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Net Value: A question of time
TheEdge Weekly, Tuesday, April 12, 2005
The Edge roundtable on The State of the Local Software Industry had its birth at a place we suspect many great Malaysian ideas have been hatched — the mamak stall.
And so it was that over teh tarik one evening, some entrepreneurs and journalists gathered to shoot the breeze. From talking about the cavalier manner in which Selangor state leaders spend taxpayers' funds, the conversation turned to the frustrations of local software entrepreneurs in trying to penetrate the market here and musings over what ails the industry. Could it be that our software entrepreneurs are just not good enough?
And so, you have our roundtable with panellists Butt Wai Choon, MD of Microsoft Malaysia; Chee Chong Hwa, CEO of Karensoft; Dinesh Nair, CEO of Qubeconnect Sdn Bhd and a leader of the open source movement in Malaysia; Brian Fernandez, vice-president of the Technopreneur Association of Malaysia, and Dr Ewe Hong Tat, Dean, IT Faculty of Multi Media University in Cyberjaya. netv@lue2.0 editor Karamjit Singh was the moderator.
Karamjit: Why is it that eight
years after the Multimedia Super Corridor
was established, we still don't have a
strongly recognised Asian level software
company?
Dinesh: The reason is culture.
If you study Malaysian history, 600 years
ago, from the formation of the Malacca
Sultanate, we have been a trading port
between east and west. We've mastered
the role of being a middleman. That culture
and tradition is very hard to break. As
a result, a lot of people don't see the
need to create. They would rather buy
from one side and sell it to the other
side.
This mindset in entrepreneurs and industry has caused our current situation. We don't actually build. The other reason the MSC hasn't succeeded in that sense is that it was a brilliant idea but the implementation was less than what we hoped it would be. There was too much emphasis on real estate, form rather than substance. Having said that, there are a couple of gems from the MSC but nowhere near what we hoped to get.
Dr Ewe: There are Malaysian companies
that are trying their best to come out
and conquer the world market. We must
also remember that we have a history in
manufacturing and have people who have
helped to shape the technology itself,
for example, engineers in Intel Penang.
I believe given enough time and exposure,
and given this MSC initiative, in the
long term, there is a bright future for
Malaysian software companies.
Chee: What do you mean by strongly
recognised? MDC has used KarenSoft as
justification for success. So there is
some recognition there. And I also take
issue with Dinesh when he says we don't
produce anything.
People look at India and Philippines as software powerhouses, but what products have they produced? Phillipines, I have been there. With all due respect, they are just bodyshops. At KarenSoft we actually build products. So I differ with you on that.
As for the MSC, when we were in Cyberjaya, we had an open source project but had problems getting people and our project was delayed. If you ask me, the insistence that we must be in Cyberjaya is a hurdle in getting people.
Brian: Basically, it takes time
for companies to get market traction and
once you get that, growth can be almost
vertical. Chee, for example, took 15 years
to build his brand and his products. Another
example I'd choose to highlight is another
MSC Venture Capital investee company,
REDtone. They changed the business model
several times but now it's showing stellar
performance because they've hit on the
right business model. A third example
of a company that will get market traction
and has its core in place is JobStreet.
Many people don't realise that it is a
10-year old-company and it's taken them
time to build their brand.
Butt: I believe the MSC has set
the correct vision. In fact, I think the
aspiration of what it wants to achieve
has inspired many people to believe in
the vision. The implementation as it is
set out was a long-term approach but I
believe many expected it to have short-term
gains. If you look at eight years, it
seems like a long time and when people
view it as not having produced a local
software company that is well known in
Asia, it's actually a factor of the approach
being long term but the expectation being
short term.
Having said that, is it possible we could have had a renowned Asian software company? I say yes. I think the approach that MSC has taken is to make sure that the broad market benefits from the programme. They could have just taken one company, branded, marketed it, almost like a Hollywood production. It could have been KarenSoft, it could have been another company. But MSC did not take this approach and I still believe the vision is right.
