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]

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