (like Orchard, Marina and Raffles) is high. However, lunch at Woodland, Jurong and Yishun (common working places for Malaysians) could be as little as S$3.00.

Malaysia needs “super-city”, not just big city. Big city provides jobs but super city provides very high paid jobs that match Singapore’s salary scale. This can be achieved by concentrating on high value-added businesses especially high value service sector like finance and information technology. Employment selection should be professional and emphasized on merit and not base on race, family ties, friendship, political link or cronyism. Only then we can have the best and most productive employees at every level of employments that worth high salary.

Big city like Kuala Lumpur consist mostly offices with high rental (thus high cost of living) and congested traffic. Super-city should be livable with mixture of offices and housings as well as efficient public transport. Urban development or town planning (where Malaysia seems failed) should be long term and sustainable.

Globalization, urbanization and digitalization – either individually or collectively – do bring both threat and opportunity. Like it or not, Malaysia has been facing this “triple-impacts tsunami”, which is not only inevitable but will grow stronger and stronger. Thus, the important question is whether Malaysia is “swimming gracefully” or “drowning awkwardly” in globalization-urbanization-digital tsunami. Fast and appropriate actions or policies should be taken in order for Malaysian swim into the benefit of this triple-impact tsunami rather than drown.

[Chinese version published at Nanyang Press, 18th May 2015. Available online at This English version may be slightly different from the Chinese online/printed newspaper version]

Globalization, urbanization and digital tsunami: Malaysia swimming or drowning?

(全球化 城市化 数码海啸 大马是游泳或溺水 )

Francis Bacon (1561 – 1626), an English philosopher and Father of Scientific Revolution claimed three inventions had changed the world. First is printing, which he considered as “humanist scholarship of Renaissance” that enable pamphlets and writing of Reformation. Second is gun power that ended chivalry, changed warfare and thus developed new form of state. Third is compass, which enables worldwide geographical exploration and discovery for the likes of Columbus and Vasco da Gama. Of course these European exploration subsequently resulted in colonization of so called “new world” includes Malaya.

Perhaps, in the future, invention of Doraemon’s “Anywhere Door” (Dokodemo Door in Japanese) will greatly changes logistic system, reduces traffic jam and subsequently affecting almost all aspects of social-economy. Now, three phenomena have been changing the world, especially to developing countries like Malaysia. They are economic globalization, digitalization (proxy by “information, technology and communication” or ICT development) and urbanization.

Globalization – usually comes together with liberalization – opens up trade and investment opportunities. Globalization is not a new thing but the latest New Silk Roads proposed by China may change the world economy and therefore worth global attention. Together with rapid ICT development, global online business of Aliaba/Tao Bao and Xiaomi can revolutionize way of doing business. Both of these future global changes involve China. Indeed, the Francis Bacon’s “three inventions that changed the world” – printing, gun power and compass – also originated from China. On localized aspect, continuous urbanization poses both benefits and threats to Malaysian social economy.

Trend and Comparison
In his paper in Applied Economics journal Vol.38 (10), Axel Dreher created an “Index of Globalization” with sub-index on economic, social and political globalization. Subsequently, these indexes are continuously updated by his Swiss Federal Institute of Technology, Zurich, Switzerland and been used as indicator for level of globalization. Based on Figure 1, Malaysia’s economic globalization sharply increased in the three years of 2009, 2010 and 2011. Urbanization is a consistent process while ICT development is rapidly improving. However, how does Malaysia’s progress compares to other countries?

Let divided “other countries” into three groups of selected (a) ASEAN countries, (b) developed countries, and (c) Brazil, Russia, India, China and South Africa (collectively known as BRICS countries). The first group (ASEAN) reflects our progress relatives to our neighboring countries. The second group (developed countries) reflects our benchmark where we want to be among them. The third group (BRICS) is considered as “super-stars developing economies” just like the “Asian Tigers” where Malaysia was once called. Comparisons with these three groups are shown in Figure 2 to Figure 4 respectively.

Figure 1: Malaysia’s “Triple-Tsunami” Progress
(Source: “EGI” from Swiss Federal Institute of Technology; “urbanization” is percentage of urban population from World Bank; “IDI” from International Telecommunication Union, ITU)
(EGI = Economic Globalization Index; U = urbanization ratio; IDI = ICT Development Index)

Among our neighbors, it is very clear that Malaysia’s development in all three aspects of economic globalization, urbanization and digitalization is better than all selected major ASEAN countries except Singapore. Figure 2 shows Malaysia (dotted line) cover-up all other countries except Singapore.

