China’s Allies And Why It Matters (Part II): Singapore & Malaysia
This is part II on the state of innovation of different Asian economies, in particular, a deep look at Singapore and Malaysia. For an overview of Japan and South Korea, check the previous post.
Asia is a big continent. Each country, while sharing some cultural aspects, is very different. This reflects on the differences in innovation maturity, finance, and talent. Based on these, you could divide the region into two big blocks. The triangle formed by China, South Korea, and Japan, which I wrote about in the previous post. Three big economies, some of them still inward-looking, and all with historical feuds. Due to their size and history, proudness is an essential element that mingles with everything they do.
The second group is conformed by most countries in the Southeast Asia region. Most of them share a common history but are less antagonizing that those in the first group. The protectionism and localism in countries of the first group is one reason why startups tend to expand into Southeast Asia. Trying to penetrate their surrounding economies is harder than making it big in, for example, Indonesia.
The next pages will explore some of the countries in this second group and what makes them tick.
Singapore is, without a doubt, the crown jewel of Southeast Asia. Build like a modern city-state, it’s the financial center of the region; it’s The Asian London. Most of the investment that happens around the area is focused in Singapore.
The stability of the country not only attracts money but foreign startups too. Most local Southeast Asian companies have their headquarters in their home town. Nevertheless, those entrepreneurs from abroad tend to gravitate towards Singapore. The reason is simple: access to finance, a great lifestyle, and a stable government.
Not all things are good, though. While the country is a great staging base, it’s not a great local market. With 5,8 million people living in the city, the country is tiny in comparison with the surrounding economies. Moreover, while the average buying ticket is high, the penetration of eCommerce in Singapore is minimal compared with other countries.
This anomaly might seem irrelevant, but eCommerce and Smart Mobility, are the two main drivers of the digital economy in Southeast Asia. Ironically, most eCommerce operations for the region are headquartered in Singapore. They are just not for the local market.
Beyond how small the market is, another of the significant challenges of the city is talent. This issue is familiar to most innovation hubs, but in the case of Singapore, it’s even worse. The local education system is excellent, and it produces impressive specialized talent. Their local crop of math geniuses is impressive. However, such high specialization comes at a cost. It’s tough to find generalist people. Generalization and abstract future thought are critical skills for strategy. So while many companies have good local technical talent, that’s not the case for senior positions. When strategy is involved, companies bring managers from abroad.
Why it matters: Singapore is an island within the Southeast Asia region. Their development and small scale make it a complicated market. Artificial Intelligence or Deep Tech startups can find good business here. However, the small size of the city is also limiting. Expanding such sophistications beyond Singapore is a risky bet. Most of the surrounding economies, where the rates of digitalization are still low, are focused on the low hanging fruit. To tackle underdeveloped digital markets, you need a sound strategy. This need is especially true when your product is very innovative and struggles to achieve a local scale. The lack of strategists, though, exponentially complicates the matter.
Beyond eCommerce, the country has also experienced a unique taste for eHealth. Health challenges have a global footprint. However, among them, obesity and associated problems like stroke, diabetes, or hypertension, are especially prevalent in the region.
“Starting next year, Singapore will treat packaged sugary drinks such as Coca-Cola the way that other countries treat cigarettes. Advertisements will be banned, and a label attesting to a beverage’s unhealthiness will be mandatory. “
“The problem is quickly getting worse. Between 2010 and 2014, obesity surged 24% in Singapore, 27% in Malaysia, and 38% in Vietnam.”Southeast Asia Has a Weight Problem. Bloomberg. Oct 2019.
It’s not surprising then to observe a significant investment around eHealth and biotechnology companies in the country. From Cancer research to new technologies to digitalize and manage patient relationships, the pool is substantial and growing.
The big picture: eHealth and Biotechnology companies aim to provide solutions, not just to Singapore. As we’ve shown, health challenges are prevalent in the region. There is plenty of room to grow and a big incentive to innovate. The steady investment is fueling the increase of current cutting-edge technologies. While the US still leads the pack, Asia is closing in fast.
But without a doubt, the top industry in Singapore is Fintech. As I said before, the stability of the city is a blessing and makes it the perfect safe haven for money. It’s not surprising then that local entrepreneurs many, former quants, would try to take on the banks.
