Malaysia's Digital Industry is the poster child for a High Income Society

Published on The Edge, @Netvalue2.0 on February 2011
Coined as Vision 2020, Malaysia's journey to become a high income, advanced nation actually started a long time ago. However we no longer have the luxury of time. If the economy does not transform by 2020, it looks like we will be winding back the clock and rely primarily on the primary sector. This is not something we will be able to survive on.

The old economic model has lost its shine as traditional industries continue to move to lower cost nations. In fact the old economic model has become dangerous. Until the recent launch of the Economic Transformation Plan, there was no clear indication of what was to take its place.

Before all this, was the heralding of the Multimedia Super Corridor, thrusted to spearhead the country into modernity and prosperity. Today is a different picture. Most Malaysians consider multimedia or digital industry as a deadwood industry, casually drifting in view but generally ignorable. I cannot blame them. The Asean financial crisis, Y2K anti-climax, and 2001 dotcom crash have combined to create an impression that the technology, media and communication sectors is a major national disappointment.

The disappointment was just not for industry players, investors and analysts. Parents and children, who were looking for technology jobs, were also disappointed.

Will the digital industry go beyond hype?

In the beginning there was a dearth of universities. Whilst building all the highways, airport, massive towers, a lot of effort and money was spent on creating institutions of higher learning. The result of this is the mass production of graduates not suitable for the industry, and the well known unemployed graduates. You can image what impact that had on general folk. This caused the general population to pull their children from the digital industry back into traditional professions or learning other new sectors.

In the last few years, new corridors and clusters have been launched - eg biotechnology, halal, Islamic finance . These are very good initiatives and deserve every bit of support because the future of Malaysia is hinged on developing a diversified portfolio of high value and highly competitive industries. But, the newer initiatives also have encountered the very same bottlenecks that the digital sectors have discovered a long time ago. And to be sure, there are many others they have not yet discovered. No doubt, they will find them.

All hype is followed by disillusionment

Let's take for instance the initial expectations set for the multimedia super corridor. Fifteen years ago, we were told we were all going to live, breath and eat information technology. Lifestyle was going to be based on multimedia. The transformation of major national institutions such as Government, education and health was going to be driven by information technology. With the MSC, our workforce will focus on high technology work. The expectations were too high.

Everything was put on fast track, every thing was important, and everything possible. We have since learnt that was not going to happen. Not everything is possible at the same time. Some important things take time, for instance developing critical mass of world-class expertise, entreprenuers and engineering.

There was certainly a lot of hype. But the hype was unceremoniously killed with the Asian financial crisis, and more pertinently the instability it brought to Malaysia. Before then, there was certainly a lot of optimism about the potential of the industry's power to generate business for Malaysia. There was a general excitement about the acceleration of the technology and internet. There was also a lot of excitement about how Malaysia is the ideal hotbed for innovation. Last but not least, there was hype and hubris about Malaysia as a home to the world's best researchers and developers. There was a lot of hype. There was a dangerous amount of overconfidence and swagger.

Do not confuse hype with BS

However, after the crisis, there was an even more dangerous and infectious amount of disbelief and diffidence. In 2001, many friends and colleagues thought I totally lost my marbles when I joined this initiative. But when you look at the facts, the strategic levers that affects Malaysia

and remove the hearsay, emotions and baggage, you will find the digital industry very compelling either as an investor, employee or future employee.

The original multimedia corridor strategy was an intelligent masterstroke. It took advantage of Malaysia's strength in the technology sector in the 1990s, the rapidly advancing talent pool whilst addressing weaknesses of small enterprises and R&D.

The interesting characteristic about hype cycles, as coined by Jackie Fenn from Gartner, is the period between the peak of inflated expectations and arriving at the expected results is a very long and painful period. This includes periods of total despair and disillusionment, followed by an increasing dose of enlightenment.

Somewhere between the hype and the dissillusionment, there is the truth. And truth for Malaysia is that digital industry will play a major role in moving this nation into an advanced economy and society. As we start ploughing through the uphill slope of the enlighment curve, this truism should be a lot clearer to all involved.

Study our digital industry, not the hype or dissillusionment

The industry has reached through the second gear and is ready to punch into the third. At least a hundred thousand jobs have been created and more are expected. The SSO cluster was started in 2003 from a standing start and has since created around forty thousand high-value jobs. The information technology cluster comprises the highest number of innovation, entreprenuers and is also a major job creator. The creative multimedia sector continues to lead the way in taking Malaysian creative industry to the global market.

We have a highly innovative industry. One thing that surprises even people in the Silicon Valley is the fact that an average of one new venture is born here every day. That is a high rate of development and innovation. These are not system integrators or resellers. We are talking about companies that ranges from new social games, mobile parking systems, integrated circuit design to GPS software.

The digital industry comprises a increasing number of exporters. In fact many our top local companies generate more business outside the country than from the domestic market. Interestingly, our companies export mainly to the Asian markets, which was once considered the pariah of international business. Asia has since become the golden market. South East Asia, once regarded as the no mans land for investors, is also starting to reemerge one of the global hotbeds.

