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'The Future of Global Chinese Commerce'

Overseas Chinese Business & E-Commerce by Mr Michael Backman, economist and author

Melbourne - October 7, 1999

There are three strands to what I want to say today. I will talk about the success of the Chinese diaspora in trade and commerce throughout the twentieth century.

Then I will discuss the impact of the Internet and e-commerce on traditional overseas Chinese commerce.

Finally, I will contrast that with the impact on the other great Asian diaspora - the overseas or non-resident Indians.

TRADITIONAL OVERSEAS CHINESE COMMERCE

The Chinese diaspora is one of the greatest diasporas the world has ever seen. Although its contribution is much wider than merely in commerce, it is in business that its contribution has been especially noted. The cross-border connections that traditional overseas Chinese business people have had, have been important in drawing together countries and their economies all this century. We talk about globalisation now but in fact overseas Chinese traders have been busy turning segmented regional markets into one big world economy for centuries. Even as long as 500 years ago, Australia was part of the global market place, when Bugis sailing ships from what is now the Indonesian island of Sulawesi visited northern Australia to acquire trepang or sea slugs from the local Aborigines. The trepang were then sold on to Macassar-based Chinese merchants who then traded them around Asia. Really, globalisation is nothing new - it is only the speed and the volume of trade that differs now. With their trading and their middleman role, Chinese traders have been extremely important for helping to make the economies in which they live more developed and more prosperous.

E-COMMERCE AND THE FUTURE OF OVERSEAS CHINESE COMMERCE

The overseas Chinese have enjoyed considerable success in commerce but the rules of the game are changing. The Internet and e-commerce are going to have a considerable impact on how business around the world is conducted, and traditional overseas Chinese business will not be exempt from this.

Information constraints are one of the main factors that keep markets separate. Many overseas Chinese business people have friends, relatives and associates spread across the world. There might be uncles in Hong Kong, a brother in Taiwan, cousins in Los Angeles and a sister in Vancouver. Informal networks such as these are able to gather in information and use it to promote business. Such informal networks allow for the identification of needs in one market, and of goods in another that can be traded to satisfy those needs. This drawing together of markets with the aid of superior information has been one of the key factors in the success of overseas Chinese traders throughout this century. Information is like gold in business and their informal networks aided by their geographic dispersion have allowed overseas Chinese business people cheap and efficient access to information on commodities, markets and market niches on a scale not typically available to others. In effect, the Chinese diaspora itself has functioned like the Internet. Overseas Chinese traders have operated like an organic World Wide Web that is able to gather, process and distribute information.

Access to information has kept many an overseas Chinese business at the cutting edge of commerce throughout this century. However, as this century draws to a close, we are witnessing an enormous explosion in the availability of information. The Internet is allowing the volume of available information to expand exponentially and its price to fall dramatically. The Internet represents a fundamental challenge to traditional overseas Chinese business. Cross-border information that was once the preserve of a few is now available to anyone with access to a computer and a telephone line.

There are other ways in which the Internet and e-commerce will impact on traditional overseas Chinese ways of doing business.

Traditionally, overseas Chinese have been one of the world's great middleman minorities. Most obviously they have performed this role as shopkeepers, traders and suppliers, bringing together buyers with producers. However, the whole point of e-commerce is to cut out the middleman - to put customers directly in touch with producers or at least with wholesalers. This trend towards disintermediation will have significant implications for some industries more than others. In 1996, independent travel agents handled 80% of travel reservations in the United States. Two years later they handled just half this amount, with much of the loss being attributed to online ticket wholesalers. Increasingly, conventional stock broking firms too are losing ground to discount online brokers.

International commodities markets are likely to move online increasingly. This will enable producers to establish closer relationships with their final overseas customers thus cutting out the need for middlemen. Slowly, e-commerce will take away the role that many traditional overseas Chinese businesses have had. It is also about shaving margins and making the customer king. It undermines long-term relationships between buyers and suppliers - the sorts of guanxi-type relationships favoured by traditional overseas Chinese business.

To date, businesses in Asia have been slow to offer their goods and services for sale online. It is estimated that currently, 20% of goods and services sold over the Internet are traded across borders. In Asia right now, the proportion is much higher. For every $7 spent in Asia online, $6 of it ends up in the coffers of e-commerce companies outside Asia. For as long as the amounts that are actually spent online in Asia remain small, this does not represent a huge leakage, but that will change as Asian consumers buy more over the Internet.

