Making waves on Asian shores - Industry Trend or Event

In the Asia-Pacific region, foreign investors are finding that cultural differences and capital constraints can be as challenging as regulatory hurdles.

China and Japan are challenging the United States for leadership in the emerging markets for content creation and hosting services. But market entry conditions are very different, and a strategy for one does not necessarily translate easily to the other.

"The most significant difference is market and customer behavior," said Hidekata Yanagawa, president, Japan Asia Network Consulting Co. Ltd., Tokyo, Japan. "My understanding is that Western countries find it easy to adopt and offer new services if the business case is attractive."

As the balance of power, in terms of Internet traffic and hosting, shifts away from the U.S. towards regions such as Asia-Pacific, a new wave of investment is descending on that part of the world. The question is what lessons have been learned from the early euphoria--and subsequent disappointment--that occurred when service providers charged into the region in the early '90s.

Japan plays "catch up"

Japan is moving to address its low Internet penetration, which key industry figures have blamed for the country's current economic crisis. Nobuyuki Idei, president and chief executive, Sony Corp., Tokyo, spoke of these missed opportunities at the Pacific Telecommunications Council 2001 (PTC 2001) in Honolulu in January. "One reason [for the economic situation] was the failure of Japan to transform itself for the information age--it was too slow to react," he said. "The past ten years has been a lost decade for Japan." Idel is chairing an information technology (IT) strategy council in Japan that has been set up by the government with the goal of making Japan an Internet superpower in the next five years. Idel said the council's goals are to deregulate and encourage investment in high speed Internet infrastructure and to create new rules to promote e-commerce and e-government. "Japan has [ducts] for fiber optic networks that regulations keep from opening to the public."

Bridging cultural divides

Deregulation overtures are beginning to attract foreign investors, but some Japanese commentators warn that the pitfalls awaiting them may be cultural rather than regulatory. "In Japan the customer places value on long-term business relationships and price is not the main consideration," commented Yanagawa. "Even if the price is cheaper, a Japanese customer might not adopt a new carrier. The decision process for doing business is quite different."

Yanagawa says Japanese companies often have very close, inter-linked relationships with their suppliers, and while this is evident also in the West, he suggested that Japan takes this a step further. For example, he recounted one of his consulting clients, a carrier that was able to offer a Japanese corporation a $2 million savings on connectivity charges per year, but the corporation stood to lose revenue because its current carrier brought it about $100 million of revenue from its customers per year. "Corporate business proposals are not one item deals," he added.

Foreign entrants are beginning to gain an understanding of how the market works but acknowledge the difficulty of adapting to Japanese market conditions. "It's a market where the Japanese like to buy from the Japanese," said Reston, Virginia-based John Bolus, president and chief executive, Millennium 3 Communications, Bermuda, a new intra-Asia subsea cable operator.

"In time, this will change but at the moment it's old school versus new school," he said. Bolus thinks recruiting domestically may facilitate Millennium 3's market entry. "We plan to get local talent and open local offices," he said.

But Yanagawa warns that English-speaking Japanese often have western business cultures and new entrants should be careful who they recruit locally. "English-speaking Japanese think in the western style and want to achieve in a short space of time," he said. "But traditional Japanese marketing and sales staff want to keep good relations with customers over a long time. The attitude is that you can lose today as long as you are sure you will get more next year."

The bulls in China's shop

China's challenges are different. Although last year's agreements with China concerning its entry to the World Trade Organization (WTO) are set to open the market to some extent, the initial problems are regulatory rather than cultural for foreign investors. Under the terms of China's agreement for accession to the WTO drafted last July, Chinese partners in any Sino-foreign joint venture must be licensed and state-owned with at least two years of experience in the market and annual revenues in excess of 3 billion yuan ($362 million). China has also pledged to allow 49% foreign ownership of Internet content providers on accession rising to 50% after two years. Voice carriers will be allowed 25% foreign ownership on accession while ISPs will be allowed 30%.

"There is a tremendous opportunity in China but even after WTO entry the government and China Telecom will keep a hold on all the cable landing stations to control what's going in and out," said Millennium 3's Bolus. But as the government lets go, people will be allowed to build infrastructure."

PRC's overseas capital obstacles

Jay Hu, vice president of strategic advisory services at Xin De Telecom International Ventures Co. Ltd., Beijing, a Sino-foreign joint venture that acts as an investment vehicle for foreign companies to invest in Chinese companies, thinks the market is beginning to open. "The entry barrier in the sector has been very high but will reduce to a moderate level," he said. "A lot of people recognize the sector is capital and knowledge intensive and requires foreign investment."

Some companies are taking an innovative approach to attracting foreign money. For example, Capital Network Co. Ltd., Beijing, has an investment vehicle subsidiary in the Cayman Islands. "We're in the closing stages of securing investment from overseas private investors," said Michelle Chan, vice president, legal and corporate development at Capital Network Co. at PTC 2001. "But in China you can't do anything if you don't have government support."

Hu is skeptical about using complex offshore arrangements to gain investment from foreign sources. "Foreign investment is still prohibited," he said. "Supposedly foreign investment is safe but it is not legally so." Yanagawa agrees, "No foreign company can make investments in telecom service providers," he said, "but there are always exceptions in China."