The average salary in MSC Malaysia is fairly high. This is because companies in all clusters need high income professionals in order to survive. It is around RM5,000 per month, around twice the national average and RM2,000 higher than the designated high-income benchmark.

Finally, this global industry continues to grow. The hardware sector grew double digits last year and is forecasted to grow another 10% this year! Other sectors are growing especially cloud and mobile based software. Digital distribution is surging this year, and is expected to start supplementing the flagging home TV markets. Last but not least, the global services industry continues to hire what ever talent that we can deliver.

So there you have it. We have an industry which creates a lot of jobs. We have a high-profit, exporting industry. There is a lot of entrepreneurship and innovation. It is a high income industry, and there is a lot of global demand. To top it off, we are also considered one of the best in the world in some of the clusters, and we are starting to become a leader of the surging Asean market.

Taking off the training wheels

Some of the things which helped the fledgling industry are now getting in the way. There are things to be done. Rather, there are things to be undone. The best example is geographical separation, which was implemented to create an advanced environment for digital lifestyle. But what was the industry's lifeline is fast becoming the noose around its neck.

We cannot fully develop a land locked industry. Mohandas Pai, an acquaintance, and a board member of Infosys, insists these bottlenecks is a big problem. In fact he mentioned it is "like running 100 metre dash against Olympians with both hands, and both legs tied behind our backs". Yes, somehow we deliver. You can imagine how much more can be achieved when unleashed.

There are other measures that helped in the early phase that are now starting to get in the way of progress. There was the separation of hardware of software industry development. There was also the separation of companies that develop and deliver solutions. Visual effects and live action production. These types of separations helped spur development of digital industries. But now they have to be tightly aligned to allow Malaysia to move rapidly with the dynamic changes, ranging from social games to quantum cryptography.

Commit yourself to the digital industry

After a lot of hype and disillusionment, the hard work from over a hundred thousand people is now starting to pay off. This is now the time for the industry to surge and become a major contributor to the economy.

Good bye DRAM

DRAM is the most efficient memory technology today created almost 45 years ago by IBM. The Korean firm Hynix licensed ZRAM technology from a tiny company based in the tiny nation of Switzerland.


ZRAM is poised to replace DRAM by overcoming a fundamental problem of DRAM - the need for capacitors to store the memory. So far, cannot be miniturised as much as other memory components. This is achieved by using insulated transistor instead of capacitors.

This technique was targeted to replace RAM (used in microprocessors) and SRAM (used in embedded devices or peripherals). But some engineering problems hasn't been solved yet.

Will the Real Outsourcing Please Stand Up?

Once a upon a time, Malaysia had dominant market share in low-cost manufacturing, leading to the creation of over 3 or 4 million employees. Today, it is clear this is something we are no longer competitive in. In some cases, companies resort to importing low-cost foreign labour in Malaysia to retain investments and local employees. But this is clearly not sustainable. Our collective job now is to exit these non-competitive activities. And it must be done now. Certainly, we need to move up into IP driven manufacturing. Moreover, we need to move seriously into services sectors. We need to move into the lucrative outsourcing industry.

Malaysia has the real opportunity to use outsourcing as vehicle to reach Vision 2020. Developing Malaysia's outsourcing industry will move the nation up the value chain. Outsourcing will rapidly transform our workforce from low-cost labour pool into an army of highly paid knowledge workers. There is also a real opportunity to create globally iconic Malaysian firms that serves dozens of clients in over a hundred markets. We can also significantly enhance our brand and the value we deliver to the international market - in particular the multinational firms.

But we could also squander this opportunity. And this will happen if we continue to think of outsourcing is a niche industry. This will happen if we also continue to think it is a low value added industry meant only for big global firms to take advantage of scarce Malaysian resources. There is nothing further from the truth. But that is not important. What is important is what you think, and you can do to take advantage of this opportunity.

Outsourcing – The five trillion ringgit industry

The global SSO industry revenues today is almost double the global Islamic financial industry's assets with over a hundred times more employees. It is also around three times larger than the computer hardware industry. It has 50 million or so employees, and it is growing. SSO is not a niche or emerging industry. It has arrived. And it has done so, in less than one generation. The great opportunity lies in the fact that less than 15% of the global SSO market has moved to more competitive locations like Malaysia. So there is still time for Malaysia to capture more opportunities.

Even more amazing is Malaysia's competitiveness in this mega-industry. Malaysia is considered by analysts around the world as one of the very best in the world. In 2005, McKinsey also ranked Malaysia as top three. Gone are the days of suspicion that something is wrong with the ranking. People are now accepting this our natural strength. But have we taken full advantage of this? There has been growth, but the greater opportunity is untapped. Specifically, even though we have top three ranking, we have not achieved anywhere near top three market share.

There is also a notion that our SSO sector is a low value added industry and employs low-end workers. This is an absolute fallacy. The numbers speak for themselves. Employee salaries in Malaysian SSO players are almost the same as IT employees. Their salaries are currently higher than creative multimedia employees. They also contribute almost half of the employment for MSC Malaysia. In general Malaysians are hired by MNCs directly, or indirectly via outsourcing firms because Malaysians are more competitive in higher value activities especially serving the Asian markets. SSO employees are amongst the highest paid in the country, and we should create more jobs in these high value activities.