Of course, Asia's governments are keen to lead the push into e-commerce. But Asia's relative slowness to take to e-commerce has more to do with mindsets than money. A lot of people in Asia have grown wealthy from property. Old habits are hard to break, and indeed, so far, some of Asia's attempts to grapple with the Internet seem to be more about real estate than the brave new world of e-commerce.

Hong Kong's much publicised Cyberport development, for example, allows for the development of almost three times the amount of luxury housing as it does for industrial space. The Internet kiosks that have sprung up along Orchard Road in Singapore in recent months seem to be more about the well-placed and presumably very expensive poster advertising on their outsides than about the computer terminals within them. Malaysia's Multimedia Super Corridor seems to be more about the 'corridor' than it is about the 'multimedia'. It's more about the infrastructure and the offices, rather than the people in them and how their creativity will be ignited and developed.

But to what extent will traditional overseas Chinese business be able to adapt to the challenges posed by e-commerce? To what extent will we see overseas Chinese businesses themselves become players in e-commerce, engaging in Internet start-ups and 'dot-coming' themselves to great wealth?

The most immediate problem to be overcome is the traditional Chinese disregard for services. Traditionally Chinese have been traders in goods; rarely in services. When they buy inputs for their companies, traditional Chinese business people tend to focus on physical inputs, but under-invest in services, be they research and development, staff training, legal advice, accounting advice, marketing and so on. It follows that there will be a similar cultural bias against investment in e-commerce and the Internet.

There are other aspects of traditional overseas Chinese business practice that run counter to the emerging e-commerce model.

Offering prospective employees stock options has been critical to Internet start-ups in the United States. Typically these start-ups are cash poor in their early days and stock options are the only way to attract good staff.

Traditional family-owned overseas Chinese companies typically do not readily welcome outside investors and certainly not if they threaten the control of the founding family.

Not only do stock options demand a willingness to part with equity on the part of the founding shareholder but they also demand accountability and transparency in how a firm manages its books. This is also something that many traditional overseas Chinese firms have not needed in the past. For them offering stock options is an anathema.

Venture capital has also been important for funding the e-commerce boom in the United States. But venture capital funding also runs counter to the traditional overseas Chinese way of doing things. Not unreasonably, overseas Chinese business people tend to want to control the companies in which they invest rather than take minority positions. But this does not fit in with the new style model of Internet venture capitalism, whereby the investors hand over the cash and then stand back.

Another aspect is that many overseas Chinese businesses are run on cash accounting only. The trouble with many Internet start-ups is that there's little cash - certainly not by way of revenue or profits. In the early days, it's all about outgoings.

Another challenge posed to Asia by the e-commerce revolution relates to existing social hierarchies. E-commerce threatens to upset traditional family and work place relations in Asia. Traditionally, older people both in the home and the workplace have been accorded much respect and their authority is rarely questioned. However, it is the young who are most Internet-aware and it is the young whose Internet companies will be the fast rising companies on Asia's stock markets. All this threatens to overturn traditional hierarchies in Asia.

So these are some of the challenges posed by e-commerce to the continued success of overseas Chinese commerce. But what aspects of traditional overseas Chinese business culture are well suited for the age of e-commerce? There are some. Traditional, family-run Chinese companies are fast decision-makers. This comes from there being little separation between ownership and management and the typically patriarchal style of overseas Chinese business founders. Also, the preference for low overheads - the disdain for flashy offices and other corporate trappings - is something that traditional overseas Chinese firms have in common with new-style e-commerce companies. The long time horizons in decision making that many traditional overseas Chinese firms have should also lend itself to e-commerce with profits possibly years away. The very hands-on approach of senior management in traditional overseas Chinese firms (especially compared with their more aloof Western competitors) is another similarity between traditional overseas Chinese business and firms at the frontier of the e-commerce revolution. Also, typically traditional overseas Chinese business is all about high volumes and low margins - precisely about what e-commerce is about, with e-commerce allowing volumes to increase and margins to be even finer. Finally, the importance that many traditional overseas Chinese families place on education will also help. So all is not lost it seems. There are some ways of doing business on the part of traditional overseas Chinese that are compatible with the emerging e-commerce model. Some, but not all.

