Changes transforming economy

Changes transforming economy

By Ken Gibson

JAKARTA (JP): Indonesia has clearly caught the 'dot com flu'
-- new startups are cropping up every day; U.S. dot coms have
arrived in Jakarta; and a host of companies are busily trying to
put an 'e-spin' on their Old Economy businesses.

Is there really money to be made in the New Economy? When will
the bubble burst? What does it mean for Indonesia? What will
happen to those in the Old Economy?

A global management consultancy firm, McKinsey and Company,
has recently completed a research on the underlying fundamentals
of the New Economy. It concluded that beneath all the hype and
publicity, there are in fact powerful economic changes afoot that
will permanently transform the way economies and businesses
function.

The research focused on three major forces at work in the
global economy -- digitization, regulatory liberalization, and
capital mobility -- and studied their potential effects on
industrial cost structures around the world.

It grouped all existing costs into two types: transformation
costs and interaction costs. The former are the physical costs of
transforming inputs to outputs -- turning metal into cars,
leather into shoes, etc.

The latter are the costs of exchanging information,
coordinating activities, monitoring, and so on. Interaction
costs, the research revealed, account for roughly 50 percent of
total costs in most industries, and as much as 70 percent in
industries such as banking.

Where the Industrial Revolution brought about a dramatic
reduction in transformation costs, the New Economy is rapidly
slashing interaction costs.

In fact, the study concluded that the three forces at work
(digitization, deregulation, and capital mobility) will boost
interaction-cost productivity by at least three times.

In some cases, interaction costs should eventually approach
zero, as the Internet and other enablers proliferate. Falling
interaction costs will change the economic world beyond
recognition: customers will reach new suppliers despite
geographic distances; companies will penetrate untapped markets;
and intermediaries-distributors, merchants, agents and others
will be decimated as buyers and sellers do their own match-
making.

These changes are occurring much faster than most people
anticipated. Whole industries are being reshaped everyday -- even
Old Economy industries, such as autos and pharmaceuticals.

For example, Ford, GM and Daimler/Chrysler recently announced
that they will launch a joint component procurement business,
while Johnson & Johnson, Baxter and three other large medical
companies have just joined together in marketing to hospitals.

Only a few years ago, such cooperation between arch rivals was
unthinkable.

A major reason for this phenomenon is that in the New Economy
the winner takes all. In the stock market the evidence is already
overwhelming: in every e-commerce category, the leaders command
far higher valuations than their competitors.

Look at Amazon versus Barnes & Noble, or Ebay, Yahoo! and AOL
versus their peers. The reason is that in the New Economy scale
is everything. If you are the first and largest, your brand is
substantially more valuable and technology costs are spread over
more customers. Moreover, you create a larger network of
customers who then interact with each other and make your site
even more attractive.

These changes are fast arriving in Asia and Indonesia is no
exception. Indonesian companies need to understand how the New
Economy will affect their business -- how supplies can be
purchased, how products can be sold, and how businesses will
coordinate with each other.

Indonesian exporters need to move particularly quickly, given
their direct ties to the changing global economy. For example,
should Indonesian paper companies use the procurement services of
Chemdex.com? Should they sell through paperexchange.com? Should
they form an industry consortium?

Even domestically oriented businesses must beware.
Stockbrokers will soon face global and Asian competition from
companies like Schwab and E-TRADE, while the travel agent
business could be destroyed by companies like Travelocity.

Fortunately, the challenges are accompanied by breathtaking
opportunities. Companies that understand the New Economy can
profit enormously by building new businesses.

International examples of innovative business building abound:
witness BBC's success in becoming a global content provider or
the achievement of Telefonica-the Spanish telecommunications
company-in establishing a successful ISP and portal service
across South America. Similar success stories can be written in
Indonesia.

For consumer-oriented businesses, a major obstacle is the
small size of Indonesia's on-line community. However, a number of
creative solutions are being devised to boost Internet access
through cable TV, mobile telephone and broadband satellite
access. These projects promise to dramatically alter the face of
Internet usage in Indonesia within a few years.

In fact, we believe that Internet technology can actually be a
catalyst for Indonesia's economic recovery: a vibrant and dynamic
e-commerce community will inevitably make Indonesian businesses
more efficient and offer new benefits to consumers.

If these new technologies are exploited thoughtfully, there
can be tremendous social benefits for all Indonesians. Take one
extreme example: why not put broadband Internet kiosks in village
schoolrooms and hospitals?

Such initiatives could allow Indonesia to revolutionize its
education and health care systems and 'leapfrog' over other
countries. Hopefully, government policy will embrace the New
Economy and harness the extraordinary power offered by emerging
technologies. If so, the real winners would be the people of
Indonesia.

The writer is president director of PT McKinsey Indonesia.
The article is adapted from his presentation at a recent
conference jointly organized by PT McKinsey Indonesia, PT IBM
Indonesia, and the Indonesian Institute for Management
Development (IPMI).