The country, though, is very unique. These past few years, the government has been encouraging incumbents to engage with startups. The collaboration between both sides of the table is quite surprising. Could it be better? Probably. Is it much better than elsewhere? Definitely.
“The meeting left him determined to disrupt his own bank before Ant, or another challenger, had a chance to do so. He considered spinning off a separate unit to lead the transformation, or outsourcing some of it to fintech firms, but decided that DBS was capable of rebuilding itself.”
“The received wisdom is that it’s impossible to change culture,” he says. “But I had gone back home to Delhi to visit my dad, who’s in his 80s. He banked online, paid his taxes online, shopped on Amazon—so what makes us think we can’t change people in their 40s and 50s sitting in a bank?”
Piyush Gupta, CEO DBS Group.How Singapore’s incumbent banks are preparing for competition.The Economist. Jun 2019.
Despite Gupta’s optimism, disruption is moving faster than any bank. An excellent example of this is how quick cryptocurrencies are developing in Singapore. A favorable regulation, stability, and a pool of quants might be the best seeder for a wave of cryptocurrency disruption.
That’s precisely what has happened. The city has one of the most significant trading volumes of cryptocurrency in the area, right behind Hong Kong. Still, it’s advantages don’t stop there. It’s not only about trading, but about safety. The country’s “pro-crypto” regulations turned it into a beacon for talent worldwide. The concentration of cryptocurrency and blockchain startups might be one of the highest in the world. The previous combination makes it the cryptocurrencies capital of the world.
Beyond cryptocurrencies, Singapore is becoming a specialist around blockchain technology. Their startups are impressive, and so are the applications besides trading. An increasing crop of companies is pushing the use of blockchain technology for eHealth, Energy, Housing, etc.
But being one of the major financial centers of Asia entails some risks too. As a consequence of the accumulation of digital wealth, the country is becoming one of the primary targets for cyberattacks. This increase is the reason why the government has been investing heavily in cybersecurity. The commitment isn’t only monetary but through an outstanding and prescient cybersecurity framework. The regulatory environment includes, for example, standards for autonomous vehicles or Industrial Control Systems.
The big picture: Many banks worldwide should be watching what Singapore is doing. The government is actively investing in fostering the best cryptocurrency and blockchain ecosystem in the world. While the money is local, most of these startups operate and disrupt at a global scale. The byproduct of such investment is the need for stronger cybersecurity. The city is also pouring extensive resources to ensure a robust local cybersecurity sector. As cyberattacks scale up globally, their potential market isn’t just Asia, but the world.
Despite all the bonanza, the next few years will be challenging for the country due to the trade wars. As the US and China keep their negotiations, Singapore, which sits squarely between both economies, is feeling the heat.
Its dependence on exports to and from the US and China makes the country especially vulnerable. The impact is already showing with a sharp decrease in their GDP growth. Meanwhile, China is pushing hard on Singapore. The country holds the key to advance electronics, and China wants access to those resources.
The unprecedented growth in China’s investments in Singapore is driven by Chinese companies and entrepreneurs looking farther afield as the East Asian giant’s domestic economy has slowed for much of the last decade.
“China has become the world’s production centre, but costs have also risen over time. Many companies have recalibrated their local presence (in China) as the business model of China is shifting rapidly from low-cost and export-focused to centering on innovation and domestic consumption, ” said Ivan Ng Wei Chean, a keen China watcher who has worked for multinational companiesChina’s growing business presence in Singapore. The Star Online. Dec 2019.
The bottom line: China is already opening bilateral talks with Singapore. If played smartly, China could establish stronger ties with the city than in the past. China gets access to a strategic market, and Singapore a more significant exporter for its technology. The city, though, still needs a bipartisan deal to ensure its security. Severing ties with the US would leave them at the mercy of China. The question is, who else can offer them security and protection.
Malaysia, which sits next to Singapore, is another essential economy in the area. While not in the spotlight, the country is closely linked to both China and Singapore.
It’s necessary to backtrack some decades to understand Malaysia’s current situation. Back in the mid-60s, Singapore created Setron, the first television assembly plant in Southeast Asia. During the late 60s and early 70s, it began assembling TVs not only for Setron but for Sanyo, Phillips, and Sony. By the late 80s, it became a subsidiary of Sony Corporation Japan under the name of Sony Singapore. During those three decades, the city-state became the electronic assembly line for most electronic companies worldwide.