NON-RESIDENT INDIANS IN BUSINESS

The other great Asian diaspora, the non-resident or overseas Indians, do not have the same reputation for cross-border trade and deal making that many overseas Chinese business people enjoy. And yet with as many as 20 million Indians outside India, the Indian diaspora is almost as large as the Chinese diaspora. When it comes to business, the overseas Indians represent a great deal of potential but it is yet to be fully realised. Asia's overseas Chinese have had a huge impact on commerce in Asia this century but the same cannot be said of the overseas Indians.

There are some indications of ethnic business networking among the overseas Indians that we more commonly associate with the overseas Chinese, however. For example, earlier this year the Thai Indian businessman Kirit Shah successfully won control of the Thai company Phoenix Pulp & Paper in conjunction with Lalit Mohan Thapar of India's Ballarpur Group. When the Singaporean Indian controlled Hind Group wanted to buy a hotel in Singapore they bought the local Oberoi Imperial Hotel, which belonged to India's Oberoi family. When the Thai Indian Chansrichawla family attempted to save its Bangkok-based Laem Thong Bank during the heat of Asia's economic crisis, one of the sources of fresh capital was Hong Kong's Hotel Holdings Group, owned by the local Indian Harilela family. The Chansrichawlas and the Harilelas are also co-investors in Bangkok's Holiday Inn Crown Plaza. When the Singapore Indian Jumabhoy family wanted to expand their Palm Courtt apartment chain to Bangkok, they linked up with the local Thai-Indian owned GP Group.

These are all examples of ethnic Indian business people getting together across borders to do business, in the same way that many overseas Chinese business people have been able to use their 'Chineseness' to facilitate business. But there are some fundamental differences too. If one can generalise, there does seem to be a greater propensity among many overseas Indians to embrace the need for business services. They appear to be not as driven by trade in commodities and other tangibles that traditional overseas Chinese businesses are. There seems to be a greater appreciation among Indian business people for business services such as marketing, legal services, accounting, consulting, research and so on. Consequently, many overseas Indians are to be found in these fields of employment. Furthermore, overseas Indians seem to be more prepared to work as employees - they are not as strongly inclined to work for the family firm or work for themselves as are many overseas Chinese business people.

These aspects - the appreciation for services and the willingness to work as employees - help to make overseas Indians well placed in the emerging world of e-commerce.

Another factor is that English is the language of e-commerce - like it or not. This is another area in which overseas Indians are advantaged. Programming in Mandarin is difficult; doing it in Cantonese is near impossible.

Already, overseas Indians are over-represented in Silicon Valley. In fact, one estimate even went as far to suggest that as many as 40% of new Internet start-up companies in the United States have been founded or are headed by overseas Indians. This seems a little high, but it is indicative. Quite possibly, technology and the world economy have moved to at last favour the cultural make-up of many overseas Indians. Could it be that in terms of the Asian diasporas, this century has been the overseas Chinese century, but that next century - the century of e-commerce - will be the overseas Indians' century? Of course, much will depend on the response of overseas Chinese businesses to e-commerce.

SUMMARY

In the past, overseas Chinese commerce has been portrayed as 'borderless'. The personal connections of many overseas Chinese business people have allowed otherwise disparate markets to be unified. It is a role that has been enormously valuable. But increasingly the Internet and e-commerce will provide the technological means for truly 'borderless' trade. Has traditional overseas Chinese commerce met its competitor in e-commerce? Possibly. There is little doubt that overseas Chinese commerce will need to find a way to accommodate e-commerce or run the risk of losing ground because of it.

I don't wish to be alarmist. But it does seem that the Internet and e-commerce do represent a significant threat to traditional overseas Chinese modes of business. Of course, the way to survive and thrive is to embrace these new realities, but there are some aspects of traditional Chinese business that will make the adaptation difficult. Having said that there are some aspects that will help with the adaptation. Whichever of these two competing strands wins out, one thing is for certain. The world of commerce is on the verge of undergoing significant evolution if not revolution and those ways of doing business, which formally have been optimal, are likely to need to be reviewed if companies are to maintain their competitive edge. And this applies to the overseas Chinese model of commerce as much to other models.

**********************

Michael Backman is the author of Asian Eclipse: Exposing the Dark Side of Business in Asia (John Wiley & Sons, 1999), and is the principal author of Overseas Chinese Business Networks in Asia (1995).

He can be contacted at : michaelbackman@yahoo.com


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