Copyright © 1996 Kenneth L. Kraemer, and Jason Dedrick
This report, from the project on Globalization of Information Technology, summarizes trends in the computer industry, semiconductors, telecommunications and national information infrastructure in seven countries: Singapore, Taiwan, Hong Kong, Japan, South Korea, Vietnam, and Malaysia.
It is based upon a trip during October and November 1995 to the Asia-Pacific region. We conducted interviews with over 150 people in government, industry, education, and research, including investment and market analysts. We will be further analyzing the interviews, databases, and reports we collected during the trip and producing additional material in the future.
This report and future reports will be available on the Internet at CRITO's homepage on the worldwide web: http://www.crito.uci.edu. The authors can be reached via email at: kkraemer@uci.edu, and jdedrick@uci.edu.
SINGAPORE
Trends in the computer industry
HardwareThe computer industry in Singapore is dominated by multinational corporations (MNCs), with around 75-80% of production by foreign firms, mainly in disk drives, PCs and monitors. Most production is for export. Historically, the disk drive industry was the largest segment of Singapore's computer industry and constituted 75% of world disk drive production in 1990. Since then the disk drive industry has been moving out of Singapore to elsewhere in the region due to high labor and land costs. However, Singapore retains a central place in this new "regional" disk drive production as illustrated by Seagate's disk drive production process. Designs for new disk drives are usually developed at Seagate's R&D centers in the U.S. where prototype production is also done. Working with Singapore's manufacturing process engineers, the designers transfer prototype production to Singapore where it undergoes continuous engineering for volume manufacturing. This usually includes flattening out the bill of materials, chaing material quality, improving yields through training, and process improvement. When desired quality and yields are achieved, the entire production line is moved to Malaysia (Penang) or Thailand for full volume production. Production of sub-assemblies goes directly from the U.S. into Malaysia and Thailand without going through Singapore because they are less complex. However, the more complex disk drives are assembled in Singapore and sub-assemblies are flown in twice daily from Malaysia and Thailand for just-in-time manufacturing. It is Seagate's vertically integrated structure that enables this tight integration but it is Singapore's excellent transportation, telecommunications and production engineers that support the process. While Singapore increasingly faces competition from Thailand, Malaysia and China as a production site for hard drives, its superior infrastructure (human resources, physical infrastructure and supplier base) has enabled it to maintain a 50% world market share in 1995. Thus, Sgapore plays a key role as the central hub of a regional production system for disk drives.
While Singapore has been losing certain aspects of its disk drive production, it has beengaining PC production. By 1993, exports of computers and sub-assemblies equaled those of disk drives, at about US$6 billion each. A fast-growing segment of the industry was printers, which nearly doubled in exports in 1993, reaching US$1 billion according to the Singapore Trade Development Board. Most production of PC systems is done by MNCs as well, although there are several Singaporean companies in the industry. The largest PC makers are Apple and Compaq. Apple produces PCs, monitors and various components in a US$250 million plant. Apple also has both hardware and software R&D centers in Singapore. Singapore's extensive supplier network enables Apple to operate a just-in-time manufacturing system, keeping virtually no parts inventories in its plant. Compaq operates two plants in Singapore, with responsibility for design and manufacture of notebook PCs for worldwide sales and desktop PCs for Asia. Hewlett-Pacrd's Singapore operations are involved in manufacturing and process design for printers, desktop PCs and servers.
The large network of supporting companies, including subcontractors, suppliers and OEMs is a mix of domestic companies and foreign subsidiaries. While most local companies are relatively small and limited to supplying MNCs, a few have entered international markets themselves. The largest domestic computer makers in 1995 were IPC, Wearnes, and Creative Technology. IPC and Wearnes are the leading indigenous PC companies, and they have entered the U.S. market by purchasing the U.S. companies Austin and ALR. Despite these successes, the local computer industry clearly is nascent. There are only two indigenous Singaporean companies among the top 20 electronics manufacturers in Singapore, and four in the top 40. The disk drive industry consists entirely of MNCs, including Seagate, Conner, Maxtor, and Western Digital. These companies carry out manufacturing, process design and distribution, and are closely involved in the product design process. A local support industry has grown up around the MNCs which foces mainly on metal parts, plastic moldings, base castings, and sheet metal. In addition, new roles are evolving for local companies as the MNCs outsource more of their activities. DHL in Singapore does assembly of custom orders for computers and delivers them for vendors to large customers around the world. Hewlett-Packard has its distribution company do assembly-to-order and shipping.
In addition to expanding their roles, local firms have developed greater capabilities and have moved to higher value production over the years. While many have grown from 10 to 100 employees in recent years, the majority of local firms are still SMEs. However, some firms are larger and global niche players. Creative and Aztech have experienced large increases in demand driven by their dominant position in sound and video cards, and local PC-maker IPC has a presence in major world markets that has driven recent demand for its PCs. Taken together, all of this computer production accounts for around 25,000 jobs and about 25% of Singapore's manufacturing value-added.
Software and contentThe software industry employs about 7,000 professionals, mostly involved in adaptation of foreign (mostly U.S.) programs. A number of U.S. companies have established facilities in Singapore for software localization and distribution to Asian markets. Apple Computer and the state-owned Institute of Systems Science have established the Apple-ISS Research Center, which conducts research on voice recognition and voice-to-text software for Asian languages.
