In the wake of East Asia's financial collapse, is the IT-investment glass half empty or half full? On the one hand, markets once closed to western integrators may open up; on the other hand, many local industries may also put IT buying on hold. Michael Durr investigates, to help you pick your way through this new minefieldThe Asian crisis is as good a lesson in global business as we're likely to ever get. The message: we're working in a global economy whether we like it or not. If you're an investor, there's no place on the planet to hide when vital overseas markets hit the skids. Thus, in this global marketplace, you're either a player or a pawn.
There just isn't much room in the spectator gallery. Solutions integrators adversely affected by the Asian financial debacle are feeling a bit like pawns.
First, much of the massive capital investment flooding East Asia's developing nations in the early and mid-1990s represented reckless lending by US, European, and Japanese banks. Second, some Asian countries attempted to peg their exchange rates to the $US - while implementing monetary policies that conflicted with the peg. The result: a huge spread between domestic-currency interest rates and those of foreign currencies.
Thailand, for example, was reportedly paying rates of 14 to 15 per cent, numbers significantly higher than the US prime rate. Thai banks were borrowing US dollars and basically printing money by lending the borrowed money at a mark-up.
Third, a backward and government-protected Asian banking sector - collateralised on its property prices - increased lending to a point that, if the value of one asset market declined, the whole bubble could potentially burst.
The real surprise wasn't just that Asia had tumbled, but that the rest of the world almost immediately felt the depth of the impact.
Obviously a "them-or-us" philosophy just doesn't fit when dealing with a huge manufacturing region that also contains nearly one-fourth of the IT-user market.
Asia-Pacific's 25 to 30 per cent annual IT growth was also supercharging the global IT industry's growth. When analysts in the region started predicting marginal growth and possibly no real economic expansion in 1998, its global impact was like water added to a racing car's fuel tank: The car keeps running, but if you're betting on top speed, you'll surely lose.
The end of crony capitalism?
One ongoing debate in the solutions-integration community revolves around whether customers are being reactive or proactive - that is, are they buying IT to handle current business or to build for future growth? Although corporate clients are savvier than ever about the operational and competitive opportunities of IT, the reality is that most buyers are also more comfortable purchasing IT with cash flow than with capital reserves.
This situation means that in a crisis most IT customers will tend to pull back on IT spending rather than use the technology to improve their long-term market position.
John Fisk, CEO of Senteq, a large integrator in Sydney, wasn't seeing "a real impact" in the early part of this year, but as the crisis begins to have an impact on the Australian economy as a whole, Fisk expects the situation to change. "As we start to see export contracts cancelled for reasons like raw materials," he predicts, "a filtering effect through the rest of the economy will begin, which will then impact us."
The wild card in this game involves other world markets. In a global economy, major problems in any region eventually hit everybody. By the same token, an ailing segment's economy can be buoyed by healthy economies elsewhere. Most analysts started predicting global financial-market carnage as soon as the Asian crisis materialised. But some of the anticipated steep declines haven't happened. Case in point: the still-bullish US stock market.
In fact, the Asian crisis may have a genuine silver lining. "I think what's happened there is fantastic in terms of the greater regional issue," Fisk observes.
Much of Asia has engaged in so-called crony capitalism, he explains, where family monopolies attempt to control their respective markets, and where the banking sector was often used as a slush fund for politically influential borrowers.
This way of conducting business appears to be waning because of the reforms pushed by the IMF (International Monetary Fund), as well as more forward-thinking management.
"It's really opening up opportunities for Western organisations to enter those markets," Fisk says.
To push such opportunities, Senteq is aggressively partnering with companies in the Asia-Pacific region. "We need to be able to provide seamless service delivery throughout at least the major centres in Asia," says Fisk. A part of Senteq's strategy is participating in the Entex Global Alliance with Entex Information Services, an integrator headquartered in the US.
As an alliance member, Senteq participated in a large project for a US-based minerals company. Senteq was awarded the contract to upgrade the company's 3500-workstation Australian network. The upgrade was used as a platform for a new ERP (enterprise resource planning) process, which Entex is providing. The next phase of the project will involve replicating the upgrades and ERP installation in the minerals company's other offices throughout the Asia-Pacific region.
In general the planning process for solutions integrators in Asia-Pacific seems to be a balancing act. Solutions integrators look for customers that are more impervious to the downturn.
"The bright spots," says David Howarth, director of international marketing at Entex, "are the large multinationals, the ones that have their manufacturing facilities [in the region]."