Implementation, on hindsight, could have been better. In my view, personally, I think some of the basic fundamentals could have been laid out eight years ago. Some of these fundamentals, I think, could have been getting the right graduates out of university fast enough. In India, for example, they realised 10 years ago they didn't have enough engineering and computer science grads. Ten years later, they had a tenfold number of grads, 100,000, a year and that in itself drove the IT industry because they had foresight. I also believe in the postgrads. If we had taken a strong approach in generating Master's and PhDs, today, we would have a pool of talent that we can tap from.
I think the recognition in the last three years of the innovation, the patent process, the privatisations, is great but it was only three years ago. We could have had eight years of learning, of mistakes and could have had more success stories.
Karamjit: The reason why I use
MSC as a starting point is because that
was when we saw the government really
push ICT as a national agenda. But all
of you seem to say that time is a factor
and that's fine. But other countries seem
to be on the ball now. How much time do
we have before we are left behind and
end up playing a marginal role? It's just
a fear that we are lagging behind. But
beyond REDtone and KarenSoft, there is
Silverlake System, which is very successful
and will go for a listing in Singapore.
In my mind, that is the closest we have
to a very successful software company.
Very little of its success has been because
of the MSC and it's ironic that the leading
company is one that didn't need the MSC.
We can move on to the second question. To win local and foreign buyers, our entrepreneurs are advised that they have to price low so that companies will then be willing to take a risk on a local company versus a foreign brand. I noticed that many companies then get caught in this commodity spiral, so how should they deal with this?
Dinesh: There is some bias against
Malaysian products, both from government
and the private sector. For example, if
you're going against Microsoft for a deal,
you have to be 20% to 30% cheaper with
the same features before you can even
be considered. Another reason Malaysian
companies get caught in a spiral is we
are working on applications at the upper
level of the software stack. Competition
globally is very tight. There are a lot
of other HR applications and accounting
applications.
I would rather Malaysian companies look at pieces lower down the software stack which require higher levels of software capacity to create. At that stage, you can charge a premium. Globally, there are only seven or eight operating system vendors out there. Because of this, you can have a premium. The lower down the stack you go, the less competitors you have.
Karamjit: Is there any way to
move into that space?
Dinesh: It's harder to create
that software, but once you do succeed,
you are in a position to charge a premium.
Brian: Dinesh, you're coming
from a technical standpoint. Actually,
the real issue is a sales standpoint,
a marketing and branding issue. Your ability
to charge a lot of times is related to
the branding aspect. I used to own a stake
in a company that developed insurance
solutions and we pitched it for RM1 million.
An insurance company in Hong Kong, took
a look at it, loved our product, paid
for us to go there and present it to them
but in the end, it bought CSC, which is
10 times the price! One of the key issues
with big applications is that you won't
get fired if you buy [it] from a global
player like CSC and it fails. But you
will if you buy a product from a small
company and it fails.
Chee: I have an example of how
David can take on Goliath. We had one
case when we went up against a vendor
which sold Microsoft and it came bundled
with everything. Our quote was RM100,000
more than theirs. We still won the contract.
It was because of mindshare. We are recognised
as a top local brand. Also, the client
realised that to KarenSoft, they were
a big customer but to Microsoft, they
would just be another customer.
Butt: Let me add to this issue
from a "so-called foreign product" perspective.
You cannot take a company from a small
local outfit against a foreign company.
Like Chee said, in some cases, the locals
win because there is local presence, local
relationship, local eco-system.
You should take a big foreign company and match it with a big multinational company and the same rules will apply. The difference is not just local or foreign, I think it is Asian or non-Asian. The Asian approach tends to take a less investment approach, upfront immediate return first, whereas others take the long-term approach and this is different for each industry. That's my view.
Karamjit: But I think the foreign
vendors are quite successful. I was looking
at a webcast where 2003 IT revenue in
the country was RM8.5 billion and of that,
65% was hardware, 15% software and 20%
services. Of that amount, 70% went to
foreign vendors, which is not necessarily
bad but I think that's the challenge for
us.