The largest domestic software company is Computer Systems Advisors (CSA), which specializes in systems integration and custom programming. Creative Technology has developed a DOS-compatible Chinese language operating systems and a word processing program that it hopes to market in the PRC. The government created a state-owned company called Singapore Network Services (SNS) to modify and commercialize the original Tradenet software purchased from IBM.
Because Singapore is multicultural, with Chinese, Indian and Malay populations, the EDB is targeting development of a new multimedia/broadcasting cluster focused on post-production and localization activities for other countries in the Asia region.
Singapore secretsThe secret of Singapore's economic success lies in attracting and leveraging foreign investment by MNCs. Singapore is run like a business and MNCs are treated like business clients by the Economic Development Board (EDB). MNCs are even assigned account managers whose charge is to find ways to meet their clients' needs and entice them to bring more and higher value-added production to the Island. Singapore is committed to "making it easy to do business in Singapore" and IT plays a major role along with transportation and urban infrastructure. High quality and reasonable cost telecommunications make it possible for firms to coordinate their activities anywhere in the region or the world. Local value added networks connecting business and government make interactions both more efficient and effective. Computerization within government and computerization assistance programs for SMEs bring everyone up to world class computing and communications capabilities so that businesses can work together smoothly.
Evolution of National Computer BoardWhile the National Computer Board (NCB) has often been in the spotlight for IT developments, there are actually several influential players: EDB, Singapore Telecoms, and the National Science and Technology Board. NCB's role and structure are changing dramatically and may change even more, with NCB possibly being folded under the Ministry of Trade and Industry or Singapore Telecoms sometime in the future. Three-fourths of NCB, the government computerization staff, has been corporatized as National Computer Systems, and will begin to compete for outside service contracts in the region in 1996. At the same time, NCS will have to compete with other systems houses for the government business it now monopolizes. In time, NCS might be spun off as a quasi-private business. NCB will be the government's CIO and will outsource computer services. It will also be the catalyst for $200 million worth of new flagship projects in eight key industry sectors: education, construction, manufacturing, distribution, leire and tourism, health, library and public services. The projects, such as the "Teachers and Students Workbench," will help create Singapore's NII and be managed and operated by lead government agencies--the owners of the resulting systems. NCB also will develop the requirements for the IT professionals needed for the next phase the IT 2000 plan but rely upon universities and the private sector to prepare them. Finally, NCB will continue to promote an IT culture, IT careers and the informatization of Singaporean society.
Semiconductors
Like the other East Asian countries, Singapore is going into high volume, high-value production of semiconductors. The EDB has identified wafer fabs as the "genesis of electronics" and seeks to attract major MNCs to build contract fabs that will produce chips for other companies. Chartered Semiconductor, Tech Semiconductor and SGS-Thomson already have fabs in place, another 2-3 are under construction and 7 more are planned. Singapore hopes to attract as many as 25 wafer plants and supporting industries. The government will reclaim land to create a science park and will provide power, water, sewer, drainage, streets and manpower for the MNCs in the park. It is now designing a one year program to prepare and retrain engineers for the 500 engineering jobs expected to be required for each plant. The whole idea is to make it easy and desirable for foreign companies to set up their businesses in Singapore by providing what one corporate executive called a "dream infrastructure of transportation, telecoms, per, water, housing and hotels."
Telecommunications/NII
Telecommunications has been separated into regulation and service provision with the Telecommunications Authority of Singapore (TAS) providing the former and Singapore Telecoms providing the latter. Singapore Telecoms provides local and long distance telephone service, has recently privatized its mobile communications arm, and is investing in both Asia and Europe. Singapore Cablevision provides CATV locally and Singapore International Media delivers CATV material elsewhere; both are also investing overseas. CATV is preferred over satellite TV by the government because it can be better managed (satellite dishes are not permitted). TAS has approved three Internet service providers in the last year or so: Singapore Net owned by Singapore Telecoms; Pacific Internet owned by Sembawang Media; and Cyberway owned by Singapore Press Holdings.
TAIWAN
Trends in the computer industry
Taiwan's computer industry has been in a constant state of flux since its inception in the early 1980s. Companies have shifted production quickly to take advantage of new market opportunities, and have improved their technological capabilities to maintain their competitive position. As the PC industry continues to evolve, several new trends and challenges have developed.
Offshore productionIn recent years, Taiwanese companies have moved much of their low-end production offshore to mainland China and Southeast Asia. Offshore production accounted for about 26% of computer production by Taiwanese companies in 1994, and is expected to reach about 33% by 1997, according to Taiwan's Market Intelligence Center. Companies are mostly moving labor-intensive production of products such as power supplies, keyboards, mice, and older generation monitors to offshore locations. More advanced products such as notebook computers, scanners, add-on cards, and CRTs remain mostly in Taiwan.
The Intel motherboard challengeIn 1994, Taiwanese companies accounted for 80% of the merchant motherboard markets (excluding motherboards made in-house by PC makers). Taiwan's motherboard makers have succeeded on the basis of excellent design and engineering capabilities, and the ability to develop and produce a variety of designs to meet the needs of different PC makers. In 1995, however, semiconductor giant Intel began designing and producing chipsets and motherboards. Some estimates put Intel's motherboard production as high as 10 million units in 1995, a total close to Taiwan's production of 12 million units. A number of major PC vendors turned to Intel to supply motherboards for their Pentium-class PCs. Intel claims that it went into motherboards simply to accelerate the acceptance of the Pentium chip, for which no one had even designed a chipset until Intel moved in. However, there are fears that Intel will decide to move downstream and shift from "Intel Inside" to "Intel Outside," i.e., an Intel brand PC. Intel is already oducing all of Toshiba's desktop computers on an OEM basis.
