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Malaysia's Own 'Silicon Valley' Shows Progress and Problems

By CHEN MAY YEE
(THE WALL STREET JOURNAL, Friday, September 22, 2000)

CYBERJAYA, Malaysia --Othman Yeop Abdullah, the man in charge of developing Malaysia's Multimedia Super Corridor, has been sharing the limelight with some global techno-heavyweights this month.

Having just hosted a passel of visiting industry luminaries -- including Acer Inc.'s Stan Shih and Compaq Computer Corp.'s Michael Capellas -- Tan Sri Othman joined Bill Gates last week to open a Microsoft building in the new technology zone. There, a beaming Mr. Gates endorsed the Malaysian initiative as "awesome!"

So why does Tan Sri Othman feel as if he's under siege?

"So much investment has been made, so many promises have been uttered," frets the executive chairman of the Multimedia Development Corporation, or MDC, the agency that oversees the super corridor. "Now we have to make sure that four or five [Malaysian companies] become world-class players to lend credibility to the project," he says. "Otherwise, it's just another high-tech park."

That's a startling admission from the chief promoter of Malaysia's much-hyped plan to build its own Silicon Valley. The four-year-old project has already swallowed $3.7 billion in state funds. Now, it's at a critical juncture: Can the initiative achieve its original goal of transforming Malaysia's economic base from manufacturing to technology -- leapfrogging more developed nations -- or will the super corridor become an isolated technological showpiece with little real impact on the rest of the country?

While tech-industry executives applaud Kuala Lumpur's commitment, they also wonder if bureaucrats should continue to micromanage the corridor's development. Governments may be good at building infrastructure, they say, but state planners aren't usually proficient at predicting the next hot technology, or at encouraging the risk-taking culture that powers the New Economy.

Igniting Innovation

What Malaysia needs to do now, some industry gurus say, is to encourage its own start-ups and urge its old-economy companies to embrace e-commerce. Start-ups are more apt to hatch innovative ideas than the big, established tech concerns the super corridor was originally designed to attract, they argue. To fund such efforts Malaysia needs to bring in experienced venture capitalists who can better spot potential winners, instead of relying on government agencies to dole out money.

How to build a high-tech seedbed is an issue that resonates in developing economies from Dubai to Singapore, where governments are also driving large-scale technology initiatives. "The ambition was to do in five years what others took decades to do," says Nikolai Dobberstein, associate principal at McKinsey & Co. in Malaysia. The consulting firm worked with Prime Minister Mahathir Mohamad's government to draft the super corridor blueprint unveiled in 1996. Mr. Dobberstein says the idea that a strong government can kick-start technological innovation remains sound, but adds: "We hyped it all up, and we're not living up to expectations."

Nobody's saying there's been no progress. Through Asia's 1997-98 economic meltdown and a political crisis over the sacking, arrest and prosecution of ex-deputy prime minister Anwar Ibrahim, Malaysia has been busy laying down high-speed telecommunications cables and power lines, erecting buildings, drafting cyber-laws and handing out contracts to get government offices, schools and hospitals online.

Slow Start

The super corridor -- a 15-by-50-kilometer strip of real estate -- begins at the 88-story Petronas Twin Towers in Kuala Lumpur and stretches south to the city's new international airport. Within its borders is a new federal administrative capital called Putrajaya, with its monumental neo-classical buildings surrounded by artificial lakes carved out of a former palm oil plantation. There, staffers at the Prime Minister's Department are being trained to replace typewriters and paper with computers and software.

Close by is Cyberjaya, a purpose-built software development center complete with a new, state-run Multimedia University. Much of Cyberjaya still resembles a giant construction site, its broad, newly tarred highways crisscrossing bare red earth sprouting the odd tuft of grass. The town's current population is about 8,000, with university students and staff accounting for some 5,000. The MDC says it expects Cyberjaya's population to grow to 20,000 by mid-2001 when more buildings and houses are completed, and to eventually reach 240,000 people.

At the moment, however, there aren't any shops, schools or housing estates to entice people to move in. Those already working here endure a daily commute by car of up to an hour each way, or an even longer journey by bus. The austere conditions mean many start-ups are reluctant to move to Cyberjaya, making it difficult to nurture the cluster effect -- with its vibrant exchange of ideas -- of places such as Silicon Valley.