I think the support of the government for local software and hardware hasn't translated into policy support.
Dinesh: The top 12 by revenue
in Malaysia for 2003 were non-Malaysian
companies. Number 13 is actually Karensoft.
What I want to stress is that total software
revenue was RM1.2 billion and the top
five vendors took about RM800 million.
Number 13, Karensoft, was looking at RM1.5
million. I'm talking about a huge gap
there.
Butt: I've not seen the data
but from my more than 15 years of experience
in this industry, most companies, be they
Malaysian, Singaporean or from Hong Kong,
tend to see software not as a product
but as a ser-vice. Look at Karensoft's
software. Many don't view it as a product
but a service. Many will sell you the
services and the software is not even
visible. You should really look at it
as a whole thing, plus software, plus
service. Then it is a fair assessment.
But the report may be right in that we don't have companies that are pure play software and which have international value. A lot of companies, I think, shy away from that because pure play software, which we call packaged software like KarenSoft's, is dangerous because pure play software tends to be pirated easily. Software with services and customised code is harder because you need a whole suite of services around it and most companies tend to go into this custom applications development because in some ways, it is harder to steal because of the intellectual property. That's my view.
Chee: We recognise this. We do
not want to repeat the mistake that Microsoft
did in the early days. If you download
our software, you must register and you
get an unlock code and only then you get
to use the software. In our case, piracy
is not a real danger because we've addressed
it.
Butt: In time, when you become
successful Chee, and I say when, not if,
you will be plagued by people all over
the world that want to crack it. You are
safe now because you are in a market you
can control.
I caution you about that because today, there is less and less use of security codes because you don't want to inconvenience the user. Instead, we use other forms such as a holographic identifier so that the user can be identified. But technically, people could still copy it and yet to put all those codes would in the end, inconvenience the user more than what we are willing to compromise. So that is a conscious approach.
Dinesh: I'm wearing my security
hat now but no code is ever secure. It
will be cracked one day; it's only a matter
of time.
Butt: Karam, if I may touch on
pricing… It's always a sensitive topic
because one always thinks that lowering
the price will make it more affordable
and get people to buy. My comment on pricing
is to look at the economics of pricing
that has stood the test of time. Pricing
of a product or a service is a matter
of efficiency. The second part that is
key is in the area of competition. Competition
in the marketplace generally has been
proven to drive price down but how do
we remain competitive?
Number one is the product or service quality. If you don't keep investing in quality you get weeded out in competition. Look at IKEA. It has fairly good quality, unique design stuff and innovation in packaging and all that. The second thing is branding. You can have the greatest product but if that product is not branded well, nobody in the commercial world will buy it and you will lose out then.
In some ways, it is efficiency in the product, efficiency in the packaging and marketing. And in many ways, efficiency does cause the price to come down. The question is, what is the right price point for any product? It's arbitrary. Two years ago, the Ministry of Domestic and Consumer Affairs tried to impose a certain price on a certain product but it did not work. It is really hard to determine the price.
I don't think anyone should interject in pricing. It has to be about competition and efficiency. And competition has to be largely about innovation, marketing and branding.
Karamjit: Brian, is there concern
about intellectual property among your
members? Have you all taken the view that
the only way for the government to get
serious about IP is for local companies
to become losers in the game as well?
Brian: I think that on the contrary,
there are a lot of small companies that
are developing and delivering products
and solutions. As an industry body representing
anything from a one-man to a 200-man operation,
IP is something that must be protected.
What we have been championing is to get the government to buy more local software or to at least, in a lot of instances, just give the opportunity for the locals to be given consideration because a lot of times, local bids are not even evaluated.
Chee: China is very patriotic.
Chinese software first. Only if they cannot
get it, will they then go for foreign
software. But we do not want to be given
any preferences. We only want the chance
to compete. Recently, I was invited to
a think tank on ICT. A lot of them were
griping about lack of government help.