Naturally, Taiwan's PC and motherboard makers are highly concerned about this new challenge. They believe that Intel only wants to make enough boards to continue to push the technology of the PC forward, and that it would not make sense for Intel to try to take over the whole industry. This is based partly on the fact that motherboard producers operate on much thinner margins than Intel is accustomed to, and that Intel would find it difficult to ramp up to a much higher level of production. In the short run, the casualties are likely to be chipset makers and smaller motherboard producers. For the longer run, Taiwan's motherboard and PC makers are pursuing several strategies, including diversification into new products and expansion of the services they can offer.
DiversificationTaiwanese companies are diversifying in both products and markets. Acer makes DRAMs in a joint venture with Texas Instruments, motherboard leader FIC is making notebooks, Elitegroup is focusing on scanners and semiconductors (in a venture with Mitsubishi), while scanner maker UMAX has just licensed the Macintosh operating system to enter the Mac clone market. Other companies are expanding into new markets. Most notably, Acer has developed a worldwide marketing network (ranking #1 in Mexico, for instance), and plans to list 21 subsidiaries on local stock markets by the end of the century (its 21 in 21 plan). Taiwan is also diversifying its OEM and components business as a number of major Japanese companies have begun to source in Taiwan or develop OEM relationships with Taiwanese companies. Fujitsu established an international procurement office in Taiwan in 1995 and plans to procure US$2 billion worth of hardware through 1998. Epson, NEC, Sharp and Hitachi are all involved in OEM relationship with Taanese companies. In fact, while Acer has pushed its own brand name, other companies such as Mitac have refocused on OEM production.
Full service OEMOEM production used to involve a U.S. company coming to a Taiwanese company with a new design and contracting for production. Taiwan's OEM leaders, such as FIC, Mitac, Acer and others have now expanded their capabilities to include design, distribution and service. Now an U.S. (or Japanese) company comes to Taiwan and is presented with a catalog of motherboard designs, and chooses the one that meets its system configuration requirements. If the Taiwanese company is producing the entire system, it may also distribute the finished product to the U.S. company's resellers and even provide warehousing, logistical and service support. The U.S. company might never actually take possession of the computer. Its only functions are marketing, channel support and finance. This new arrangement puts a premium on set-up capabilities that go far beyond low cost manufacturing. They include: market intelligence, product design, logistics, and customer support. By developing these capabilities, the Taiwanese compani have increased their share of the value chain in the PC industry and created competitive advantage against competitors in other countries. Finally, Taiwan's companies have improved their quality and no longer have the reputation for the poor quality they had in the 1980s.
ConsolidationTaiwan's computer industry was built around nimble small and medium-sized enterprises (SMEs), who could get to the market faster than the giants who dominated the industry in Japan and Korea. The PC industry has evolved to a point, however, where economies of scale are critical to success. Only large producers can get volume discounts on components, or offer the scale of production necessary to handle major OEM accounts. The same situation is true in components and peripherals such as motherboards and monitors. The result is that the industry is consolidating, with the top five producers accounting for the large majority of most product categories. However, the list of the top five includes different companies in most categories, with only a few companies such as Acer among the leaders in multiple product lines. So consolidation still does not involve industry domination by a few giant diversified firms, as is the case in Japan and Korea. The role of Taiwan's smaller companies is limited mostly to splying components such as resistors, capacitors, screws, etc. This is still a critical role, however, as computer makers in Taiwan can literally order all the parts they need to develop a new design and have them delivered the same day. The companies hurt most by the consolidation are medium-sized firms that lack the size to compete in volume markets, but are too big to survive on small, irregular orders.
SoftwareTaiwan is a major player in the global computer hardware industry, but has had little success in software so far. The government has targeted software as a growth industry and is implementing a plan for software industry development. The Institute for Information Industries is supporting development of vertical applications for industries such as banking, manufacturing and medicine, while another III program involves developing applications for small businesses. There are plans for a software industry park, but the opening of the park has been delayed. Finally, a New Product Development Grant Program has given grants to about 15 companies to help develop products (an average of about US$100,000 each).
The software industry has struggled so far. The domestic market is small and exports to Chinese-language markets are difficult due to rampant piracy in the region. The government and industry are now targeting games and CD-ROM titles rather than try to compete with international giants who dominate the business software market.
Semiconductors
Taiwan's semiconductor industry consists mostly of relatively small "boutique" companies whose strengths are in design and flexible production of specialty chips. The only large scale producers are the TI/Acer joint venture, UMC and TSMC. The latter two are spin-offs from the government supported Industrial Technology Research Institute (ITRI). Now, however, the worldwide boom in demand for DRAM chips has spurred a rush to build large-scale wafer fabs. A total of 18 companies have plans to build fabs, with US$10 billion investment. These include existing chipmakers such as UMC, TSMC and Mosel-Vitelic, other electronics companies such as Elitegroup and Tatung, and traditional companies such as Formosa Plastics. Most of these plans are joint ventures with foreign (mostly Japanese) partners. Some of the companies have hired overseas Chinese executives from U.S. companies to run their operations. These include TSMC and its new subsidiary, Vanguard, which consists of ITRI's Submicron Lab that was purchad by TSMC.