Figure 2: “Triple-Tsunami”: Selected ASEAN Countries

Figure 3: “Triple-Tsunami”: Selected Developed Countries

Figure 4: “Triple-Tsunami”: BRICS Countries

Surprisingly, Malaysia level of economic globalization is higher than selected developed countries (Figure 3) and BRICS countries (Figure 4). Information, communication and telecommunication (ICT) development as proxy for digitalization is a relative weakness for Malaysia. South Korea, the world second best ranked in ICT Development Index is far ahead of Malaysia. Nonetheless, higher rank in ICT development aspect does not necessary good. Example, in United Kingdom, its citizens have been heavily criticizing their government for over-liberalized ICT sector until selling and allowing foreign entities controlling major ICT companies and technology there. On the other hand, China gave strong challenges to United States in online businesses; most glaring example is Alibaba/Tau Bao group. Perhaps, it is due to China’s relative uniqueness in term of high domestic population and very low cost of production. Other countries include Malaysia did not enjoy that uniqueness, thus have to fully utilize the benefit of these triple-tsunami factors. Malaysia also moderately urbanized. Comparing to developed countries, Malaysia still lags behind but better than China, India and South Africa. This implies big room for further urbanization which is currently concentrated on Klang Valley (mega cities such as Kuala Lumpur and Petaling Jaya) and few capitals of certain state like Johor Baharu, Ipoh, Penang city center and Kuching.

Globalization China through New Silk Roads
Globalization intensifies movement of goods and services as well as capital. This resulted in changes in method and location of productions as well as intensity of international trade. Few decades ago, China has been single out by United States for its “anti-globalization” and “anti-trade” policies. However, when China liberalizes their economy and export began to growth strongly, the American and European started to violate the free trade spirit promoted by them. New tariffs and concerns were hurdled against China as well as South Korea. Thus, is free trade just a game? Is that we play by its rule if it can benefit us and quit the game if otherwise? Regardless of the answer, globalization is an unstoppable process and it can be good (opportunities) or bad (threat) to any countries include Malaysia.

To the surprise of the world, coming decades of economic globalization could be leaded by China after the announcement of “One Belt, One Road” big plan by China’s President Xi Jinping in 2013. The “one road” is actually not only one but covers land road, railways, sea and air, which together also known as the “New Silk Roads”.

A simple Google Image of “New Silk Roads” will show the Economic Belt involving physical roads or railways through northern China to Middle East before links to Moscow and Europe (Turkey, Rotterdam and Venice). According to United Nation Comtrade’s database, Malaysia’s main export and import destinations in 2013 are Singapore, China, Japan, United States and Thailand. Besides China, other nations are out of this Economic Belt Silk Road. Perhaps, the most likely affected European trading countries are Netherland, Germany, France and Italy but their volumes of trades are not that much as compare to our top five trading destinations.

It is the Maritime Silk Road that may give biggest impact to us. Will it be opportunity or threat? It depend on an extraordinary bold move – create a “Ma-Thai Canal” together with Thailand just like the “Suez Canal”. The Maritime Silk Road will benefit Singapore much more than Malaysian ports. The “Ma-Thai Canal” that cut through border of Malaysia-Thailand significantly reduces shipping time and cost. Thus, Malaysia (and Thailand) can position themselves to get significant benefit from any success of China economy or the New Silk Road.

Some historical information will be scary to Malaysia. It is believed that a Thai Canal at Kra Isthmus (the narrowest part of the peninsular in Southern Thailand border) has been proposed as early as 1677 by Thai King Narai. This idea has recently re-surfaced with variety of location inside Thailand being proposed for feasibility study. The latest in 2015, China-Thailand collaboration is proposed. What will happen to Malaysia’s economy, especially port and shipping industries if Thailand go alone or in cooperation with China? Thai Canal cooperation seems suit China’s New Silk Roads plan very well too. Imagine we jump into the partnership with Thailand (or even include China) for a win-win situation. Our northern ports along this canal will be busier than Singapore port, which is impossible for us to achieve now. Then, we can swim happily in the wave of globalization.

Malaysia is somewhat less than developed countries (include Singapore) but more than ASEAN and majority of BRICS countries in the process of globalization-digitalization-urbanization. On economic globalization, some see it as new form of colonization but some see it as a big window of business opportunities. Now China has its Maritime Silk Road plan. Singapore has superior strength in its entreport and service sectors. Thailand seems renewed its intention to create a maritime canal. Thus, Malaysia needs to act fast to ensure at least we can still float in economic globalization wave.

