Financial Journalist

Hong Kong iMail October 30, 2000

Do not be dazzled by the figures bandied about by the most respectable financial institutions - they all want to believe

By Gerry O’Kane

A friend cornered me last week to tell of his brave concept for doing business. He thinks it’ll make millions and he should have no problem floating the company. It doesn’t cost anything to use it and requires no hands-on training. The customer doesn’t even have to be at home. He might be on his way to work. He can test the goods, try on the clothes, get answers from experts immediately and, if he likes the product, can hand over cash. He calls it buying from shops.

You might have heard the joke. You might not, but you understand the sentiment. Everyone seems to be talking about B2B. It is not Cantonese, Mandarin or English. It is jargon. Business-to-Business; it has been happening for thousands of years.

For small-to-medium sized Hong Kong business, it is a good perspective to mock the pomposity of the industry that annoys with its own self-importance. But it is worth bearing in mind that even buffoons can be good at what they do. The evidence is mounting that certainly larger firms, and quite probably SMEs, will be turning over billions of dollars that come from transactions carried out over the Internet.

Be sceptical of the figures bandied around, however. By 2005, Goldman Sachs expects Asia to generate about 10% of the US$4.5 trillion global market for B2B e-commerce. Not good news because if the International Data Corporation is to be believed two years before Asia would account for 25% of the global B2B. Or you could believe Forrester Research that by 2004 e-commerce would be worth US$1.65 trillion in Asia — three times the amount Goldman Sachs estimates. Of course it is doubtful these studies have the same definitions or geographical boundaries so we can excuse the discrepancies. But it doesn’t matter; if they are all out by a factor of ten, it remains big money.

Only the SME can evaluate whether taking the B2B route will be worthwhile. Not everything benefits from using the Internet contrary to what some would make us believe. But for a nation such as Hong Kong, which has traded internationally for generations, there should be more than a smattering of SMEs using the Internet. No doubt Hong Kong businesses remain sceptical after the farce of Hong Kong’s SPEDI project evolved into Tradelink to bring us a decade out-of-date electronic data trading system. But in today’s B2B marketplaces, for that is what they are becoming, online intermediaries connect buyers and sellers. Fortunately the new industry is not EDI and is not based on proprietary systems. Internet trade is open technically and access is only limited to government interference and national infrastructure.

So where does Hong Kong stand in the league of B2B development and should you be joining the race to put Hong Kong on the winners rostrum? On the one hand computers in companies linked to the Internet is far below that of most European states. It is certainly lower than Singapore, Taiwan or Korea. Indeed in all surveys Hong Kong falls below these nations in terms of revenues generated by B2B commerce. On the other hand one survey argues there are more secure servers for e-commerce per person in Hong Kong and Singapore than in the entire European Union. Certainly Hong Kong has an Electronic Transactions Ordinance which allows electronic writing and signatures to be recognised for legal purposes. If anything is crucial for the growth in B2B commerce it is this legal recognition. Contractual offers and acceptances can be done electronically. Public keys and Certification Authorities supporting electronic signatures are already in place with the Hong Kong Post Office. The UK is due to introduce this service soon. Singapore has a similar legal structure to Hong Kong, while Japan has found its existing laws on business, telecommunications and credit card use can cover e-commerce.

One hot point of debate in the European Union is the introduction of taxation on Net transactions. The EU wants value added tax (VAT) to be added to Internet sales, something the US is against. Japan has reported taxation should be considered but in the same breath says it should follow the OECD guidelines; or back to the US point of view. As for Singapore it does it the way you would expect. Internet sales from overseas companies must be registered for GST (Government Sales Tax) while domestic Internet companies that are exporting get tax relief of 10%. So much for the OECD.

Hong Kong on the other hand, is playing China’s game of wait and see. The Inland Revenue is looking at the issue but not saying much. However corporate tax forms now ask if any goods or services have been bought over the Internet.