While the infrastructure is slowly falling into place, when it comes to creating innovative new technology, "nothing much has happened," concedes Dinesh Nair, director of research and development at WorldCare Health (Malaysia) Sdn. Bhd. The company is a subsidiary of a U.S. concern with a government contract to electronically transmit medical images of sick villagers to consultants in urban hospitals.

Malaysia has yet to embrace New Economy values such as doing away with old hierarchies and tolerating failure, Mr. Nair suggests. Right now, "ideas from young people are pushed aside just because they are young," he says.

Nor has the super corridor buzz spread to many Malaysian business people, notes Cheong Yuk Wai, chief executive of MyBiz International Group. MyBiz, whose shareholders include Citigroup Inc. and A.T. Kearney Inc., runs a portal for small and midsized companies to promote and sell a diverse range of products. But of the 370 firms MyBiz has signed up, only 30 to 50 actively solicit business online while the rest "sit and wait," says Mr. Cheong. "Are people talking about a knowledge economy? Does a child get excited? Do businesses get excited? That hasn't happened," says Mr. Cheong, who is also a member of the government's policy-shaping National Information Technology Council.

'Snowballing of Dissent'
William Miller, a retired Stanford University computer science professor who has helped Asian governments, including Malaysia, formulate technology policy, puts Malaysia "pretty low on the scale of a technology originator." Dr. Miller hosted Dr. Mahathir at Stanford four years ago when the Malaysian prime minister promoted the super corridor project in Silicon Valley. He remains a staunch supporter of the idea. But when it comes to technology innovation, he ranks Malaysia behind Singapore, Japan, Korea, Taiwan and even some parts of China. Dr. Miller says he can't name any Malaysian technology companies that look like they have the potential to become global players.

"The next two years will be very critical," warns Dr. Miller. "They have to get capital support, have to learn how to get global."

In Malaysia, growing public impatience for tangible results has led to what Al-Ishsal Ishak, an MDC board member who runs his own Web solutions company, neuroweb sdn. bhd., calls a "snowballing of dissent." Criticism of the MDC's management has been popping up from unexpected quarters, including Malaysia's usually docile media. That's turned up the heat on Tan Sri Othman, a soft-spoken 59-year-old career bureaucrat who has served as secretary-general of the Ministry of Primary Industries and as a university vice-chancellor.

Earlier this month, the New Straits Times, a pro-government newspaper not known for its investigative journalism, ran a prominent article suggesting that Tan Sri Othman would soon leave the MDC, attributing the purported scoop to an unnamed source. The MDC swiftly denied the report and announced that Tan Sri Othman's contract had been extended by another two years. But the incident underscored the public perception that all was not well within the super corridor.

While business people are generally supportive of Tan Sri Othman, they complain privately that some other MDC officials are inexperienced and arrogant -- traits that put off some companies looking to set up shop here. Tan Sri Othman doesn't dispute such criticism. He says the agency has started training staffers on how to handle clients, acknowledging that foreign companies "have so many choices, they can go and invest somewhere else." Tan Sri Othman also says the MDC is "at a stage where you need new blood," but says that he will stay at its helm for at least another two years.

The MDC's oft-cited gauge of progress is the growing number of companies with Multimedia Super Corridor status -- 362 at last count, of which about 60% are small and midsized Malaysian companies. Such companies have to promise they will conduct research and development activities within the corridor. In return, they enjoy perks, including a 10-year exemption from corporate taxes, the right to bid for contracts to provide infrastructure, hardware and software for government offices, schools and hospitals, and the freedom to bring in foreign computer programmers with a minimum of red tape.

But since the MDC is also the agency that confers super corridor status, the number of concerns qualifying is hardly an objective measure of the project's success. Of the 362 companies, 46 haven't started operations, while a number are dormant, according to the MDC.

In a survey of 209 super corridor companies conducted in April, the MDC concluded that these companies collectively will have invested a total of 1.8 billion ringgit ($473.7 million) by 2001. "On a global scale, it's just not significant," says one industry analyst.