Talent issues: Get over it

Malaysia does not have the tens or hundreds of millions or billions in population that other markets have. But, Malaysia is not the only country with challenges in talent. Even the largest economies have supply issues. According to studies by McKinsey large countries such as India, China and Philippines will not have enough engineers to feed the global demand by the year 2015. There is not enough resources in the world for the insatiable appetite of the outsourcing industry.

What we need to do is to concentrate on building supply properly, because this is now a supply game. Malaysia does not need to have 50 million employees for the outsourcing sector. A reasonable target is two million jobs by the year 2020. Two million employees is a major industry in any one's yardstick. The top 15 outsourcing companies in the world does not add up to two million employees. India's outsourcing industry is a little more than two million employees.

So our role should be to move our employees from non-competitive local sectors into outsourcing. There are significant improvements being done today in the Ministry of Human Resources in terms of retraining people into higher value skills needed by the global outsourcing industry. But this comprises one portion of the Malaysian machinery to get outsourcing going. This has to be done in a big scale by many institutions. Most importantly, the private sector needs to stop looking at the government for guidance and instruction. Malaysian industry needs to take the lead.

Concentrate on our local firms

There is nothing wrong with having multinational firms setting up in Malaysia. In fact, direct investments from MNCs was probably the greatest contributor to our economic and intellectual wealth to date. However in the new economy, Malaysia cannot survive on MNC-based FDI alone. We need to ensure we build our economies based on a strong foundation of local firms.

Moreover, the key resource needed by the global outsourcing industry, is not human capital. The key resource is scalable outsourcing companies. In fact, around half of the global SSO market is delivered by outsourcing players. Outsourcing companies do not just provide cheap resources. MNCs need ability to scale their operations up and down, as economies and markets rises and ebbs. Outsourcing players provide multinationals the ability to do this.

The Malaysian challenge lies in the ability of our local firms to become truly global. The good news is Malaysian companies are recognised by international analysts as amongst the best in the world. The bad news is although these firms are very good, but they are also small when compared with tier one players which employs tens of thousands of employees. They need fuel to grow in terms of financial and human capital.

Most importantly, local firms are not leveraging on the top talent available in Malaysia. Multinationals in Malaysia continue to hire the best people and pay top dollar, which is a good thing. What is not so good, is that our local firms cannot do this. They are not able to go into higher value added activities that yield higher revenues, higher profits and also create larger regional organisations. This is one of the biggest issues faced by the Malaysian outsourcing industry, and it is also the biggest issue faced by the Malaysian SSO industry in general. Our local industry needs to rapidly move up the value chain and take up high-value added activities.

Stand on the shoulder of giants

The most successful local outsourcing firms in Malaysia are an interesting collection of dynamic, industrious and committed entreprenuers. For the most part, they have built the local industry from the ground up. As I see it, they understand their own strengths, weaknesses and how to capture the greater global opportunities. But they need some help to compete with truly global players with over 50,000 or even 100,000 employees. If there's anything that is obvious about this industry, that it is about scale. If you do not scale, you will die or be gobbled up. Is it possible for a local firm to hire ten of twenty thousand Malaysians? Why not. It is time for Malaysian players to take a leadership role and take a no compromise stand on developing a globally competitive brand. This starts from the boardroom and cascades down to the cubicles. This is key in capturing the best talent, technology and trade.

Most glaring though is the absence of investments by local traditional players into the global game. Most of the outsourcing giants in the world was started by traditional firms: EDS was started from General Motors, Wipro was in agro-business, TATA and Mahindra were also from traditional businesses. The list goes on. So the big question is, where are the major local investors? It is time for major local firms to seize the greater opportunity and make a lot of money on the global outsourcing game.

"SEA" the opportunity

Four years ago in an article, I hinted Kuala Lumpur is a bit like Bangalore, and Malaysia is a bit like the state of Karnataka. Four years later the truism seems to be confirmed in the context of South East Asia. Many Malaysian players in ICT, outsourcing and animation are starting to consolidate their leadership in regional markets and go into global markets. There are too many to mention in one article. In the outsourcing space, local firms are continually recognised as amongst the leaders in the world.

However, the real war for talent has just begun. The battle for scale, and therefore for survival, is contingent upon how fast and how well our Malaysian firms can take advantage of vast talent pools in the region. In this region, Malaysian firms are best poised to take advantage of their current leadership position. Asia is now a major growth market, not just for low value activities. Today, the combined markets of India, China and South East Asia already has as many middle-class consumers as North America. It will probably double within a generation. Today, Malaysia and Malaysian firms are delivering all kinds of services, especially high-value activities, to these markets.

There is a major call from policy makers for local investors to commit themselves to the Malaysian economy. 2010 is the year to make this investment.

Table: Some of the largest Firms in the World (thousands of employees)

IBM 400 (not all are in outsourcing)

Accenture 180

TCS 140

HES 135

Infosys 105

Wipro 100

CSC 90

CapGemini 85

Convergys 75

ACS 75

HCL 50

ADP 45

AEGIS 35

Unisys 30

CGI 25