Hu believes the sector will continue to open as support from the government continues and recognition of the need for foreign investment is affirmed. "The Chinese government has always been very supportive of the development of the sector," said Hu. "The premier believes IT is a driving force for promoting Chinese growth and wants to get Chinese companies to embrace these technologies and modern ways of doing business."

Yanagawa thinks that in the future it will become more difficult for new entrants to form relationships with companies in China. "Whenever the Chinese market is opened it will be too late for anyone who wants to enter the market," he said. "Any carrier that wants to enter the market should start now. They should find exact partners and should really already have their partners today."

However, no one disputes that even when foreign investment is widely allowed there will still be restrictions, particularly in regard to Internet content. Sony's Idei thinks China will struggle to serve its huge population and regulate content. "China has two issues," he explained, "the size of the country and freedom of expression."

Hu at Xin De also thinks content will prove a thorny issue. "Overall, the government are more open than I thought and many Chinese can find ways of visiting sites," he said. "But regulators are very cautious about content and there have been conflicts among regulators. The propaganda branch wants to defend the orthodoxy of the party's belief. It thinks the Internet can be used as a tool to disseminate the party line."

Bolus takes a more relaxed view. "I think the Internet scares a lot of these [Asia-Pacific] countries. There is too much information available about religion and politics."

                 Comparison of Internet Regional Bandwidth
              Asia Pacific  Europe
Intraregional 3,124.0 Mbps  176,594.9 Mbps
To US/Canada  19,716.5 Mbps 56,241.2 Mbps
Region total  23,201.4 Mbps 233,491.7 Mbps
Source: Telegeography Inc.

Rolling out the IP networks, city by city

The Asian Internet boom is fueling renewed efforts to link up the region with a series of proposed intraregional subsea networks. Although capacity is beginning to increase in the region, recent figures suggest the market is far from comparable to the United States or Europe In spite of its high population rate. "It's been interesting to see how the Asian market has developed differently from Europe," said Bram Dov Abramson, senior research analyst, Telegeography Inc., Washington D.C. "We've seen Initiatives directed at the national level. In Korea and Japan there have been some very impressive fiber build-outs but the market is not as integrated politically, linguistically and culturally as western Europe."

According to a listing of the world's top 50 Internet hubs, prepared by Telegeography, London is the top hub with 86,589.7 Mbps of traffic in the year to mid-2000. But Tokyo, the highest-ranked Asian hub at 15 in the list, had only 10,835.1 Mbps. Seoul was the next highest placed in the region--30th--with 2,317.4 Mbps, while Shanghai ranked 44th, with 626 Mbps.

But many think the region is poised for rapid growth in intraregional Internet traffic. "The Asian Internet explosion will be comparable in scale to that of the U.S.," said Shyong Lim, board director, C2C AsiaPac Pte Ltd., Singapore, an intraregional subsea cable operator. "And it will happen in the period 2000-2010."

Other new operators agree. "There will be enormous growth in traffic from Asia to the U.S.," said Reston, Virginia-based John Bolus, president and chief executive of Millennium 3 Communications, Bermuda, a provider of point-to-point fiber links. "We're betting that even if a fraction of the American Internet explosion happens in Asia, people will be screaming for bandwidth."

Both companies are focusing on building city-to-city networks rather than country-to-country networks and think the market is ripe for development. "Asia is underserved by cable and the landscape is full of water, so it's logical to lay subsea cable. But it's no good just providing bandwidth to the cable landing station, so we're bring capacity into the city center," said Lim.

The C2C network will comprise a 7,000-km self-healing cable linking business centers in Taiwan, Peoples' Republic of China, South Korea, Japan, the Philippines, Singapore, Malaysia and Hong Kong. The first phase due for completion by the third quarter of this year will be a northern ring linking Japan, China, Taiwan, Hong Kong and the Philippines. The second phase will link Hong Kong, Malaysia, Singapore, Jakarta and the Philippines.

Lim claims that the C2C network will be Asia's first terabit cable, and marine operations are already underway with almost 40% of the link's capacity pre-sold. C2C is the product of a joint venture involving SingTel, Globe Telecom, KDD Corp., Norwest Ventures and Tycom Asia Networks, among others.

Millennium 3 Communications has a similar geographic presence but has not built its own cable assets, purchasing network assets on an indefeasible right of use (IRU) basis. "We have long-term capacity leases but the goal is to own our network," said Bolus.

Bolus claims 56% of the world's population inhabit the 14 countries Millennium 3 plans to serve. He thinks there will be Internet content originating from the region but expects the first driver of Intraregional traffic to be locally hosted content.

Lim agrees but expects Asian content to generate traffic sooner. "Content has been U.S. centered, but Asia has more and more regional content," he said.

Abramson at Telegeography agrees. "I think the Internet will become less U.S.-centric. Hopefully we're getting to a point where we'll be talking less about the balance of power."

COPYRIGHT 2001 EMAP Media Ltd.
COPYRIGHT 2001 Gale Group