Taiwan's chipmakers have been earning exceptional profit margins recently, and the continued rapid growth in global demand for DRAMs has drawn new investment into the industry. There are a some serious risks involved, however. First, projections for continued demand growth could fail to materialize due to economic or technological reasons (e.g., Internet-based software replacing memory guzzling PC applications). With Japanese and Korean chipmakers making huge investments in new capacity, there is a risk of over-capacity at the time the Taiwanese fabs, or for that matter the Singaporean fabs, would come on-line. Second, Taiwan already has shortages of electricity and purified water, and it is doubtful that supplies are adequate to support so many new fabs. Third, several companies are planning public equity offerings to finance these investments, and it is not clear that those offerings will be successful.
Telecommunications/NII
Telecommunications services are still expensive, thanks to the continued control of the industry by the state-owned monopoly DGT. DGT has drafted laws that would split its regulatory and operational functions, with operations taken over by a newly created company. The new company would still be government owned, and workers would not give up their civil service status, however, making cost cutting difficult.
Like other countries in the region, Taiwan has developed plans for developing its national information infrastructure (NII). A committee has been formed under the Executive Yuan which meets each month to develop policy, but has no funding to implement programs. Each ministry has its own budget for NII development. It is expected that DGT will make the investments to upgrade the basic telecommunications network, with digital switching and eventually fiber optic cable. Other services, such as wireless and data communications have been opened to private sector competition to accelerate their deployment.
DGT has published plans to establish Taiwan an the Asia-Pacific telecommunications hub, a goal shared by a number of their neighbors. Given the uncertain status of its relationship with mainland China, and the relatively high costs of telecommunications services in Taiwan, it is difficult to imagine Taiwan becoming a regional hub.
HONG KONG
Hong Kong has always been, and probably will always be, a major trade center rather than a manufacturing center like Taiwan, South Korea or Japan. This reality goes a long way to explain the character of its computer industry. Hong Kong's unique role in the global computer industry has been that of an entrepot--an intermediary center for the collection and distribution of computer hardware and software between foreign firms and mainland China or other Asian markets. That role is evolving to include the management of mainland subsidiaries of local and foreing firms.
Trends in the computer industry
HardwareComputer manufacturing has been declining for more than a decade and is almost nonexistent today in Hong Kong. Most of the major multinational corporations (MNCs) have sales and support in Hong Kong, and some also have software localization, but no one has significant manufacturing. VTech, the major local computer manufacturer, is reportedly making money on electronic toys while losing money on PCs. Other local companies make components, but the value-added is low.
Hong Kong's role in the global computer industry is that of trader. It "trades" hardware and software in the gray market. It provides access, distribution and management services for foreign firms that want to do computer business with mainland China. It provides managers and supervisors for foreign firms that want to do manufacturing and assembly in Shenzhen and other parts of southern China. And it is a location for the international procurement offices of MNCs. For example, NEC is using Hong Kong as a procurement site for parts from Asia. In short, Hong Kong is primarily a hub for doing computer business in mainland China, and throughout Asia.
Most of Hong Kong's computer production is for export because the locals prefer "brand" computers. Hong Kong's computer exports were US$1.32 billion in 1994 and are expected to be around US$1.6 billion in 1995 out of total electronics exports of US$39 billion and US$51 billion for these two years. Computer exports are about 16% of total electronics exports, but three-fourths of the exports are in parts and accessories, and only one fourth in computer systems. Although some of the computer exports are to other parts of the world, the vast proportion are to China. These exports are mostly of computers that are brought into the country and then re-exported, or assembled locally and then exported.
SoftwareThe computer software industry in Hong Kong is small, focused on local markets, and not distinguishable from the computer services industry. This is because software houses rely upon systems integration and maintenance revenues more than software revenues per se. A recent study for the Hong Kong Productivity Council by IDC showed there were about 500 firms employing 17 people on average or 8,500 people overall. Most produce custom software and do systems integration and maintenance. Some produce packaged software for niche markets (e.g., Windows-based Chinese accounting, sales order, purchase order, inventory control) and localize foreign software for Chinese markets. Most recently, a few small firms are beginning to produce software for interactive CDs.
The high cost of doing business (especially the high cost of real estate), the low demand for Chinese-language software, the intense competition among the players, the poor salaries paid by software houses compared to in-house computing shops, and the business culture of small and medium enterprises that do not believe in paying for software are major roadblocks to development of a viable software industry in Hong Kong. Intellectual property protection remains a very serious problem in Hong Kong despite government efforts to crack down on the many small shops selling pirated software. The recent HKPC study shows the government is aware of the industry's potential, and that some people would like to see more vigorous government assistance for the industry, but there is no agreement about what should be done.
The quality of IT professionals is rated high and getting higher, but salaries and turnover are also high, so training of professionals, and training and retraining of technicians is a constant problem for local firms and universities. The HKPC and the Industrial Technology Center are trying to help local firms through start-up incubators, R&D funding, technical assistance and business assistance (management, marketing, distribution). The government is building a science park near the Chinese University in the hopes of attracting 500 high-tech companies. Although there has been a major change in the government's efforts to help local high-tech industry in the last several years, many observers feel that it is all too little, too late to create a viable computer industry focused on hardware or software production. At the same time, they feel that Hong Kong will continue to be a major hub for doing IT business with mainland China.