The downturn in local economies makes those multinationals' products more attractive in the Asian market, Howarth notes, and integrators that are focused on large multinationals should be able to ride out the storm. But integrators concentrating on domestic accounts will have a tough time, he adds.
Long-term opportunities that this crisis has sparked include the opening up of markets. "A year ago we met with a client who was seeking an opportunity in Asia-Pacific," notes Tom Manning, managing director of Ernst & Young's Global Client Consulting for Asia-Pacific, based in Hong Kong. The client concluded that the market was a little too regimented and a little too tight.
"He would come to a very different conclusion if we had the same conversation now," says Manning. Companies are coming to the table prospecting, looking for banks to invest in and for smaller vendors and suppliers around which to establish new networks. And, according to Manning, the market is hungry.
Tremendous IT opportunity
The worst-hit developing countries -Indonesia, Korea, Malaysia, and Thailand - are feeling especially heavy pressure to clean house in the financial sector as they try to qualify for IMF assistance. But the manufacturing sector is comparatively sound, say some economists. Japan, though, is another story (see above).
However, the consensus is that Asia remains a tremendous IT opportunity, especially for integrators that understand where the new openings lie amid a changed market landscape. The region's future is in the size and energy of its markets, and virtually every sign indicates that the energy factor is as strong as ever.
"If I had investments to make," sums up Entex's Howarth, "I'd know where to make them - Asia."
Ernst & Young's Manning says you're fairly safe in target-ing global firms with resources outside the region. However, national or regional prospects are another story.
He provides a tiered view of likely IT buyers and their current positions:l Tier one: Fortune 100- and Fortune 500-type companies with a presence in Asia are continuing to invest and believe in the region's future. They also have the resources to grow their businesses. These top firms are concerned with improving their cost structures as well as their flexibility to succeed in a fast-changing economic environment - that is, information flow. Obviously they're drawing on their diversification elsewhere in the world.l Tier two: Regional multinational companies - those that have grown to be influential in, say, four or more of the 12 countries in Asia - are vulnerable right now. As a result they're more cautious about the types of IT upgrade programs they'll undertake. They cannot afford to stand still but may not have the funds for aggressive projects that would keep them on par with larger, global competitors. The competitive positioning in various industries is being influenced by how many companies can continue their infrastructure-development efforts. Some are failing; others are able to continue or even to accelerate IT spending.l Tier three: National firms - that is, large Asian companies within a given country focused mainly on their domestic market - are often quite sophisticated about IT. Some of these firms were busily building an even greater IT infrastructure when the crisis hit. They're now feeling squeezed - they face the question of whether to continue investing or to defer until the domestic market stabilises and they know their demand prospects.
ERP rising in Japan?
Japan's economic woes are spurring companies to seek greater efficiencies. ERP (enterprise resource planning) could be a winner for integrators.
In 1997, a dozen Japanese systems-integration firms working with Andersen Consulting and Baan closed one of the largest deals for Baan ERP software in company history. The sale, which encompassed 10,000 desktops, was made to Japanese heavy-equipment manufacturer Komatsu.
The success of this sale depended on three elements typical of international projects: the vendor, the local integrator, and the global consultant.
"Baan's value proposition in Japan was through the local systems integrators," says Doug Sallen, vice president of middle markets for Baan. Andersen Consulting's role was as a business process re-engineering consultant to the global Komatsu company. (Incidentally, Andersen Consulting has well-established offices in every major city throughout Asia-Pacific and receives close to 17 per cent of its $US6 billion annual revenue from the region.)Government-approved spendingGenerally ERP seems poised to make major headway in Japan. To position the country for growth and to stimulate the economy during the current economic downturn, the Japanese government is aggressively encouraging domestic IT spending through tax incentives and other programs.
ERP is a particular focus in this stimulus program, and the government has even established an ERP council in its Ministry of International Trade and Industry that has responsibilities for regulating manufacturing.
Historically the packaged-software industry has lagged in Japan. In the US and Western Europe, packaged software represents a $US14 billion market. By contrast, Japan, which is half the size of the US economically, supports a packaged-software market of less than $US500 million.
According to a Baan scenario, however, Japan's appetite for packaged software may grow in these tough times. In Baan's view the current economy is pushing customers away from expensive, customised mainframe applications and urging them toward less expensive and more flexible solutions.
And, finally, ERP may grow in Japan simply because of technology maturity. "Many Japanese executives feel that investments by US companies have been experiments to see if the technology would benefit business," Sallen observes.
These "late majority" buyers told Sallen that they'd have confidence in the technology only when they saw the level of investment stabilising in the US. Apparently it has, because this is one objection Sallen no longer hears.