From the Desk of Dan E Khoo

The economic prospects of traditional retailers in many global markets are in a widespread state of deterioration.  Their situation even has its own term of art – “retail apocalypse” which actually now exists as a Wikipedia entry.  Even strong companies and those who realize a material share of their revenue from e-commerce sales are feeling pressure to close stores. Using the US market as an example, over 20,000 retail stores closed between 2013 and 2018. Close to 7000 of these closed in 2017 alone, despite very high consumer confidence ratings, low unemployment and continued growth of the US economy.

Beyond the retailers themselves, global brands are rethinking their distribution strategies in ways that indicate a pivot toward e-commerce. Nike, for example, forecast at its October 2017 Investor Day conference that its e-commerce sales would represent 66% of its corporate revenue growth over the next five years. At that same conference, Nike also announced a massive revamp of its wholesale strategy, indicating that it would place a primary focus on just 40 out of its current 30,000 retailers. The message is clear, simply distributing product out to lots of stores is not their going-forward priority – e-commerce makes the vast majority of those physical points-of-sale obsolete.

The global offline-to-online movement is unquestionably a factor in the decline of traditional retail, but not the sole factor. US government statistics show that e-commerce sales in 2017 still account for less than 10% of all retail sales.  A driving factor in the recent run-up in retail store closings is the large debt load carried by large traditional retailers, which in many cases is a consequence of leveraged buyouts made by private equity firms in recent years. Rising interest rates and changing market conditions are making this debt more difficult to refinance than in the past, driving several large retailers toward, or into bankruptcy.

As it relates to the realm of MDEC, there are at least two important takeaways from this trend.  The first is that the dominant position large retail corporations hold over manufacturers in reaching consumer markets is rapidly coming to an end.  While neither these companies nor brick and mortar retail stores would ever completely disappear, their consumer trust and convenience advantages over dealing directly with product suppliers of any size through e-commerce have been decimated.  Consumers worldwide are becoming accustomed to using platforms such as Alibaba’s Electronic World Trade Platform (eWTP) to purchase goods directly from SMEs, and infrastructural improvements such as Malaysia’s Digital Free Trade Zone (DFTZ) make it possible for those goods to delivered anywhere in the world in three days or less.  The opportunities for SMEs to serve customers anywhere in the world are now already large, and destined to do nothing but increase.

The second, as illustrated by Nike’s announcement, is the major pivot of global brands toward direct distribution through e-commerce on a mass scale. Datuk Yasmin identified our opportunity this way:  “Through the DFTZ, Malaysia is optimized for e-commerce transshipment, with the infrastructure, policies, procedures, talent pool, and experience to provide the world-class support global leaders require. We are optimized end-to-end. We are already receiving enquiries from global brands who understand the potential of what we have built here, as well as the larger market opportunity.” Strategically situated as the gateway to Southeast Asia’s 630 million consumers, Malaysia is destined to become one of the world’s handful of major e-commerce hubs, and a principal contributor to the reimagining of commerce.

Perhaps more importantly, at roughtly 10% of total trade, e-commerce has cleared hit tipping point and yet is just at the early innings of a global shift towards an omni-channel consumer experience.

Datuk Dan E Khoo is the President of MDEC Americas Inc; a Silicon Valley organization established to drive the global expansion of Malaysia’s digital economy.

As consumers continue to expand the use of electronic commerce channels as their preferred method of shopping, the traditional retail industry “location matters” adage seems fated to obsolescence. Clearly, the location of a physical retail location is becoming less important than it was as recently as five years ago – the retail location is often in the cloud, accessible from wherever the consumer and his or her smartphone happens to be.