[Chinese version published at Nanyang Press, 11th May 2015. Available online at This English version may be slightly different from the Chinese online/printed newspaper version]

Wednesday, July 1, 2015

Finding super service industries


Sun Tzu’s Art of War advised to pull out from losing battle but reinforce the winning ones. Despite overall great potential for service sector, there are losers and winners sub-sectors. Therefore, it is important to clearly identify them, pull out from the declining sub-sectors and reinforce the growing ones. Unfortunately, publicly available data is so limited to make any precise analysis. Thus, three model of analysis are used to identify potential service sub-sectors.

Semi-static Comparison (Model A)
Semi-static comparison model compare the potential of service sub-sectors within two static time frames, namely “Period 1” and “Period 2”. “Period 1” takes average value for year 1987 to 1989. “Period 2” takes average value from year 2011 to 2013. “Period 2” is more important as it take latest available data. “Output contribution to Gross Domestic Products” (GDP) and “labor share” for each service sub-sectors are compared over two periods. All data for this model are obtained from World Bank.
Based on Figure 4, “wholesales, retail, hotel and restaurant” sub-sector has the higher output contribution to GDP for Period 2 as well as biggest improvement between the two periods. “Finance, insurance, real estate and business service” are second highest contribution and improvement.
Figure 4: Service Sub-Sector Output Contribution to GDP (%)

Based on Figure 5, “wholesales, retail, hotel and restaurant” used the highest labor share follows by “other services” sub-sector such as community, social and personal service. “Finance, insurance, real estate and business service” came third yet recorded the second biggest improvement over the two periods. In contrast, labor share for “other services” sub-sector decline from 42.97% in Period 1 to 31.69% in Period 2. Adding “productivity” factor to “output contribution to GDP” and “labor share”, we get “Bubble graph” as in Figure 6. The size of bubble represents productivity, which is measured in term of “output per labor”. “Utility” (also known as “Electric, Gas and Water supply”) sub-sector is omitted as it does not yield much room for creative development.
Figure 5: Service Sub-Sector Labor Share (%)

Figure 6: Service Sub-Sector: Output, Labor & Productivity

Based on Figure 6, “wholesales, retail, hotel and restaurant” is at the most top right, thus implying biggest output contribution plus highest labor share. “Finance, insurance, real estate and business service” has biggest bubble size, implying relative highest productivity.
Analysis from Figure 4 to Figure 6 reveals that “wholesales, retail, hotel and restaurant” and “finance, insurance, real estate and business service” consistently outperformed other sectors. Hence, that two are the potential service sub-sectors to be focused on further development. Nonetheless, Model A also reveals that some room for improvement for the two sub-sectors. “Wholesales, retail, hotel and restaurant” needs to improve on its productivity while it will be nice if “finance, insurance, real estate and business service” can offer more job opportunities.
Four Quadrant Analysis (Model B)
Four quadrants analysis used data from Bank Negara Annual Report 2011. Top right quadrant is most preferred as it implies highest contribution share to GDP and highest growth. In contrast, bottom left quadrant is least preferred.
Figure 7: Service Sub-sector Annual Growth vs. Share to GDP for Year 2010

Figure 7 shows that “wholesale and retail trade” has relative high growth and high share to GDP, thus is a “superstar” in service sector. Continue robust consumer spending and recovery of motor vehicle supply distribution that was disrupted due to Fukushima disaster will be helpful to maintain such high growth in the future. Malaysia should put more resources into this sub-sector.
Putting extra effort to develop “finance and insurance” sub-sector may push it into superstar category. Liberalization of finance sector and expansionary monetary policy to counter global economy recession will encourage low interest rate that will boost growth in bank lending. Malaysia is third largest domestic currency bond market in Asia excluding Japan. Malaysia also has a dominant 47% share in global sukuk market. These indicate potential of this sub-sector.
“Rising stars” which has high growth but not yet contribute highly to GDP are located in the top left quadrant. They are “communication”, “utilities” and “transport and storage”. Rapid growth of broadband penetration is booster for communication sub-sector. However, potential slowdown trade and manufacturing may negatively affect demand for transport and storage as well as real estate and business service. There is limited growth potential for utilities service. Despite much hype on tourism industry, its related sub-sector, namely “accommodation and restaurant” still stuck with relatively low growth and low share to GDP.
Despite only taking only one year of statistic to make inference, the three best sub-sectors that Malaysia should focus on are “wholesale and retail trade”, “finance and insurance” and “communication”.