Semiconductors
Motorola is the semiconductor industry in Hong Kong. Motorola has been manufacturing there for over 25 years. Its current facilities are highly automated, employ highly skilled engineers, programmers and technicians, and make complex chips for world markets rather than simply local or regional markets. It is expanding in Hong Kong while also building new plants in China and other parts of Asia. Motorola works through Hong Kong distributorships, which do assembly and testing and deal with customs, import and transport of integrated circuit (IC) products to business customers.
Telecommunications/NII
While everyone else is talking about national information infrastructure, it appears that Hong Kong has built it. Hong Kong has very sophisticated, advanced telecoms at cheap rates and with lots of competition to keep rates low and innovation high. Hong Kong's work force is three million people and its population is six million, and there are 1.6 million pagers and 600,000 mobile phones, constituting very high ratios of penetration per worker or per person. Hong Kong is CATV ready, has fibre backbone in place and will have fibre to most buildings by 1998. It is the first place in the world to commercially launch CDMA mobile technology in a joint venture between Motorola and Hutchinson.
In addition, Hong Kong is creating value-added networks and services to be delivered over these conduits including electronic commerce, electronic trading, electronic delivery in services, video-on-demand and government services. A Government Computer Network links major government departments and will be the basis for providing bilingual public access to government data bases such as the land registry, legislation, court cases, and trade. The Telecommunications Authority already licensed 40 Internet providers. All of this fits well with the notion of Hong Kong being a hub for business and with Hong Kong's way of doing business fast, responsively, flexibly, tailored, through small and medium-sized enterprises and with little government intervention. Perfecting Chinese language input, character recognition, and voice recognition on computers will be important to achieving greater use of computers and telecommunications.
JAPAN
Trends in the computer industry
HardwareJapan's computer market has gone through a dramatic change in the past 3-4 years. Throughout the 1980s, the PC market was dominated by the proprietary NEC 98 series, with other domestic companies also selling machines based on their own proprietary versions of DOS. These systems were incompatible with each other, and with the international MS-DOS standard, which created a fragmented hardware and software market. PCs were very expensive, under-powered, handled the Japanese language poorly, and had limited networking capabilities. As a result, market penetration of PCs was a fraction of the levels seen in other industrialized countries.
A series of events in the early 1990s changed the situation entirely, and has led to a boom in PC sales the past two years. First, IBM introduced DOS-V, a common standard Japanese version of DOS, which was adopted by foreign PC makers in Japan, and eventually by Japanese companies other than NEC. Then Apple made large inroads into the Japanese market with its easy-to-use graphical interface, which made computing much less frustrating to Japanese users. Soon after, Microsoft introduced Windows 3.0J, which runs on both DOS-V and NEC 98 series computers. This served to unify the Japanese applications market and enable Japanese computers to run standard Windows programs. Finally, Compaq launched a price war by selling PCs at about half the price of NEC's machines, a move which made PCs affordable to a much larger market. As a result of all these developments, PC sales in Japan have increased from 2.5 million units in 1993 to 3.4 million in 1994, to an estimated 5.5 million in 1995. Foreign PC makers doubd their market share from about 15% in 1992 to 30% in 1994.
NEC has responded by offering low-cost PCs with standard components sourced from a Hong Kong procurement office, rather than from its traditional suppliers in Japan. Fujitsu and Hitachi have turned to Taiwanese OEMs to cut costs and improve their time-to-market. Fujitsu has moved aggressively to increase its market share in Japan and has also announced plans to compete aggressively.
Japan's electronics giants have been touting multimedia as the new growth area that will revive their flagging growth rates. The discussion of multimedia is shifting from a hardware-dominated notion that prevailed in 1994 to a broader notion that includes software and content. However, Japan's electronics giants are still focused mainly on hardware, attempting to leverage their technological leadership in existing products to develop new markets. The recent agreement between Toshiba and Sony on DVD standards is expected to create a large new market for devices that will replace video tape and CDs.
SoftwareJapanese companies have been virtually non-existent in the packaged PC software market outside the domestic market, and even in Japan, foreign companies account for over half the market. The one area in which Japan has succeeded internationally is video game software, most of which is developed by contractors hired by Nintendo and Sega. However, those companies are turning to California (Silicon Valley and Hollywood, or "Sili-wood") to develop interactive content for new 64 bit game machines. Meanwhile, some startup companies are developing entertainment content such as games and CD-ROM titles, but there are still serious barriers to successful entrepreneurship, including the lack of venture capital.
While Japan has been unable to challenge the dominance of U.S. companies in business software, the government has not given up. A number of trade disputes have revolved around software, including recurring efforts to legalize software decompilation to allow reverse engineering of foreign software products. A recent dispute over ISO 9000 decertification appeared to have been resolved by an agreement between American and Japanese industry associations, but an article in Computing Japan suggests that the two sides have very different interpretations as to what the agreement means. MITI is also attempting to nurture Japan's software industry by providing grants and loans to support software companies with promising product ideas. It is not clear that MITI has the ability to pick winners in software. Some in the industry claim the program is nothing more than a bailout for software companies being squeezed out of the custom programming business as demand for custom programs declines.