Drying Well of Investment

A new Malaysian stock exchange, modeled after the Nasdaq Stock Market, is supposed to attract high-tech start-ups, but that hasn't caught on either. After 17 months, the Malaysia Exchange of Securities Dealing and Automated Quotation, known as Mesdaq, has just two listings. At Internet networking functions around Kuala Lumpur these days, start-up companies talk instead of raising funds in Singapore or Hong Kong.

Still, the MDC likes to promote the fact that world technology titans continue to show interest in the super corridor. At the MDC's annual meeting of its international advisory panel earlier this month, 29 members including Mr. Shih, Mr. Capellas, Silicon Graphics Inc. Chairman and Chief Executive Bob Bishop, Fujitsu Ltd. Chairman Tadashi Sekizawa and Sun Microsystems Inc. Chief Scientist John Gage sat down with Dr. Mahathir in Cyberjaya. Behind closed doors, the advisers told the prime minister that Malaysia needs to do more international marketing and to churn out more skilled workers, including specialized lawyers and accountants to support the tech industry.

But the continued foreign interest hasn't translated into big investments. Bill Gates, also a member of the advisory panel, didn't make it to the meeting, but he swung through a week later to open a new center for training software developers in Cyberjaya. Mr. Gates said the corridor had the greatest "scale and commitment" of similar initiatives he'd seen outside the U.S. He likened the potential synergies of the Multimedia University and Cyberjaya to that of Stanford University and Silicon Valley. Microsoft pledged to invest 10 million ringgit in the next five years to work with the university to train developers.

Yet the size of Microsoft's Malaysian investment is miniscule compared with what the software giant is investing elsewhere. In India, Mr. Gates's next stop after Malaysia, he said Microsoft would invest $50 million in the next three years at its development center in Hyderabad. In Cambridge, England, Microsoft is setting up a $80 million research lab.

So what do critics think the Malaysian government should be doing? Some say it's time for the MDC to let the private sector to play a bigger role, particularly in kicking in venture capital. In neighboring Singapore, for example, while the government has set up a $1 billion venture capital fund, it's leaving investing decisions to professional venture capitalists, including some from Silicon Valley.

But in Malaysia, traditional venture capitalists are more used to funding manufacturing companies and have been slow to put money in technology start-ups. So have risk-averse banks.

As a result, the MDC's venture capital subsidiary has wound up in a key funding role for local concerns. The unit, MSC Venture Corp. Sdn. Bhd., launched a 120 million ringgit fund in June 1999. MSC Venture has since disbursed 20 million ringgit to seven companies. Critics complain that's too slow.

Tan Sri Othman says the blame is misplaced. He says many of the Malaysian start-ups seeking money have weak management teams and inadequate business plans. And he dismisses the possibility of farming part of the funds to professional venture capitalists, saying that would be "completely abdicating [our] role."

The Wall Street Journal - 28 March 2001

Malaysia's 'Super Corridor' Fails To Attract Financial Attention

By CHEN MAY YEE
Staff Reporter of THE WALL STREET JOURNAL
Malaysia's so-called multimedia super corridor hasn't attracted substantial interest from global technology companies, nor has it had a significant impact on the country's economy, according to a confidential study by international consultants McKinsey & Co.

"Key gaps still exist in attracting sizable and pioneering operations from leading companies and facilitating knowledge and wealth transfer, especially to the broader economy," McKinsey said in a 15-page summary of a study prepared for the state-owned Multimedia Development Corp., or MDC. The MDC is responsible for overseeing Malaysia's four-and-a-half-year-old effort to build an Asian Silicon Valley aimed at transforming the country's economy to one reliant on technology from a manufacturing base that is increasingly under threat from lower-wage countries such as China.

A copy of the McKinsey summary -- addressed to the MDC's executive chairman, Othman Yeop Abdullah -- was obtained by The Asian Wall Street Journal. The report, dated Feb. 5, is the first independent analysis of the super corridor.

