The Impact of Economic Crisis on IT and Internet Industry in Asia
Asian economic crisis has given serious impact on IT(Information Technology) and Internet industry in the region. However, the damage is relatively lower than other sectors such as automobile, or travel industry. Internet industry in Asia is showing strong resiliency: no report of bankruptcy was reported from even the most severely affected countries such as Indonesia. There will be more mergers and consolidations to come. IT and Internet may have potential to help recover and boost the economy again.
In July 1997, Thailand was hit by severe devaluation of its currency which triggered Asian-wide economic downturn. The most badly affected countries so far are Indonesia, Thailand and Korea which had to ask IMF (International Monetary Fund) for massive amount of loans to rescue their troubled national economy. Less affected, but still in serious condition are the Philippines, Malaysia, and Japan. Among the least affected countries are Singapore and Taiwan, as well as mainland China and India.
The real cause and destination of this economic crisis is too broad for the author to analyze, but one interesting argument can be brought up. That is, how Information Technology (IT) and Internet will help recover from the damage.
In March 1994, Vice President of United States Albert Gore announced a new initiative called Global Information Infrastructure (GII) building. In his keynote speech at International Trade Union (ITU) Development Conference in Buenos Aires, he proposed that accelerated introduction of high technologies in information and communication area would help boost the economic development Backed by strong growth of computer, semiconductor, and other high-tech industry in US, he argued that liberalizing telecommunications, promoting new use of computer networks such as Internet would bring significant increase in productivity, with little incremental cost, thus provide opportunities to prosper for not only the developed nations, but less developed nations as well.
After four years since his proposal, the US economy has certainly made significant growth, with record-low unemployment, booming industry, especially in PC software and hardware, Internet and related business which is estimated to contribute to the overall growth for at least 25%.
IT sectors are less affected
How about Asia? In general, the most badly affected industry sectors are real-estate development, construction, bank and financial services, followed by manufacturing for consumer goods such as automobile and electric appliances, retail, and heavy machinery industries. Many banks and financial institutions in Thailand, and Indonesia had to be closed or bailed out already. Many construction companies simply could not survive any more in these countries. Automobile sales in Thailand, and Malaysia for example, is experiencing 70 to 90% drop in sales volume compared to previous years and still having thousands of cars in stock.
Compared with these industries, IT and Internet industry seem, at least so far, not so much affected in Asia. The Malaysian government expected its IT industry to make 14.4% growth in 1998 in their budget plan released in October 1998, and Computer Industry Association of Malaysia (PIKOM) also projected 20% growth earlier in 1997, but they modified that to around 10% in December 1997. This still looked too optimistic, thus in January IDC (International Data Corporation) changed its forecast for Malaysian IT market growth in 1998 from its previous figure of 16.5% to 5.7%. But it is still expecting some positive growth. IDC also reported that IT industry in Thailand will have minus growth of 38% in 1998. This is also same with Indonesia where the overall economy is now severely damaged. Japan's PC sales in 1997 remained slow with little growth, with sales for individual consumers dropped 30% compared with that of 1996. It is expected that PC sales in Japan in 1998 may show some recovery, partially spurred by the introduction of new Windows 98 later the year.
LAN and network business seem better than overall IT and PC market. In spite of economic downturn, orders to install corporate networks have remained stable Thailand and Malaysia. This trend may not continue however, as experts predict that both countries may enter more serious recession.
Internet anr Intranet are least affected
Internet and Intranet market seems the least affected sector within the IT industry. Access Media International (AMI) reported that number of Internet users in Asia will continue to grow, reaching 22 million in 98, 34 million in 99, 44 million in 2000, to double in 2 years. IDC also expects Internet users to grow by annual rate of 63% from 1995 to 2001.
Internet technology deployments are coming of age in most developing markets in Asia Pacific. This was revealed by the findings of a 14-country-wide Corporate User Survey, conducted in October-November in 1997 as a part of Asia Pacific Internet Study conducted by AMI in cooperation with Asia Network Research (ANR), APIA (Asia & Pacific Internet Association) and APNIC (Asia Pacific Network Information Center). In its executive summary, this report describes the IT and Internet trends in Asia as follows:
While the region's financial and economic scenario depicts a gloomy picture for IT investments for 1998, with the possible exception of People's Republic of China(PRC), Internet technologies continue to make modest inroads into corporate businesses. Though revised to reflect the effects of the ongoing financial turmoil, expected spending by corporate organizations in Internet and related technologies appear to be encouraging, compared to overall IT investments.
