Tech’s coming of age – and what it can teach us in Malaysia

  • In cash, earnings and outlooks, tech sector is now the norm, not the exception
  • Budget 2017 should have allocated more spend on innovation and the digital economy

Tech’s coming of age – and what it can teach us in Malaysia

 

 

IN the US, the third-quarter earnings season has now fully wound down, and by some way, the standout profit performance were in the tech sector and financial services.

Whether this provided the bright spark investors sought in terms of future earnings necessitated some analysis of each sector’s prospects, and here is where the tale diverges between the two.

In the very broad main, bank outlooks appear challenging, chief among which are a global trend towards more, not less, regulatory compliance, which is curbing its approach to risk and limiting the amount of capital it can deploy in the wake of fiscal and PR disasters at Wells Fargo, JPMorgan and Goldman Sachs.

There are also the necessary unravelling of business processes to compete more effectively amid thin demand for capital because of overly high debt both at personal and corporate level, not to mention a phenomenon which is giving them heart palpitations at night: FinTech.

In plain English therefore, this message: banks have a murky future ahead of them.

In tech, however, the story is quite different. The sector, spearheaded by The ‘Frightful Five’ – a grouping coined by the New York Times’ Farhad Manjoo ­– has four undisputed rulers of the consumer technology industry: Amazon, Apple, Facebook and Google. They’re now also joined by Microsoft, at one time a waning influence but now rebounding in a major way.

These once-upstarts are now almost the old heads on the blocks, the 800-pound gorillas that the young upstarts want to, well, upstage.

With folks heading online en masse, the old world is increasingly being left behind, and existences are now being lived online and digitally. No wonder then, that not only are the ‘Frightful Five’ going to be increasingly dominant on the US corporate earnings scene, they will also soon overtake the old economy boys like 3M, ExxonMobil and the Wells Fargos of this world.

Look at how the landscape of dominance by ‘The Frightful Five’ is shaping up. On desktops, Microsoft’s Windows remains the king, while online, its excellent Office 365 service is now fully mature and also similarly dominant. In search, Google clearly rules the roost.

On mobile- and smartphones, Google and Apple control the only two mobile phone operating systems of note and the apps that run on them. Facebook and Google control the Internet advertising business while Amazon, Microsoft and Google dominate the cloud infrastructure on which companies and startups run.

Amazon’s shopping and shipping infrastructure is fast-becoming the gold standard in online retailing, while Facebook keeps getting stronger in that most fundamental of digital platforms: human social relationships (aka ‘Social Media’). And as Manjoo points out, many of these platforms generate what economists call “network effects”: that is, as more people use them, the more indispensable they get.

As an example, look no further than Facebook Messenger and WhatsApp, both owned by Facebook and hugely ubiquitous, since everyone seems to be on them.

To the above, one could also add China’s Alibaba, which controls e-commerce and payment systems and Tencent, notably in mobile messaging, in that fast-expanding juggernaut of  a country.

These megatrends are driving upheavals in the Old Economy, but they also raise some important questions back home in Malaysia. Having just announced yet another annual Budget aimed at appeasing the masses in the immediate term, one has to wonder when and where the real structural change will come. As PwC’s Tax Leader Jagdev Singh mentioned on the radio, more could have been allocated in R&D and digital technologies but wasn’t, with the funds instead spent on the civil servants themselves and BR1M allocations.

With the speed at which tech is fast becoming the norm and not the exception, Malaysia must ask itself: is it really all that serious about moving up the value chain in the long-term or is it just content with playing catchup?

True, we saw the announcement of a ‘Digital Free Zone’ in Budget 2017 but how is this area going to be all that different from what the MSC already offers? Two decades and a bit on from the wide-eyed wonders Netscape’s Navigator gave us, tech, it would appear, has truly come of age. Not only is it propping up the S&P 500 in terms of its gargantuan and still-growing earnings, the cash it has amassed can only mean more investment and more disruption in the years ahead.

As Moody's Investors Service points out, Apple, Alphabet, Cisco Systems, Oracle and Microsoft hold more than a third of cash in Corporate America, with a total of $504 billion as at 2014. No longer the exception but the norm, it’s probably only a matter of time before it gets mainstream and predictable enough to warrant an investment by that most Old Economy of investors, Warren Buffett.

As the US experience amply shows, a truly functioning Digital Economy is a fantastic growth driver. It would serve us well in Malaysia to fully understand the benefits of a vibrant Digital Economy that sits front and centre of investment and attention, and not merely a sideshow to the stodgy inefficiencies of a government-controlled GLC ecosystem.

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