“Location matters” still rings true despite the evolution of commerce from physical to electronic, but its meaning has also evolved.  We all understand the concept of instant gratification and the feeling of frustration that can arise from waiting for a purchased item to be delivered. Jack Ma, founder and Executive Chairman of Alibaba, the world’s largest retailer has set the success requirement for their Electronic World Trade Platform to delivery within 72 hours of purchase to anywhere in the world, 24 hours within a country. Being able to consistently meet this requirement requires a highly sophisticated set of inventory management and logistics systems to be sure, but those things alone will not guarantee success. As it turns out, the shipping point’s location matters to a great extent in timely and efficient delivery – particularly when cross-border shipments are involved.

In an e-commerce world where this location matters, Malaysia enjoys many advantages, just as it has since the beginnings of international commerce centuries ago.  Strategically located on the Strait of Melaka, Malaysia is the natural gateway to southeast Asia, within easy reach of many of the world’s most dynamic economies. The ASEAN region is home to 630 million consumers and collectively the world’s sixth largest economy at over US$2.4 trillion annually. However, it’s not only the physical location that matters. What Malaysia and its partner Alibaba have put in place in that location are what make it one of the world’s most advanced e-commerce hubs.

Reliable and efficient shipping operates on a hub and spoke system, with few hubs connecting out to many spokes in a region.  The hubs are the most vital parts of the system, where synchronization of warehousing, packaging, transportation, and other logistical aspects of fulfilling an e-commerce transaction such as customs clearances or dealing with returned merchandise.  Malaysia’s recently launched Digital Free Trade Zone, which has within it the first international hub of Alibaba’s Electronic World Trade Platform, is among the e-commerce industry’s most advanced hubs worldwide.

Why did Jack Ma and Alibaba choose Malaysia for its first deployment of its Electronic World Trade Platform? Location was clearly one of the reasons. Our geopolitical stability and deeply ingrained trading culture were reasons.  The others relate to a powerful shared vision and the leadership commitment to execute an aggressive development plan. Making the Digital Free Trade Zone a reality involved the Prime Minister and other senior members of the government setting directives that cut across 26 different agencies and ministries. This top-down leadership, plus the sector-specific knowledge of MDEC and others driving the growth of the nation’s digital economy were what made it possible to transform vision into reality in under one year. Datuk Yasmin summed it up this way: “It was many things, but most importantly, he and the Alibaba team saw that we had the vision for it and the ambition to see it through.”

Jack Ma said, “the first-e-hub under the Electronic World Trade Platform outside of China will go a long way towards making global trade more inclusive and provide much-needed support to a hugely important constituent:  SME’s and the younger generation.” Clearly, the significance of the partnership with Alibaba, and the capabilities it has brought to market have industry, socio-economic, and other far-reaching implications. Datuk Yasmin expressed the following in conclusion:  “My dream is that we will rediscover and reposition the glory days of the Straits of Melaka during the silk and spice trade.  Melaka was right in the center of the universe then, and I feel it can be that in the e-commerce universe.”

Datuk Dan E Khoo is the President of MDEC Americas Inc; a Silicon Valley organization established to drive the global expansion of Malaysia’s digital economy.

For centuries, Malaysia has been a center of international commerce, owing to its strategic location in the Strait of Melaka, and the resulting trading orientation that developed among its people. And while it remains an important player in the traditional forms of international commerce conducted principally among large corporations, the power of e-commerce has been harnessed in Malaysia specifically for the benefit of its expanding the cross-border trade of its small and medium-sized enterprises (SME’s).

Capitalizing on its culture and heritage rich in trading and commerce, Malaysia’s drive to grow its digital economy has always focused on inclusiveness. This approach aligned well with the vision of Jack Ma, the founder and executive chairman of Alibaba, the world’s largest and most profitable retailer, for an Electronic World Trade Platform (EWTP). In Ma’s view, the globalization of trade, though geographically widespread is flawed in its implementation because it has benefitted only big, multinational companies.  This flaw is largely due to cost of cross-border trade that is driven by its complexity, rendering it inaccessible to SME’s. Putting an e-commerce platform in place that removes the complexity and therefore the cost that excludes most SME’s from cross-border trade will enable SME’s to profitably reach markets beyond their own borders.