Telecommunications/NII
NII1994 was the year of NII/multimedia fever in Japan, with the Ministry of Posts and Telecommunications (MPT), Ministry of International Trade and Industry (MITI) and NTT all publishing NII vision statements. The fever was driven by Vice-President Gore's NII proposals in the U.S., and the perception that Japan was falling behind in a critical area of national competitiveness. Both MPT and NTT were calling for the creation of a fiber optic network reaching every home, school, business and government agency in Japan by 2010, at a cost upwards of 33 trillion yen (US$330 billion).
In 1995, the hype is being replaced by more pragmatic considerations, and visions are turning into concrete spending projects. While MPT continues to publicly call for fiber-to-the-home by 2010, people involved in implementing the NII plans (including NTT) are talking about a more flexible hybrid approach. This could include a mix of fiber, copper, coaxial, and wireless. Meanwhile NTT's focus is shifting from broadband ISDN (B-ISDN), video-on-demand, and interactive TV to computer networks. This shift is driven by the boom in PC demand and Internet use in the past year. NTT's announcement of an Open Computer Network in June is aimed at creating an infrastructure for digital communications.
The two key ministries involved with NII, MPT and MITI, are both spending large sums of money on NII. Each has budgeted close to US$1 billion for the present fiscal year for a variety of projects, including trial video-on-demand, distant education, telemedicine and local government networks. MPT's projects focus more on communications infrastructure, while MITI concentrates on applications development. However, in typical fashion, the two ministries are operating independently rather than cooperating, as each competes to encompass NII and multimedia under its jurisdiction.
The future of NTTNTT is central to any Japanese plans for an NII: all existing NII plans assume that NTT will be building the information infrastructure to the consumer's door. NTT was a government agency until 1985, when it was officially spun off as a "private" company and MPT acquired responsibility for regulating NTT. Even after stock sales from 1986 to 1988, the Ministry of Finance still holds about 65% of the shares of NTT; with ongoing MPT influence, NTT has become at best a quasi-private corporation.
After the 1985 privatization, the question of breaking up NTT further was postponed. Further privatization also has been on hold since the collapse of the stock market, because Ministry of Finance (MOF) has not wanted to offer additional shares in a soft market. However, with the prospect of an expanded information infrastructure, and ongoing market power of NTT to crowd out smaller rivals, MPT and the new common carriers (NCCs) have renewed their push to break up NTT. A special committee of the MPT Telecommunications Council is scheduled to recommend a future structure for NTT, with a report due in March, 1996. It is expected that the committee will recommend the breakup of NTT, but that will be just the first step in a long process before a final decision is made.
In fact, the battle over NTT has been waged in the court of public opinion throughout 1995. MPT argues that breaking up NTT would create a dynamic telecommunications market, with competition leading to lower prices and new services. NTT responds that competition is now international, and that it should be allowed to stay intact to compete in international markets. NTT also argues that a breakup would damage network coherence. Finally, NTT argues that its R&D labs are a national resource that should be preserved.
NTT took two preemptive strikes against divestiture in late 1995. First it announced that it would provide local networks to other carriers in order to create a competitive environment. It also announced that it would cut its workforce by 50,000 from the present 200,000 to reduce its operating costs, in return for the company being kept intact. NTT President said, "We present this restructuring on the assumption that the breakup will no go forward."
One industry analyst argued that NTT's pricing structure for interconnection made the offer to open local connections "a fake," intended to win political points rather than create true competition. Potential local competitors are mostly small carriers, cable TV companies and other utility companies that have their own fiber optic networks between cities. None have the capital or technology to compete seriously with NTT.
NTT's plan to cut labor costs will be difficult to implement, given the political clout of NTT's union. The average salary at NTT is estimated at between 8 million and 10 million yen (US$80,000-100,000) per year, and NTT has a higher worker/customer ratio than its international competitors. NTT's union has not agreed to job or salary cuts, and past efforts to spin off units such as NTT's Software Center were successfully thwarted by the union.
A former NTT executive argued that the real purpose of NTT's announcements was to "move the playground from the NTT Law to the Telecommunications Business Law." Under the NTT Law, the issue of breaking up NTT is within MPT's regulatory jurisdiction. However, by broadening the agenda to encompass the Telecommunications Business Law, NTT is trying to shift the debate to the Diet, where it can line up its allies to oppose breakup. Shifting the debate to the Diet, and/or to some kind of interministerial negotiations, means probably delaying the issue for years. If the Telecommunications Basic Law is to be rewritten, a host of issues will have to be resolved, including the demarcations between local and long-distance service, domestic and international service, Type I and Type II service, and broadcast and cable TV.
One of NTT's goals is to be allowed to expand into international markets. Since its privatization, NTT has been prevented by MPT from providing international service, which remains the domain of international carriers KDD, IDC and ITJ. MPT is unlikely to allow an intact NTT to provide international services, as it would lose one of its most important sources of leverage over NTT. NTT would also like to end the separation of Type I (common carrier) and II (value-added) services. By opening its local lines to competitors, NTT is positioning itself to be allowed to compete in value-added services free of MPT's regulation. This strategy puts NTT's monopoly profits in local service at risk in order to pursue new growth markets in the future. Again, however, MPT is not likely to agree to such a change, as it would prefer to increase, rather than decrease its regulatory reach. By putting such a broad agenda on the table, NTT hopes to attract allies in its battle with MPT. So far the scorecard seems to be as follows:
Pro-breakup:MPT, NCCs, cable television companies, other potential competitorsAnti-breakup:NTT, MITI, NTT's family of equipment suppliers, NTT unionUnsure:Ministry of Finance, political leaders
A key player is likely to be MOF, which is very concerned about maximizing the value of its shares in NTT. In the past it was assumed that MOF would oppose a breakup because NTT's share value would be hurt. However, in 1995, Nomura Research Institute produced a report stating that NTT would actually be worth more in parts than as a whole, as the smaller units could pursue profitable alliances to enter new markets and cut costs. Another possible factor will be the outcome of the next national election, expected in 1996. If an LDP majority is restored, the party and its Prime Minister will have more influence over the NTT issue than the present coalition government can muster.