But in spite of the legislation already existing, Hong Kong has serious problems with on-line contracts, in spite of these theoretical secure e-commerce servers. “Hong Kong’s banks have been somewhat behind place like the US in supporting e-merchant accounts but things appear to be changing for the better,” says Jackie Mailloux, director of communications at Lemon (Asia), an Internet services company. But she warns that what does exist makes it worth customers ensuring that the bank is delivering a quality service at a reasonable cost.

Critics argue that Hong Kong’s traditional banking systems have been slow to react to the explosion of e-commerce. In the U.S. the government has been using on-line procurement since 1989, Britain started electronic procurement about three years ago and Hong Kong has just signed up to it recently. Sixty per cent of Fortune 500 companies use virtual cards for small-scale purchases.

In many current Hong Kong B2B operations where contact is made via Internet, products displayed on-screen and deals signed — payment has to go through the traditional methods. Forrester Research estimates the cost of administrative support for international trade averages 7% percent of the transaction cost. Export company margins are traditionally about 8%, so any increased efficiency in transaction costs can make a significant difference to Hong Kong businesses.

In the past year TradeCard has announced it will be targeting import and export companies in Hong Kong, Taiwan, Singapore and Korea. It aims to handle 70% of the paperwork required by traditional trade processes online and then pay via its partner’s payment centre, Thomas Cook. HKB2Bnet.com launched saying it was designed to incorporate product selection and transaction processes. Meanwhile Commerce One intends to build on-line trade exchanges in Hong Kong, among a plethora of other Asian countries. Sun Hung Kai Properties’ subsidiary, E-Supply Chain Management, says it will build a vertical, integrated, or complete, Internet service for the territory’s SMEs. All the big names such as Intel, IBM, Microsoft and Oracle have said they will offer complete services too but details of e-payments remain vague.

All these figures and arguments do not help an SME to enter the B2B arena. If you do join some sort of Internet marketplace, you need to discover who is involved, the shareholders and operators. Confidentiality about your business is vital. You must check all the terms and conditions of being part of this ‘community’. The SME must consider the geographic reach of their Internet business presence. If it is truly to be global and that is where the money is likely to be in the long-term, then having fast, localised sites in native currencies and language are needed but they cost more. If it is global can your partners or marketplace handle international transactions?

For SMEs considering the Internet for new business, ignore the hype and concentrate on the figures, the bottom-line. While Hong Kong may not be regarded as a B2B leader in Asia, this is no reason to lose out on your own opportunities.

B2B, Hong Kong, Tradelink, Internet transactions

Hong Kong iMail October 30, 2000

Too many are caught up in Internet issues when they should mind their own business and use the Net as a helpful tool

By Gerry O’Kane

In 1997, Chief Executive Tung Chee-hwa announced his Digital 21 IT Strategy.

His vision was for Hong Kong to retain its competitive edge by becoming a regional technological hub, a growth in e-commerce and a way for local businesses to enter new global markets.

On the face of it, the announcement of the Cyber Port showed Hong Kong was indeed making a play for a leading role in the global technology and e-commerce markets. The queues for shares in Li Ka-shing’s catchily named Tom.com seemed to suggest that the population of the SAR were ready for this new age.

But as we all know the Cyber Port has been criticised as being a property deal couched in technology dreams and Tom.com raised US$113m for … well, being a name.

For the smaller businessman these issues can cause confusion in how he should be assessing the Internet as a possible source of new business or enhancing old business.

The first thing that should be clarified is to forget what is going on at Pacific Century CyberWorks and Tom.com and all those companies whose core business is the Internet itself.

The business models that dictate these operations have nothing to do with existing companies that should be looking at whether elements of Internet technology can improve the way they trade. The way Hong Kong SMEs should view it is as if PCCW was a firm a century ago offering electricity. It might have a problem with the delivery of the new technology but you as a factory owner, shop or book-keeper must consider whether electricity will help your business. It does not mean you shut the factory, just use it.

Listening to many of the Internet company salesmen will not help either. They will talk of Internet Service Providers, web-hosting services, storefronts, e-malls, e-merchant payment services and a confusing array of software applications to support your Net business.