In six out of seven developing markets in the region, Internet and related spending by organizations with more than 100 employees is expected to be between 22% and 89% of their overall projected IT expenditure. On average, these organizations in the Philippines and the PRC are expected to spend more than 35% of their entire IT budget on Internet technologies this year. By comparison, the Internet and related technologies' share in overall spending by corporations is relatively modest in the case of relatively mature economies. The share of Internet spending (as a percentage of overall IT spending) is not expected to change drastically in most countries this year, although its absolute value will increase along with IT spending budget increases.
Interestingly, despite the tough economic conditions in the region, businesses in all countries, except the Philippines, are expected to spend more on Internet related technologies in dollar terms in 1998. Even in Japan, where average corporate spending on IT infrastructure is expected to decline by 15%, Internet spending will grow by approximately 4%. The growth in average Internet spending by businesses in other countries will range between 20% - 35%, while for Japanese corporations it will be just 4.5% over 1997.
end of quote
To testify this, no Internet Service Provider (ISP) was reported to go bankruptcy so far.
Currency exchange rate a burden
One of the most significant burdens for IT and Internet industry in Asia is the devaluation of local currencies against US Dollars. Since most of the core IT products such as PCs, servers, routers and switches, most of basic and applications software and technologies are all produced or sourced from the United States, weaker local currencies have resulted significant increase in price/cost structure in Asian countries. When the currency fluctuated wildly, local retailers found it difficult to give customers the quotation since the moment they quote and the time they would sell may have 20% to 40% difference in cost thus they may create potential loss in each sales. This affect both users of Internet as well as ISPs. As customers and the traffic grows rapidly, ISPs have to face constant investment to upgrade overall network capacity to absorb increasing demand and avoid poor performance. This requires more installations of servers, hard-disk storage, routers, switches and related software as well as human resources to manage them. With the price increase triggered by the higher US dollar rate, this became quite burdensome for some ISPs with little cash at their hands.
Unfair cost of international lines
Internet Service Provider (ISP)s are facing further burden. Since most of the settlements for the Internet connection to the counterpart in US are fixed in US Dollar terms, the exchange rate devaluation means automatic increase in cost of operation. According to Jin Hor Hur, President of Asia & Pacific Internet Association, the average cost of international connections used to account around 30% of all the costs of operation for an ISP, but now some of ISPs are experiencing 60% to 70% of their costs goes to these international connection charges.
To make matters worse, most Asian ISPs are forced to accept 'unfair' terms. For any ISP, in order to make their service a viable one, they must connect their own lines to 'Global Internet'. This simply means connecting their network to other network which has global connectivity, and that is usually to connect directly to the US ISP, or to an ISP in their local country which has direct connection to an ISP in the US. In any case, the US counterparts which are asked to link Asian ISPs usually request the Asian side to cover all the costs incurring from these international links. In the conventional telecommunications world, the charges are settled according to the amount of traffic, and the traffic are always counted as callers should bear the charges, not the receivers. For telephony it is a simple solution. But when it comes to Internet, it is not that simple. First, all international links are based on capacity-based flat rate arrangement. The actual amount of traffic itself does not affect the amount of payment at all. Second, it is not easy to determine who triggers the traffic and how that should be measured.
A typical scenario can be: A user in Singapore accesses a web-site in US and download popular software thus creating traffic from US to Singapore. Does this mean that this individual generated all the traffic from US by sending small amount of signal? Or the company hosting the web-site server send the signals upon receiving the command from the individual user in Singapore? Is it the user in Singapore benefits, or the software company that propagate their product benefits? Does this individual have to bear all the cost of traffic, because he is getting the free software? What if this user is purchasing the software online? Should the buyer bear all the cost of 'receiving' the data just like shipping charges, or the seller to share?
Another scenario can be: A US corporation received an inquiry via e-mail and send the reply back to, say Kuala Lumpur, Malaysia. Should this user bear only the cost of his e-mail from Kuala Lumpur to US, or both from and to KL?
