Make it Malaysia – your springboard to ASEAN

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KUALA LUMPUR MALAYSIA - FEBRUARY 7 2014: Kuala Lumpur Monorail Transportation System in Downtown KL Malaysia. The monorail is one of the several train systems in Kuala Lumpur.KUALA LUMPUR MALAYSIA – FEBRUARY 7 2014: Kuala Lumpur Monorail Transportation System in Downtown KL Malaysia. The monorail is one of the several train systems in Kuala Lumpur.

ASEAN is a collection of ten nations with a population of 622 million and GDP of US$2,573,589 million in 2014, which if measured as one country would be the 7th largest in the world. It is just ahead of Brazil, but behind France (US$2.829 billion) the United Kingdom (US$2.989 billion) and Germany (US$3.868 billion).

What’s also interesting is that Southeast Asia is the fourth largest internet market in the world. A recent joint study by Google and Singapore’s Temasek Holdings highlighted this growing opportunity arising from the existing base of 260 million internet users.

The internet business is expected to grow to US$200 billion over the next decade and internet users will almost double to 480 million by 2020. That’s great news for B2C players, especially in the three sectors identified in the study; e-commerce, online travel and online media (digital advertising and games). As with most estimates, they often are an indicator of a trend – business done on the internet is going to explode across Southeast Asia.

Gopi BCIndonesia, with the largest population base in ASEAN, will see the biggest growth, which is to be expected given the dispersed population across over more than 900 inhabited islands that make up the country. This dispersal of population has resulted in unique traditions and localized regulations (and restrictions) that are not dissimilar to the diversified community of ASEAN nations, each at different levels of development. Malaysia, Singapore, Philippines, Thailand, Vietnam, Indonesia, Brunei, Cambodia, Laos and Myanmar make up the 10-country federation and represent a diverse collection of languages, cultures and business practices.

The fragmentation of regulations across these countries remains a major obstacle. Tony Fernandes, co-founder and Group CEO of AirAsia recently spoke of the difficulty of consolidating ownership of the AirAsia companies because of country restrictions on ownership. Unlike the European Union, ASEAN remains essentially a loose political association that has not taken any significant steps towards developing a common set of regulations that would allow companies to operate freely across borders.

This means that businesses have to separately register and comply with domestic laws in each ASEAN country. In fact, in an interview with McKinsey, Fernandes said, “It’s easier for McDonald’s to come here than for another ASEAN company to go into the Philippines and Malaysia, Indonesia, or Thailand.”

An ASEAN Economic Community (with a vision for 2025) is now in place and its early days, but for the present the lack of free movement of people, goods and services across borders remains a major obstacle. Today, businesses have to separately register in each ASEAN country and comply with country specific regulations. Given that ASEAN follows an “opt-in” principle and prefers to work through the gentle nudging of its members, it’s going to be a long time before we see any harmonization of the regulatory environment for operation of cross-border businesses.

N2N Connect, for example, operates an online trading system widely used across Malaysia has to obtain registration in each ASEAN country with the stock exchange regulator. Similarly for GHL Berhad, the regulations in Malaysia for registering a credit card merchant are different to the regulations in the Philippines. iPay88, that operates an online payment gateway, or Tranglo that is in the money transfer business also requires regulatory approval from each of the ASEAN countries it operates in.

Complying with multi-country regulations means that “one size fits all” is not going to work in ASEAN. US companies have benefited most from this strategy as they could do one build for the US market, which is a large one – 320 million, with a median household income of US$53,600 [figures for 2015] and then sell the same product in English speaking markets outside the US. It’s a strategy that works given the scale opportunity afforded by an affluent and homogenous US market.

Indonesia with 248 million is the most populous ASEAN country, with Philippines (97 million), Vietnam (90 million), Thailand (68 million) and Myanmar (65 million) coming next. The smaller countries are; Cambodia (15 million), Laos (7 million), Singapore (5 million) and Brunei (0.4 million). Malaysia sits in the middle, geographically and economically, with a population of 30 million and a GDP of US$312 billion [2015] and offers a great springboard into the region for a number of reasons.

