Convenient or strategic? TheEdge, NetValue, Tuesday, June 22, 2004 Michael Ye, general manager, business operations and general manager, Europe & American division, of Dalian Software Park Co Ltd (DSP), cuts a confident and persuasive figure as he talks about the advantages of doing business in Dalian and the impressive list of companies based in the DSP. When it came to question time, the CEO of a Multimedia Super Corridor company wanted to know where Ye had learnt to speak English so well and if this was common in Dalian. Ye assured the CEO that his fluency in the English language was acquired entirely in China, but deftly sidestepped the question on whether this was the norm in Dalian. "The government used to emphasise reading and writing but now spoken English is being given priority." Ye was in Cyberjaya two weeks ago with his Mandarin-speaking chairman. It was the third high level visit by Dalian officials. The agenda included firming up the contra arrangement for office space between MDC and DSP. The idea came from the Dalian side. It was also to meet/woo some of its companies. As one Multimedia Development Corp Sdn Bhd (MDC) official nervously put it: "You can say we are competitors [both are wooing ICT companies] but at the same time, we can also partner." For now, Dalian is probably more a partner than competitor as it is doubtful MSC companies will want to locate there to do software development. Says Tan Teong Boon, CEO of Mesdaq-listed Infortech Alliance Bhd, "As a Malaysian company, if you are doing core basic research, you will do it here. But if you are working on enhancements and customisation for customers, you could decide to go to the DSP to take advantage of the abundance of software engineers there." Tan is looking to set up in Dalian to service customers. "We have not decided whether to be in the DSP or in the city. It depends on where our customers are." However, he first has to win the customers, the main reason for setting up shop in Dalian. "We are going for the market, not the incentives." Even Ye admits that the MSC incentives are much better than what the DSP has to offer. Which is why he did not mention incentives in his presentation. Curiously, nor did he speak about intellectual property rights. When asked about this, he says the government is well aware of the critical long-term benefits of protecting IP and is now strongly supporting IP measures. He points out that Satyam of India recently established a large R&D centre in the DSP. For MSC companies keen to explore opportunities in China but aware of the formidable challenges and complexities of playing the ICT game there, the hope is to ride on MDC to ease over some of the bumps. Singapore tech outfits ride on the back of the Infocomm Development Authority of Singapore in its newly set up facility in Shanghai and MSC companies will hope for the same with MDC. However, some wonder if Dalian is the right place for MDC to establish its presence in China. The contention is that MDC should look at it based on market access opportunities for MSC firms and not because it is convenient. During a recent press conference, MDC CEO Datuk Mohamed Arif Nun explained that Dalian was picked because it was at the same stage of development as Cyberjaya (it was set up in 1998); it allowed MDC to go in small to test the waters; and, critically, there was strong support from the mayor and deputy mayor. Indeed, as Ye points out, in China, the government plays a critical market access role. Ye also says because Shanghai and Beijing are spoilt for choice, they will not have much time to attend to the needs of small companies. "We give better attention and more time to our investors' needs," he says. Still, it is highly likely that any interest from MSC firms in China will come from the sales and marketing side, not technology development. It remains to be seen how much support such outfits get from the government. Anticipating this marketing approach, Johnny Tai, a seasoned China hand, advises MSC firms to set up wholly owned companies and to avoid entering into joint ventures with the Chinese. "It is simpler to set up wholly owned companies in China rather than joint ventures as Chinese partners with political backing may turn bullies," he warns. Tai is MD of Skye Travel & Tours Sdn Bhd and also serves as International Trade and Bureau chairman, Small & Medium Industry Association of Malaysia. For more of his views and those of other Malaysian entrepreneurs with experience in China, netv@lue2.0 posed some questions on MDC's strategy in China. netv@lue2.0: MDC has picked Dalian because the software park there is keen to have a tie-up with it and the Dalian mayor is very supportive. Another reason is that Dalian is a 45-minute flight from Fukuoka in Japan and 90 minutes from Pusan, South Korea. MDC feels the proximity of the two will help with market access. Do you feel these are strong enough reasons? Tony Pua, chief executive officer of Sesdaq-listed CyberVillage Holdings Ltd: The way China works is such that everything is very 'provincialised'. Each local government has its own priorities and so on. Hence, in an ideal situation, MDC needs to have an office in every major province. From that perspective, it doesn't really matter where MDC starts its office in China first, as long as it's not somewhere no Malaysians will go to do business. Having said that, Dalian is a major city but probably is not where Malaysian IT companies are likely to be active in the near future. These cities would be Shenzhen, Beijing, Nanjing, Guangdong, Xiamen and Shanghai. Dalian is a 'free' exchange though, and China is a surprisingly expensive place to set up office, especially in the major cities. So, I don't think it can be regarded as a 'bad' choice from that perspective. If you ask me whether MDC should pay to set up in Dalian, then the answer would be no. David Wong , CEO, S&T Global Sdn Bhd: Based on your question, I do not agree with the choice of Dalian. First of all, what is the main focus and the reasons for MSC companies to venture into China? For us in the BPO space, markets that make sense for me would be the major ones like Shanghai, Beijing and Guangzhou. If Dalian is offering