Super Service Industry
Services (or products) with no outstanding advantage or superiority is easy to be replaced thus, has many substitutes. In economic theory, these services are elastic and usually less value-added. In contrast, super service industry that serves global markets can also enjoy economic of scales and brand premium.
Referring to Figure 8, service sector is the most preferred and best potential economic sector in Malaysia. We are ready to further develop it with service sector being heavily focused in Economic Transformation Program (ETP). Within service sector, analysis (Model A and Model B) selected “Wholesales, Retail trade”,“Finance, Insurance” and “Real Estate and Business Services ” as potential sub-service sectors. Government already have a finance master plan to promote “Finance, Insurance”, so we only focus on Wholesales, Retail trade” and “Real Estate and Business Services ”. For “Real Estate and Business Services ”, in order to be the super industry it need to increase the annual growth to the top right quadrant. Within these selected sub-sectors, two specific businesses are proposed to be developed into “super industry”. They are (i) online retailing (with Alibaba group as benchmark) and (ii) shared service and outsourcing (with India as benchmark).

Figure 8: Major Sector, Sub-sector and Specific Industries Selection

(i) Online retailing
Online click is more user-friendly and convenience nowadays.  After globalization and new technology evaluation, many conventional warehouse and retails business are heading toward online such as Tesco (grocery), Parkson (department store) and Bata (apparel), Watson (Health and beauty) and IKEA (home and garden). We have few Malaysian owned e-commerce companies such as Youbeli, Q0010 and Lelong. However, a survey from eCommerce-MILO revealed that foreign owned but Malaysia-based subsidiaries seem more popular. Top three shopping preferences are Groupon, Facebook, and Livingsocial.

Globalization of online shopping culture has brings additional foreign competition from the like of Alibaba’s TaoBao and T-Mall (China), Ebay and Amazon (both United States). During the special event day like on 11 November 2014 (known as ‘singles Day’), TaoBao sold over RMB57.1 billion  (about RM31.1 billion ) worth product and Malaysian was the top 10 spending customer on that day. Why Malaysian not prefer to buy the good on local online market?

TaoBao have comparative advantage as compares to Lelong. Most of the products sold there are made in China, which is very price competitive. Thus, TaoBao able to offer cheaper price as compare to Lelong. Buyers are motivated by low price and online information enable easy comparison.

(ii) Shared service and outsourcing
According to Multimedia Development Corporation (MDC), share service and outsourcing (SSO) is an industry that is fast gaining momentum in Malaysia as well as part of Business Service projects of the National Key Economic Areas (NKEA). SSO worldwide and Asia Pacific markets are respectively expected to worth US$38 billion in 2015 and US$15 billion in 2016. Malaysia’s SSO market in 2011 are US$537 million and expected to growth to US$997 million at an expected compound annual growth rate of 13.1%.

MSC Malaysia also reported that Malaysia has 252 SSO companies but majorities (160) are multinational, generating RM9.14 billion revenues and providing 58,448 high-value jobs with average net salary of RM5000 per month.

Given relatively good physical and information technology infrastructure (IT), lower wages workforce in related work fields (like IT support) and general proficiency in English language as well as multilingual ability, Malaysia is well positioned to tap a bigger global market share. This competitive advantage has been reflected in A.T Kearney’s Global Services Location Index where Malaysia has been ranked 3rd in eight consecutive years until the latest 2014 ranking (see Figure 9).
Using the 2014 A.T Kearney’s Global Services Location Index, Malaysia has better “business environment” as compare to India and China but far behind Singapore (who ranked 48th). In the “people skill and availability”, Malaysia is worse than India, China and Singapore. Singapore obviously has the disadvantage of high business cost reflected in “financial attractiveness” aspect of the ranking. Malaysia relative competitiveness sandwiched between India and China.

Figure 9: Summary of A.T Kearney’s Global Services Location Index for 2014

A.T. Kearney highlighted that smaller pool of labors hinder Malaysia but has advantages in term of politically stability, multilingual environment at reasonable rates. All those advantages fit well for companies with mid-sized demand and a lower risk appetite.  Excellency in IT, Business Process Outsourcing (BPO), and voice services has sustained India as an undisputed leader in SSO global market. Quoting, National Association of Software and Service Companies (NASSCOM), A.T. Kearney reported the sector in India today employs one million people and represents 25 percent of India's total exports. Meanwhile, SSO is more domestic focused in China currently. Yet, with transition to service-oriented economy and government’s support, China’s SSO is expected to growth strongly.

[Chinese version published at Nanyang Press, 19th January 2015. Available online at This English version may be slightly different from the Chinese online/printed newspaper version]