About 26 million people live in peninsular Malaysia, which has excellent road, rail and flight connectivity, internet access and mobile phone penetration. This means no boats or planes are required for transportation, as even Penang Island is connected to the mainland by two bridges. From Cyberjaya, North to Penang and South to Johor Bahru, it’s only a 3-hour car journey on the highway. What this means is that unlike most ASEAN countries, both the customer and the people resource are easily accessible.

In addition to the excellent infrastructure available in Malaysia over the years several core competencies have also emerged beginning with the establishment of the Free Trade Zone in Penang, where National Semiconductor, Advanced Micro Devices and Intel set up in 1972. They were followed by Osram, Hewlett Packard, Robert Bosch, Hitachi Semiconductors, etc. Other semi-conductor manufacturing and support companies emerged.

Globetronics was established in 1991 followed by several other companies; Silterra, AIC Semiconductor, LKT Engineering, Unico, etc. that tapped into the available engineering talent and entrepreneurial spirit of Malaysians. Fast forward to 2016 and we have three MSC-status companies that carry the torch; Vitrox – machine vision inspection machines, MDT Technologies – RFID solutions and Aemulus Technologies – chipset based RF testers.

Another significant cluster that has emerged is the animation industry. Pinewood Studios, a world class facility located in Iskandar, where Marco Polo (TV series) is being filmed, Les Copaque of Upin & Ipin fame and KRU Studios founded by brothers Norman Abdul Halim, Yusry Abdul Halim and Edry Abdul Halim. There are several other animation companies operating in Cyberjaya including, Animasia Studio, Animonsta Studios, Giggle Garage, Inspedia, Lemon Sky, MFX, Passion Republic and Piktochart, which is based in Penang.

At Cyberjaya, Malaysia hosts several hundred technology and service companies. Many like Silverlake, serve clients around the world. Their core banking system is being used by several banks across the region. Scicom with +1,800 call centre staff based in Kuala Lumpur serves 18 countries in 19 languages and dialects, apart from English and Bahasa Malaysia. They also have centers in Phnom Penh and Colombo. Symphony HRS offers human resource solutions and services to over 3,000 clients around the region, again based out of Kuala Lumpur.

All these companies are comfortable operating in the fragmented regulatory environment that makes up the ASEAN region. It is this expertise held by companies like, Siverlake, Scicom, GHL, iPay88 and many others that make them a natural partner for the “one-size fits all” global companies that are seeking to tap into the potential of the region.

In 2010 Facebook acquired local developer Octazen Solutions, in what they described as a talent acquisition exercise. More interestingly, in the 2011 acquisition of GroupsMore by Groupon we saw co-founder Joel Neoh lead their growth trajectory into the region. His co-founder, Khailee Ng left Groupon to run Singapore-based 500 Startups Asia Fund. CEO Azrul Rahim sold his JomSocial app to US based app development company iJoomla.

In 2014 Australia-listed Seek Ltd acquired Malaysia-listed Jobstreet Corporation in a deal that valued the company at US$523.5 million. Jobstreet, headquartered in Malaysia, had offices in Singapore, India, and the Philippines. Just this year UK-based cable provider, Sky invested US$45 million in Malaysian based iflix which also operates in Thailand and Philippines, underscoring the importance of regional experience.

In the next wave of activity, I see opportunity for more acquisitions to leverage on Malaysia-based networks and talent. It is probably going to take decades for a common ASEAN market to emerge as that will require the countries to adopt common standards and regulations. Hence for the foreseeable future, I see Malaysia-based companies having a unique value proposition – the ability to function in the multi-regulatory environment that makes up ASEAN.

*Gopi Ganesalingam is Vice President (Enterprise Development Consulting), Malaysian Digital Economy Corporation

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