attractive incentives and benefits , then we may consider. It sounds like the MDC-Dalian tie-up is more focused on software companies. I suspect the above selection is based on reciprocal arrangements, which make both parties happy but benefits to be extended to MSC companies need to be weighed carefully. Chee Chong Hwa, CEO, KarenSoft Technology Bhd: Based on a Google search, the following facts emerge on Dalian. Location: northeastern China with an area of 13,800 sq km and a population of 5.9 million. Its GDP is 140.6 billion yuan and it enjoys the provincial level of economic decision-making authority. While I agree that it is important to have the support of the city mayor with regard to the proximity factor, Japan and South Korea are very advanced in technology and the question is whether MSC companies are prepared to penetrate these two countries. South Korea and Japan are not in KarenSoft's expansion plans. Johnny Tai , MD, Skye Travel & Tours Sdn Bhd and International Trade and Bureau chairman, Small & Medium Industry Association of Malaysia: As the home of China's Silicon Valley is located in Beijing city, Haidian Science Park or in Mandarin, 'Zhongguan cun', I would recommend MDC to first weigh anchor in Beijing. Besides being a capital city of 20 million and the HQ for 140 smaller cities, other reasons are its generous tax breaks and other preferential policy treatment. It has been the country's leading incubator of high-tech businesses. As such, it also serves as a major cradle of the knowledge-based economy in China. Working in this park are some 500,000 or more highly educated teachers, researchers, engineers, scientists and an abundance of support staff. There are also 232 top-notch research institutions, including the Chinese Academy of Science, 56 leading higher learning institutions, including Peking University and Tsinghua University, dubbed respectively as China's Harvard and MIT. As of today, there are more than 6,000 high-tech companies operating in Haidian Science Park. Over half of China's top 200 Internet companies are based in this park and the number has been growing at an average rate of more then 30% since its inauguration. Last year, the technological, trade and industrial revenue of the park was US$20 billion. What do you think of MDC's objectives, (shared services for MSC firms, business matching, promote MSC, market intelligence) for setting up in Dalian? Pua: I think the objectives are fine. It needs to promote MSC companies and attract investors to the MSC. A lot of people would like MDC to secure business for them but that's really not MDC's responsibility. Wong: The Infocomm Development Authority of Singapore has set up a centre in Shanghai that helps with match-making, the initial set up of Singapore companies there with various services and shared facilities, and providing market and business intelligence. These services are offered from as low as S$1,000 a month for start-ups. Chee: Conceptually, the four objectives make sense. Tai: The success of MDC's objectives will very much depend on its sustainability, the comparative advantages/uniqueness it offers and its overall marketing strategies. Business, especially in China, depends a lot on acumen. MDC needs to be decisive and ready to overcome obstacles. Once in, it should devote its time and attention fully to making it work. How can MDC best facilitate market entry for MSC companies into China so they can make an impact? Pua: It can't help us secure contracts [as much as we would love that to happen] but it can help do some of the following: Since China is an administrative and bureaucratic nightmare, help MSC companies figure out all the paperwork and laws. For example, setting up companies [what type and cost?], understanding tax [very important!] and so on. Lobby the Chinese provincial counterparts for special concessions and benefits for MSC companies. The provincial authorities carry a lot of discretionary powers which, if 'lobbied' correctly, can grant MSC companies special rights and concessions, for example, tax rebates, visa applications, repatriation of profits and rent concessions. Wong: a) Initiate some government-to-government projects; b) Organise more focused trips to China; and c) Target Chinese companies that can be potential customers of MSC companies to Malaysia and host them over here. Chee: From what we have heard and experienced, prerequisites for success in China should include: Fluency in Mandarin for strong networking and understanding of the business environment; Getting a Malaysian to head the office; Right timing; Having a product that will meet China's needs; and Be aware that China [the land of Sun Tzu's Art of War] has never been ruled by the West and concepts such as ethics and fair play may be alien to them. Having said that, I think that the MDC China office [wherever it is located] should: Be headed by a Mandarin-literate Malaysian; Gather market intelligence to identify sectors to be penetrated; and Provide information on the business and tax laws relevant to the targeted provinces. MDC's chief executive Datuk Dr Mohamed Arif Nun says MDC is mindful of costs and that is why it will start with one full-time employee assisted by an MDC official from Kuala Lumpur. If response is good from Dalian, then MDC will consider hiring more people. MDC may employ a Chinese citizen currently doing an MBA in Malaysia to head its office there. The reason: The person will know Malaysian culture and be familiar with the MSC concept. Do you think this is the best way to run the office in China? Pua: I think it's a good try. MDC has learnt from the past, particularly from some of the more extravagant projects which have not generated the necessary returns. I'm actually happy for MDC to be taking the 'exchange' approach, low-cost start-up and step-by-step approach instead of the usual big-bang, everything-grand approach. This way, if it is successful, we can always still spend more money later, but if the venture doesn't work, the pain isn't that great. Chee: From the cost standpoint, it makes sense. However, this approach will be too slow. What if Dalian doesn't work out? How fast can they set up elsewhere? By Karamjit Singh