I was blunt and told them as entrepreneurs, we don't need help. But we don't want to be discriminated against either.
Dinesh: I disagree with any form
of preferential treatment of local software.
Any form of artificial help stifles quality.
But what we are asking for is evaluate
local software bids on the same level.
All things equal, go on merit, go on pricing
and go on the standard ways of evaluation.
Brian: Look at Singapore. A lot
of their ICT companies get their first
contract from the government. Obviously,
they price it very reasonably but if you
actually look at it, a lot of them got
their start from selling to a government
agency. From the Malaysian context, that
rarely happens.
Dinesh: In the Malaysian context,
what usually happens is, somebody wins
a bid, then looks for a technology provider
outside the country and says, "I won this
bid for RM25 million, can you do it for
RM20 million".
Butt: That's very generous! Actually
I'm a very pro-supporter of building a
local software industry. What Brian and
Dinesh said is very true. We should support
the locally made software industry but
one thing you've got to do is to get that
into the mindset of the buyer. If you
build from a garage, software or hardware
and expect to be rewarded just like that,
it's kind of risky for the business owner.
My recommendation for the business partner is either you co-brand with a brand name or you go out and you say that it's built locally but it has other well-known brands in there as well. As you do that, eventually you will learn to build your own brand. This is what I would recommend to have a fully vibrant local software industry.
Dr Ewe: I agree. We can't expect
a local company to become a giant in a
few years. What we can expect is that
local companies be involved in all kinds
of software development activities and
build their expertise and go deeper and
deeper into the technology side and at
the same time understand the demand from
the market and then they can sustain and
go strong.
Butt: Dinesh mentioned an earlier
point about playing at the lower end of
the software engineering stack. That is
a very important point because if you
are starting new in the software industry,
to get down to the lowest engineering
place is the hardest and carries the highest
risk. Inevitably, only a few players will
succeed over time so the path to go there
is not recommended for everyone.
The sustainable part is to play in the higher-end stack and as you gain expertise, you may have a chance to play in the lower plane. Many will fail en route to what we call the platform play. Overall, for Malaysia as an economy, I don't know if we're ready to play that game right now but over time, I think we should have a path towards it. But right now, I think we have a higher opportunity to play in other games.
Karamjit: So, the journey ahead
is still very tough and steep. You need
your rappelling skills and climbing gear.
Dinesh: I agree that we may not be at
that level where we can build those kind
of things. But we need to have that path.
We can't be doing these things forever.
We don't want to have another roundtable
20 years from now talking about the same
thing.
Karamjit: We shouldn't even be
talking about this two years down the
road. You say that it takes time, but
can we fast track this? Can a government
body pick some of the better companies
and come up with a certain initiative
to quicken the pace of development at
the lower end of the software stack?
Dinesh: Things like these cannot
be forced. These things happen. Like Microsoft…
it just happened. But it was hoped that
the MSC would be that Petri dish for these
things to happen. We need to look at what
we did not do and do those things to create
this Petri dish.
Brian: See, one of the few things
that the government should do and leave
the rest to market forces is to give grants
at certain levels because it is so costly
to do that. Its CMMi (Capability maturity
Model) initiative is an excellent example.
My own company, QSol, is one of the first companies to get accepted into this programme. For us as a company to have to invest RM300,000 to go and get certified is expensive, but now we can get it for a much more affordable RM50,000. The government was the one that provided that platform.
Butt: My concurrence with some
of the panel members here is that I think
we've got to set up the right environment
first. It's got to be vibrant. If the
environment is there, the success stories
will happen. It cannot be engineered to
happen but over time it will. Google and
the Acers of the world happened. When
the time is right, when the entrepreneurs
are there, when venture capital is in
place, when the piracy issue is reduced,
that's when success will take place. So
today, we should grab the low-hanging
fruits, the nuggets and get all the things
right and over time, it will happen.
By netv@lue2.0
Net Value: Foreign-trained
or local?
Software Roundtable:
Best time to be technopreneur
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