Among other things, McKinsey recommends reducing bureaucracy and bringing in more technical and venture-capital expertise to the multibillion-dollar project. The super corridor is a 15-by-50-kilometer strip that runs from the 88-story Petronas Twin Towers in Kuala Lumpur south to the city's international airport. It includes the new administrative capital, Putrajaya, a software-development center called Cyberjaya and a new Multimedia University. The corridor is intended as a test bed for new technologies, which would eventually be rolled out nationwide.

As of September, the project had swallowed $3.7 billion in state funds. McKinsey helped draft the corridor's blueprint. That 1996 document identified subsections of the project such as electronic government and so-called smart schools, which were defined as flagship applications. Local and foreign consortia were invited to bid for contracts within the flagship applications.

Impatience With Project

Despite setbacks caused by the 1997 Asian financial crisis, much of the physical infrastructure has been built and many of the contracts have been awarded. But public impatience for signs of more tangible benefits to the wider economy has mounted in the past year, with much of the unhappiness aimed at the MDC.

In October, the MDC re-engaged McKinsey to prepare a status report on the project. When contacted on Friday, Nikolai Dobberstein, a McKinsey partner based in Kuala Lumpur, declined to comment, citing client confidentiality. The MDC's executive chairman, Tan Sri Othman, didn't respond to a request for comment that was faxed to his office on Friday.

In its summary report, McKinsey acknowledges that Malaysia has "made significant progress" on the super corridor. But the consultant also points to an array of shortcomings.

While many international technology companies are represented in the corridor, "the level of investment and employment of knowledge workers is, with some exceptions, not very significant," McKinsey says. What's more, the MDC has trailed rivals such as Singapore and Israel in customizing investment incentives to attract leading foreign technology companies.

McKinsey recommends that the MDC confer closely with the corridor's International Advisory Panel -- which includes the likes of Microsoft Corp. Chairman Bill Gates -- to figure out what it would take for them to invest in and do more in Malaysia. The report suggests "a more direct awarding of selected high-value contracts to the highest priority companies, e.g. through a 'beauty contest.'

Stimulating the Corridor According to McKinsey, the Multimedia Development Corp. should:

Directly award high-value contracts to high-priority global technology companies

Hire top managers with a strong industry track record

Hire top venture capitalists to manage its venture funds and nurture start-ups

Give special incentives to big local companies to entice them to work with technology companies within the corridor

Build more office, commercial and residential buildings

Build a stronger talent pool by bringing in top universities

Source: McKinsey report on Multimedia Super Corridor

McKinsey also says many companies view the MDC as "too bureaucratic." Technology companies complain that the process to apply for multimedia-super-corridor status -- which confers incentives such as tax holidays -- is too complex and that the MDC's staff lacks the expertise to evaluate applications, the report says.

It recommends that the MDC hire top managers "with a strong industry record" and other experienced managers to deal with priority clients. Further, companies that have bid for flagship applications complain about a "cumbersome awarding process" and hint that they might not take part in future tenders, McKinsey warns.

McKinsey also recommends that the MDC hire top venture capitalists to manage its venture funds and nurture start-ups, because such capabilities "are developing only slowly in Malaysia."

Anchor-Company Incentives

The consultant adds that while many local companies have set up shop in the corridor, Malaysia's biggest non-technology-related corporations haven't. These companies haven't become customers of or suppliers to companies within the corridor, nor are they using the corridor to develop information-technology solutions.

McKinsey says such participation is "essential to ensure real productivity improvements ... particularly in the manufacturing and service sectors." McKinsey recommends special incentives for companies with so-called anchor potential, such as Malayan Banking Bhd., the country's biggest bank, and national car company Perusahaan Otomobil Nasional Bhd. to entice them to work with technology companies within the corridor.

In other areas, McKinsey says that:

Telecommunications infrastructure is "still not consistently at world-class levels."
The MDC should push national phone company Telekom Malaysia Bhd. to improve its services.
The MDC should speed up construction of office, commercial and residential buildings to ensure "an attractive working and living environment."
It should impose "more stringent cost and quality guidelines" and compensate affected companies if these aren't met.
The local Multimedia University alone isn't enough to pull in the region's best talent.
McKinsey recommends that Malaysia try to bring in top universities, such as the Massachusetts Institute of Technology and Stanford University of the U.S., by designing special incentive packages or awarding flagship applications to them.