Meanwhile, Malaysia had a different industrial genesis. Before the independence of the country in 1963, the country was one of the major exporters of tin, rubber and palm oil. While Singapore was always a trading post, Malaysia had an already established mining economy. It took Malaysia nearly 20 years to adapt and diversify its industry.
As wages began increasing in Singapore, a need to lower the costs of their exports arose. Malaysia, which had much lower salaries, became the perfect partner. The city-state began exporting its high-tech components, assembling them in Malaysia, and then shipping the finished product overseas. It was a win-win situation for both economies.
The status quo has benefited both nations. Until recently. As Malaysia’s economy began growing, so did life standards and, consequently, wages. But Malaysia isn’t the only country in the region that prospered. Suddenly, other Southeast Asian countries began competing with the country’s manufacturing capabilities. The impact has been dramatic, with Malaysian exports plummeting in recent years.
There is a big difference between Singapore and Malaysia thought. When the transition happened, Singapore retained and developed their high-tech design capabilities. In other words, they kept their intellectual property. That’s where Malaysia is precisely at right now. As jobs are siphoned out to other nations, the country is struggling to develop its intellectual property.
But things are changing and changing fast. There is a new crop of entrepreneurs pushing for significant disruption. Some years ago, few people bought goods online; now, it’s one of the top countries by eCommerce sales growth.
Not only consumption patterns are changing, but also people’s mentality towards innovation. While Singapore still ranks high in terms of patent applications, Malaysia is catching up fast. For years there has been criticism that the country didn’t “invented” anything. Even if they did, few people cared to patent their ideas due to lack of Intellectual Property enforcement. All this is changing fast today.
“The enforcement used to be more lax, but now most governments in the region have drafted laws to protect IP over the last 20 to 30 years. The reciprocity between the countries also help ensure rights are respected,” Allen says, pointing out that Malaysia even has a specialised court for IP disputes.
He reveals that in Malaysia, the patent chasers are mostly technology companies from electronics to biotech, while trademark- intensive industries are mostly food & beverage franchises.The need to protect ideas. The Star Online. Aug 2018.
Still, most of these patents are registred to non-residents. There is an increasing need to have locals innovate, not just foreign companies. The current situation resembles the one in Singapore years ago where foreigners made the bulk of innovators. Thanks to its world-class education system, Singapore has been able to revert this. Even though Malaysia began investing in their youth education not long ago, the effects are already notable. An increasing number of students are enrolling in STEM courses, as well as traveling abroad to finish their education.
An innovation wave is growing in the country, but things are far from smooth yet. Corruption is still a problem in the country. While the government has been trying to incentivize startups, the efficiency of these programs has been rather low. Another challenge is the lack of investment itself. Entrepreneurial education is much needed; however, so is the money to fund disruptive ideas. The Venture Capital (VC) industry in Malaysia is virtually non-existent. Most investments are loans instead of equity deals. Most alleged VC partners are but government employees. Term sheets remain draconian, and to top it all, funds are too small to serve the needs of the startups.
Industries-wise, the country is pretty diversified, although the usual themes resurface. Both eCommerce, eHealth, and Fintech are, of course, present. However, Malaysian startups try always to find a different angle. It’s also impressive how they’re moving into robotics and autonomous machines, fast. While impressive, it’s not surprising as they have a large manufacturing industry willing to automate many of the current processes. Nonetheless, some want to evolve the country’s manufacturing from electronics to autonomous electrical vehicles. It’s a big bet which might pay off.
Why it matters: Malaysia is on the right path. Corruption is decreasing, education is rising, and people are willing to develop new ideas. While Singapore is ahead on many of those dimensions, Malaysia has something that the city-state doesn’t have, people and space. Talent will come, but living costs will remain reasonable compared to other areas. This advantage will make Malaysian companies very competitive. The truth is that China is already investing in the country. Many of the startups under development are joint ventures with Chinese entrepreneurs. As the GDP per capita grows, more entrepreneurs will remain at home, fostering a vibrant ecosystem.
The Be Continued…
The last installment of this series (Part III) will briefly take a look at some other Southeast Asian economies (Indonesia, Philippines, and Vietnam), and their role and impact on the innovation stage in Asia.