As a nation, changes towards the New Malaysia are already underway given the recent election results. However, in the context of a New World Order enabled by digital and technology, it is important that we maintain a strong understanding of trends and shifts in the marketplace both at home and globally, as they have a bearing on the future of the economy.
The following article outlines a few observations across and around the Malaysian digital economy. This article is excerpted from a personal communication originally written to the CEO of a large Malaysian institutional investment fund in November 2018.
(1) Unfair advantage in (digital) technology towards global players.
Whilst 85% of Google’s quarterly revenues of US$31.1Bn are generated from advertising, it has active and fast growing interests in mobile hardware, IOT, content production, and even broadband connectivity (US). YouTube for example is still barely profitable, while advertising via search and banner display are generally what power their profit margin of 30%, enabling them to cross-subsidise across their eco-system of services and build deep moats against competition. Amazon, Apple, Tencent, Alibaba operate much in the same way, typifying the same eco-system approach. In late 2018, Netflix is going for a second debt round this year for another US$2Bn for its content warchest that is expected to reach US$9Bn in spending this year, on the back of strong global subscriber growth delivered every quarter. The implication is a more threatening landscape for local players in consumer sectors, and that targets for investments may have to be global, despite services being rendered locally. APAC is 15% of Google’s revenues, and Netflix generates ~50% of its relatively small ~US$15Bn revenues from outside US and will spend US$1.3Bn in technology this year alone.
(2) Rapid scaling of regional and global players may accelerate crowding out the local landscape.
The market capitalisations of FAANG stocks (Facebook, Apple, Amazon, Netflix, Google), as well as Chinese players Tencent, Baidu and Alibaba individually now reach northwards of US$150B-1T, providing them strong investment momentum to dominate any market they enter. Tencent for example with revenue growth of >30% YoY, EV/EBITDA >30x has high appetite to invest into new markets. Across the ASEAN region, emerging local-cum-regional players like Grab, Go-Jek, Traveloka, Lazada, Shopee, and Iflix have been able to access cheap capital from VCs/MNCs keen to gain a foothold in new value creation. It is hard to exaggerate the pace at which this has happened; Grab to date has raised US$5.1Bn and Lazada US$4.7Bn, while Go-Jek, Tokopedia and Traveloka have raised some US$2.1Bn, US$1.3Bn, and US$500Mn respectively, the majority from non-ASEAN based investors and within the span of the last 2 years alone. Each may operate locally, but have global investor bases.
(3) Seemingly low investment exposure by local institutions into technology sector.
Global funds like Vanguard, Fidelity and Blackrock seem to be well invested into technology stocks across IT, software, semiconductor, and internet companies. Target companies with high concentration are for example; Microsoft, Amazon, Apple, Intel, Google, Alibaba, Nvidia, Salesforce. Investments are also growing into emerging Asia/APAC region, for example, into companies such as Tencent, TSMC, Naver, Softbank. Direct equity ownership in FAANG + Intel, Microsoft, Cisco, Nvidia (US tech) across Vanguard, Blackrock, TRowe Price, and Fidelity total some US$255Bn, US$225Bn, US$78Bn, and US$117Bn respectively, while their tech focused mutual funds total some $US50Bn in assets, with high returns of 25-35% (1-year basis). GLIC exposure to tech is nowhere as high However this does not necessarily make these particular stocks a preferred investment; current headwinds/market corrections in the US, lofty valuations, recent declines due to dollar strengthening, backlash from public around data concerns (e.g. Facebook), and tax concerns are enough to make them each tricky considerations in their own right. It is worth pointing out that FAANG and FAANG+ (+Alibaba, Baidu, Tesla, Twitter) have historically outperformed the S&P500 by a significant margin over the last 5 years; FAANG+ annualised returns since 2014 is 27%.
(4) Lack of clearly defined investment approach for GLICs to participate efficiently in early-, mid-stage (local/regional) technology plays.
Many early stage/series A/B focused funds already exist in the region, e.g. Accel Partners, East Ventures, Emerald Media/KKR, Gobi, Monk's Hill, Golden Gate, in addition to several corporates that have created CVC structures to expand beyond their core businesses, e.g. Axiata (ADS), Singtel (Singtel Innov8, Digital Life), Temasek (Vertex Ventures), Sinarmas (Sinarmas Digital Ventures), Lippo (Venturra Capital). Ed: these latter structures have yet to show clear successes thus far. Given the risk, there is perhaps a need to partner players through a balanced portfolio – a few riskier bets into new digital businesses via a fund of funds structure on the one hand, and on the other, private equity investments into more hardy ‘physical technology & manufacturing’ plays, plus global equity investment into major and emerging regional/global tech stocks. It is also worth pointing out that traditional methods; valuation, business cycles, and value chains may be distinctly different for tech sector vs. traditional, requiring new skillsets and capabilities in investment managers.
(5) The technology cluster development approach seems lacking in ineffective ness for Malaysia.
The country has undertaken a range of initiatives like MSC, and other development zones, as well as biotech, green technology and semiconductor sector initiatives for example by Khazanah in the past. These generally took a Silicon Valley approach – to build out clusters that combined multiple value chain components into a virtuous eco-system. Except for Penang and Kulim that were underpinned by electronics manufacturing, there has been limited success in driving commercial success. In my opinion, heightened global goods and data flows of the last 10-15 years have created a fluid global demand and supply chain, driving the need for globally competitive quality and efficiency, and major global clientele as key value drivers vs. the legacy integrated value chain approach.
(6) New capital flows favour populous countries in the region, risking Malaysia falling behind.
Capital flows into new tech startups have generally favoured markets with large population sizes that can drive rapid commercialisation of digital business models at scale. In fact, Indonesia and Singapore have attracted more than 90% of the total venture capital fund-flows into the region over the last 3 years – the former due to its population size and latter due to its favoured location for regional tech company HQs. It is not hard to imagine how the story will pan out if the current trend continues over the coming 5-10 years.
(7) Risk of potential long term economic value leakage out of country if tech globalisation trend continues.
The largest tech companies are largely owned by public markets for example in the US and HK/China, while mid-scale emerging digital companies in the region are largely invested by a combination of foreign VCs, and technology giants (such as Alibaba, Tencent). Meanwhile, participation by local investors is low, perhaps due to GLIC legacy preference towards local and yielding assets; and high market valuations of digital companies that are generally too large for local corporates to invest in. In contrast, Singapore, through Temasek and GIC have actively invested in technology plays globally. In China, the government has close involvement in companies like Baidu, Alibaba and Tencent (BAT), having also created regulatory barriers to restrain players like Facebook and Google from operating freely in the market. Today some 60% of China’s unicorns (>US$1Bn valuation startups) have garnered investments from BAT. In Indonesia in 2013, Tencent formed a JV with PT. MNC to conduct all its activities in Indonesia – a smart move on the part of MNC and Indonesia. For Malaysia and the region, crowding-out of local investment due to wide availability of foreign capital is very real and may have wide repercussions on the composition of market capitalisation in the future.
To summarise, it is clearly a scary world and marketplace that we operate in today, given globalised competition and a weakening of regulatory barriers to protect local businesses. There is clear risk if, as a nation, we do not pursue measures to ensure our resilience. This is likely to involve alignment and coordination across the value chain, from investors, board members, right down to consumer propositions.