It is difficult to forecast the final outcome of the breakup issue. No one is happy with the present regulatory regime, which maintains artificial market barriers between different categories of service and hamstrings NTT and its competitors alike. However, the present political climate seems more conducive to continued standoff than a decisive resolution of the issues. For the near future, NTT is likely to remain intact under the present regulatory structure, but uncertainty surrounding NTT's future will be an obstacle to rapid development of Japan's NII.
InternetThe Internet was slow to catch on in Japan, partly because of the high cost of telecommunications, MPT's licensing power over Internet access providers, and government efforts to enforce Open Systems Interconnection (OSI) standards while the world was embracing TCP/IP. However, Internet is replacing multi-media as the catchword in Japan, as businesses are able to use the Internet immediately to advertise and put information on-line, rather than waiting for new infrastructure to be developed. Major newspapers such as the Asahi Shimbun are now on-line, and on-line providers such as Niftyserve will offer Internet services in 1996. It is estimated that there are 2 million Internet users in Japan now, and large companies are using Internet for PC networking.
SOUTH KOREA
Trends in computer production
South Korea (hereafter Korea) has done very poorly in production of minicomputers and PCs. Its Ticom minicomputer had very low sales except among governments. After experiencing rapid growth in production and exports in the 1980s, Korea's PC industry went into a steep decline in the 1990s. Korea's PC makers could not compete with the design capabilities and production flexibility of the Taiwanese industry. As price competition heated up and product lifecycles shortened in the 1990s, Korea's PC companies were squeezed out of the international market. The industry, dominated by the four big chaebol, and Trigem Computer, has survived through sales to the domestic market, but is estimated to be losing money as total revenues fall.
However, the nature of the PC industry is changing in ways that might benefit the Koreans. Production volume is becoming a critical success factor, as large PC makers are able to secure stable components supplies and obtain volume discounts on price. The big Korean PC makers are supported by substantial sales volumes in the domestic market, and Trigem has recently landed some major OEM business. The chaebol are also ramping up flat-panel display production. Samsung has developed the first 22" flat-panel display, for a wall hanging TV. Hyundai has developed a 386 Intel-compatible CPU, the first in Korea and has plans for 686 and 786 class processors. LG is producing 6X-speed CD-ROM drives and has developed and all-in-one multimedia chip.
The Koreans are also using an acquisition strategy to move into new markets and product areas. Samsung bought a 40% stake in AST Research, a leading PC maker with strong market presence in the U.S. and throughout Asia, especially in China. It has also taken a stake in the new Hollywood studio, Dreamworks (the creation of Spielberg, et al.). Hyundai owns a major share of disk drive maker Maxtor, and is expected to buy out the company entirely in the near future. LG Electronics bought Zenith's television operations, mainly to gain access to the U.S. market and to Zenith technology in digital HDTV.
All of this activity is not aimed at the computer industry in particular. In a presentation by an LG Electronics executive, the company's strategy for multimedia was shown to cover the full spectrum from components to consumer electronics to communications. The PC was just a small slice in the whole pie. While the technologies being developed or acquired could help Korea's PC industry, the lack of focus will hurt it. While Taiwan's computer makers live and die with computers, Korea's electronics giants can thrive whether or not they do well in computers. Given their bureaucratic management styles (although that is changing), it is not clear that they can develop the focus and flexibility that are still critical to success in the PC industry.
Some of the acquisitions are of dubious value as well. Maxtor received a major cash infusion from Hyundai a couple years ago and lost it all; the company is now an also-ran in the disk drive industry. AST is likewise on a downward spiral in the PC industry. Lacking strong design capabilities, its products are not distinctive and it has lost market share since its acquisition of Tandy's PC division two years ago. While it is possible that Korea's PC industry will rebound, there are still questions as to whether Korea's industry structure is suited to the PC industry.
Semiconductors
By contrast to computers, Korea's giant conglomerates, or chaebol, such as Samsung, LG Electronics (formerly Lucky Goldstar), Hyundai and Daewoo, have been very successful in high volume commodity products, such as DRAMs, and many consumer electronics products. The chaebol have challenged Japan's leadership by their ability to make the massive investments needed to compete in such industries. In fact, Samsung became the world's number one producer of DRAM chips by making large investments in the early 1990s, at the same time its Japanese competitors were reducing investment in response to the Japanese recession. The Koreans are now going after Japan's dominant position in LCDs, threatening to destroy another Japanese monopoly.