In the first scenario, the common sense can be that users in non-US side should bear all the cost. In the second scenario, however, perhaps both sides should share each cost. But under current arrangements and practices, US ISPs demand that all the international connection costs be paid by the Asian ISPs who 'want' to connect to US. It is seller's market, not the buyer's so far.
Despite this extra burden (that is the author's view), most Asian ISPs have still been able to absorb them and sustained the growth. But now we are seeing this may not be so easy to continue. The economic outlook in most Asian countries this year is not so promising. They are trying to find all the possible ways to help defray the increased costs. One way is to bundle together. By 'sharing' the precious international leased lines among competing (and cooperating) ISPs, they can lower the direct cost. This is seen in some Asian countries such as Hong Kong, Indonesia, Japan and Korea.
But these sharing may have its own limits. What is expected to come is mergers and acquisitions. Already there are some indications that US ISPs and telecommunications companies are interested in buying shares of Asian ISPs. With the recent booming of Internet market in the US, several major ISPs are now financially in a very strong position with some hundreds of millions of dollars raised from bond or stock market. With these cash they are looking for good buys - with stronger dollars - to establish wide global foothold.
Does IT and Internet help boost the economy?
As described before, there seem to exist a wide range of belief that information technology, particularly Internet, will help boost the economy. Many governments in Asia is subscribing this idea and working on national information infrastructure projects to spur their industry into more and more information and communications intensive directions.
According to Charles Dodgson, editor of Telenews Asia, "Virtually every Asian economy has identified IT & Telecommunications as a priority development sector" and he concludes "It is impossible to stop investment in telecoms and multimedia because it is the sector that will help us get out of our current problems".
Malaysian government is strongly promoting its IT policy with MSC (Multimedia Super Corridor) project, a physically dedicated IT city development combined with 'soft infrastructures' such as 'Cyberlaw' and tax and other incentive measures to accommodate foreign investment. Singapore is competing with SingaporeONE, with nation-wide high speed multimedia network, with more than 100 contents and service provision applications heavily subsidized by government budgets. With these strong national commitments, already dozens of US and European IT and telecommunications industry companies have started to participate. Among them are Intel, Acer, Arcatel, NTT, Sun Microsystems, DHL, Ericsson, NEC, Nokia to name a few.
MSC is still in an early stage of building physical infrastructures while SingaporeONE has formally announced the launch of commercial operation of high speed network after 1 year of pilot program experiments.
It is certain that these national programs are seemingly attracting more investments in IT sectors to Asian region. Whether these policies can achieve the stated goals are not so certain at this stage. The challenges range from lack of qualified human resources, which will be the most significant factor, to choice of proper technological architecture against the background of extremely rapid pace of technology innovations showcased in Internet to political control of telecommunications carriers and contents of the services.
It is noted that compared with US and European companies, Japanese high-tech companies are not as aggressively participating to MSC as expected. The gloomy economy at home is the biggest reason for this attitude, but they are also concerned about the implementation capacity of the project by Malaysian government.
It is also noted that among the Asian countries, Japanese companies are seemingly less interested in investing to IT and Internet for corporate use. That is attested by senior official of Cisco corporation, the leading vendor of Internet equipment such as routers, that Japan is almost the only country in Asian market which is showing decrease in sales volume this year. Even Korea or Thailand is still making sales growth, if not that explosively anymore.
One suggestions is, by mapping the Internet penetration ratio to population and GDP per capita, Japan is located at the most lower position, compared with most other Asian countries. On the contrary, Singapore, Hong Kong and Taiwan are located in the upper position in terms of using the Internet in relation to GDP per capita.
It may be no coincidence that Japan is facing one of the worst economic recession after the World War II. By failing to streamline the business structure of major corporations, unlike the US companies, the Japanese companies in general are significantly lacking the efficient and effective conduct of business procedures. It may also be no accident that Singapore, Hong Kong and Taiwan are still enjoying relatively better economic situation thanks to its heavy investment and commitment to IT sector and also promoting the use of IT and industry. If this is the case, then other Asian countries will also follow the same track, by creating more IT-oriented industry and social structure, with emphasis in education, to further purse the economic growth and prosperity deep into the 21st century.