Their argument for SMEs to accept the Internet is along the lines that a growing company in a competitive market cannot afford not to participate in electronic market places. In theory doing business on the Internet lowers costs, increases efficiency and productivity. They argue to forget bricks and mortar; not participating on-line will mean not being in business.

A study released by Forrester Research of Cambridge, Massachusetts, predicts that Asia-Pacific nations will generate US$53.7 billion in e-commerce in 2000, rising thirty-fold by 2004.

Forrester expects Japan to account for slightly more than half the region’s e-commerce. But, it adds, Australia, South Korea and Taiwan are projected as the other leaders in the area - not Hong Kong.

So should local SMEs get into this brave new world?

Before looking at e-payments or web-hosting, companies have to look at themselves and appraise their own current way of doing things. Hong Kong’s Internet penetration is believed to be around 20%, much lower than Europe or Singapore. According to Chris Westland, professor of IT and the Hong Kong University of Science and Technology, over 60% of Hong Kong SMEs do not even have email and 93% of these have said they have no intention of getting it all. He also points out that being successful in the new world requires creativity, empowerment and participating management, not a traditional hallmark of most local SMEs.

Jackie Mailloux, director of communications at Lemon (Asia), an Internet services company, says, ” Before rushing out to contract a Web developer or Web hosting service, company managers need to sit down and figure out what they hope to achieve by putting up a web site or, in other words, what it is supposed to do for the business.”

This cannot be emphasised enough because it will dictate what kind of service your require. If you are a retailer are you intending to sell to local people over the Net or would you prefer an international audience? Do you intend to deliver, sell directly by Internet or simply market the company? Is your company looking to sell factory-made products in bulk to other businesses or services? And is your company capable of making internal changes that might be needed to maintain this new way of doing business?

“With that in mind, and some preliminary ideas on paper, they should go out to find a partner who actually understands the nature of that business and can therefore provide sound advice,” adds Ms Mailloux. Ideally that partner will clarify what you will need and what impact it is likely to have on your internal company structure.

Should you go the route of using the Internet purely as a marketing tool, choices are simpler. You will probably provide what is known in the industry as ‘brochureware’.

“Perhaps a web site’s most important but often-undervalued function, however, is in the marketing sphere,” she says.

“In a place like Hong Kong the company web site can and should become the core of a whole range of marketing activities, replacing company newsletters, supporting direct marketing events, and so on.”

Even this simpler function will dictate what sort of service provider you might want because if it is to be constantly updated, it may be cheaper to outsource that production to a third party.

The more complex question is whether to sell over the Internet. Then the SME has to decide whether to partner with an existing e-tailer, go into a virtual shopping mall or perhaps spend a lot of money creating an online shopping site. When you do that it may upset and compete with your distributors or other sales channels. The question is whether to lead or follow.

Following may be cheaper but if done incorrectly can lead to problems.

The SME must base its Internet strategy around the customer whether it is another business or a consumer. It must fulfil the expectations of efficiency and good service.

And that has been shown as not going too well in Hong Kong up until now. A recent ACNielsen online’s E-Shopping Survey, while reporting a 30% in annual consumer spending, says that customer satisfaction has declined 23 percentage points over the last eight months.

Even though sales are up, customers are most dissatisfied with slow delivery (64%) something that seems a fundamental error in the fast world of computer communications. Thirty-seven percent were unhappy that the incorrect products were delivered.

If the SME has gone the way of an e-mall or partnered an existing e-tailer, he will probably have little control over the delivery or even packing of the goods. The cheaper way of selling online was to allow the partner to do that but it is the SME’s name on the goods and that is bad publicity and perhaps a vow on the part of the customer not to buy his goods again. It is here that the SME has to do his homework too.

Issues of online payment and a global presence all become entangled in these decisions but as we have shown clear thinking and good advice are essential parts of choosing an Internet strategy. Consider it as being any other business decision and do not be blinded by hype or confused by jargon.

Internet Business, Digital 21, Hong Kong, SME, online