Trends in the computer industry
Vietnam has spent the last several years getting ready for the information revolution. It has set up central administrative arrangements and created policies and plans for development of a computer industry and informatization of the country. It established the Steering Committee for the National Program for Information Technology (SCNPIT) and produced two key documents: Policy on information technology development in Vietnam up to 2000, and Master plan up to the year 2000. The central planners had assistance from foreign government and industry experts and the results appear to be quite sound. They put in place Country objectives and priorities regarding the application of IT and have been followed by procedures for obtaining central government assistance by the 43 government ministries and the 53 provinces. Basically, each agency must obtain central government approval for their computerization efforts, whether they are eventually funded by the central government or not. The government provides trning and assistance but the agencies must prepare their own feasibility study and computerization plan. If the plan fits into Country priorities, the central government will try to find financial support from international development agencies and foreign governments. As put by several vendors, however, IT in Vietnam is still more a matter of plans and planning than hardware, software and systems.
In response, government planners point out that Vietnam is a poor country but has already launched computerization projects and has more just awaiting funding. Education has led the way with a $5 million project that started in 1993 to put five PCs per school in all secondary schools. Computerization of public administration in central ministries and the provinces also started in 1993 with French aid of $5 million for equipment. Banking modernization is to follow in 1996 with $46 million from the World Bank, the largest single project to date. Other computerization priorities include taxation and treasury in the Ministry of Finance, and statistics, planning and management of natural resources in both the ministries and provinces. Finally, PC sales have more than doubled from about 50,000 in 1994 to 100,000 in 1995.
The computer industry in place in Vietnam is minimal--so much so that there does not seem to be any data on production. It consists mainly of MNCs such as IBM and DEC, which have "representative offices" that provide support to about a dozen local resellers. These in turn sell hardware and software to what are essentially government customers even when corporatized or privatized. The resellers also provide service, support and training to customers. The resellers are small, ranging from around 10 to 100 employees in size, and inexperienced, having only been in existence five years or less. In contrast to other vendors, Compaq ships PC directly into the country from Singapore in big amounts aiming at individuals and SMEs and using self-taught resellers for support. Customers in the North and South differ somewhat. Hanoi customers are mainly government agencies and utilities whereas Ho Chi Minh City customers are commercially-oriented SMEs who are interested in billing, accounting and record keeping appcations.
Minor hardware production is coming to Vietnam. Fujitsu is building a $70 million plant to make motherboards and a much smaller joint venture of $10 million between a local and Vietnamese ŽmigrŽ company is planning to manufacture electronic components. There have been many proposals regarding software production but none have come to fruition as yet.
Telecommunications/NII
NII is not really a topic in Vietnam; nor is multimedia or "content." Vietnam has more basic things to do like provide basic telephone and data communications. Telecommunications is run by the government although separated into regulation by the General Department of P&T and service provision by the Vietnam National P&T (VNPT) company, which is a government enterprise. VNPT builds the infrastructure and provides telephone and microwave services. It has built a fibre optic backbone between Hanoi and Ho Chi Minh City and plans to extend fibre to the major city in each of 53 provinces by the year 2000.
MALAYSIA
Trends in the computer industry
IT has achieved a new position in Malaysia in the past year. It is being formally incorporated into the next Five Year Plan of Vision 2020, Prime Minister Mahatir's 30 year plan for Malaysia first set forth in 1992. A key symbol of this change occurred at a three-hour session at ICIT 95 in Kuala Lumpur (KL) in November. There the Prime Minister first presented his plans for a new capital city, a smart international airport, and a massive multimedia corridor linking these with KL. He then casually took questions from audiences in each of Malaysia's states via multipoint videoconferencing that worked flawlessly. The event was significant because of the strong support for IT that it represented, for the technical capability it demonstrated, and for the expression of local "content" (issues, concerns, culture) by the participants.
The new international airport will be built at Sapaat, about 40km southwest of KL and the new capital city or "Putrajaya" about 30km southeast. A new metro and new freeways will link Putrajaya and KL, and will also serve a new "multimedia super-corridor" 15km wide between the two cities. Efforts are underway to attract major international firms in computers, semiconductors, multimedia, animation, databases, broadcasting and other information industries to invest in the corridor. Of the 20 billion ringgit to be spent for Putrajaya, 2.4 billion ringgit will be for IT infrastructure.
Computer usage is growing along with Malaysia's booming economy. For example, computer use in government grew over 500% in 1995, primarily due to a major new program to put computers into high schools throughout the Country but also due a doubling of spending by governments. Total government spending in 1994 was 300 million ringgit of which about 40 million was for PCs alone. Total government spending in 1995 is 1 billion ringgit, of which 350 million is the first of two supplemental budgets for computers in the schools.
The current IT industry in Malaysia is impressive and concentrated in the Penang area although growing in KL as well. The industry is led by large MNCs who use Malaysia as a production platform for export of semi-conductors, PCs, and components such as disk drives, motherboards, etc. The MNCs are supported by a production network of local SMEs that produce sub-assemblies and parts. There are also local assemblers of PCs but no Malaysian brand computer as yet. There are local software and services houses which mainly provide custom programming, localization of U.S. software, systems integration and maintenance, and support services.
Malaysia has a shortage of workers at all levels and currently has about one million guest workers from Indonesia, India and Bangladesh. It especially has a shortage of scientific, engineering and technical personnel, including people for universities. The shortage of IT workers in Penang has resulted in new plants being located at other major employment centers along the west coast with some loss of synergy from the industry "clustering" that has characterized Penang.