This aligned view of inclusion forged a natural partnership between Alibaba and Malaysia to develop and launch Malaysia’s Digital Free Trade Zone (DFTZ).  Effectively eliminating the complexity associated with customs, foreign exchange, warehousing, shipping and reaching a marketplace of potential customers, the Alibaba Electronic World Trade Platform (eWTP) hub within the DFTZ gives SME’s from Malaysia, and ultimately throughout the ASEAN region and beyond unprecedented capabilities to reach large consumer markets. In his remarks on the launch of the DFTZ, Jack Ma said: “Today we are witnessing a historic moment in Asia, where one country has begun to use technology to enable its SME’s and young people to become more competitive on the world stage.”

About 2000 Malaysian SME’s were part of the initial launch of the DFTZ.  There is a Malaysian Pavilion on the Alibaba platform and various powerful tools that connect potential buyers outside of Malaysia with Malaysian products for the first time. So far the results have been interesting.  The top Malaysian product sold into China through the Malaysian Pavilion is white coffee. Durian is number two. Bird nests for bird nest soup is also a popular SME export – leveraging our not quite as well-known location advantage of being on the flight path of swallows traversing southeast Asia. The mix of products and volume sold through the DFTZ to the world’s consumers will continue to evolve and grow in interesting ways, but whatever the products, it’s the growth of SME’s ability to benefit from streamlined cross-border trade that really matters.

Reflecting on the launch of the DFTZ and the partnership with Alibaba, Datuk Yasmin said: “I’m really happy with how this came together. Of course it was a lot of work on our part, but it didn’t seem so due to the sheer excitement of doing something so new.  To be working with the global leaders at Alibaba and such an innovative leader as Jack Ma, has been truly a pleasure for us, and also has brought us to a whole different mindset now. The platform that we built was developed by locals. I must say that it was at a high standard.  Through this initiative we raised the standard of our local suppliers to that of a global caliber, an Alibaba caliber, and that’s something that will have lasting effects.”

Dato’ Dan E Khoo is the President of MDEC Americas Inc; a Silicon Valley organization established to drive the global expansion of Malaysia’s digital economy.

Today, as it has been for centuries past, the Straits of Melaka is one of the world’s most important trade routes. Malaysia’s prime location on the commercial artery that connects the Pacific and Indian Oceans and the major economic centers of Asia has been a major factor not only in the growth of the Malaysian economy but also in the development of trading and commerce as a key dimension of Malaysian rich history and culture.

The United Nations Conference on Trade and Development (UNCTAD) estimates that roughly 80 percent of global trade by volume is enabled by shipping. A relatively narrow channel, the Straits of Melaka is relied upon by a third of total global shipping. In dollar terms, an estimated US$5.3 trillion worth of goods transits through the South China Sea annually.

As early as the first few centuries A.D., trade on the Straits of Melaka helped to create economic and cultural links among China, India, and the Middle East.  Europeans also plied the Straits during this time.  By the middle ages, it had become the hub for trade and commerce that it is today, with ships using points along the coast of the Malayan Peninsula to dock and conduct commerce.  It is said that the Chinese, Indians, Omanis, Yemenis, Persians, and Africans exchanged goods and established trade agreements with traders from Sumatra, Java, Bali, and Canton. Silk, brocades, porcelain, and perfumes from the Middle Kingdom were traded with hardwoods, carvings, precious stones, cotton, sugar, livestock and even weapons from India. From the interior of Malaya came tin, camphor, ebony, and gold. Surrounding traders brought spices, perfume, rice, gold, black pepper and sandalwood.

The regional prosperity that came from being the hub of activity for traders of all ilk (and silk) led to a self-reinforcing loop that perpetuated an affinity for the virtues of commerce. The strategic location of the Straits at the heart of the Eastern trade routes, coupled with favourable seasonal winds, were critical natural factors that encapsulated the trade-hub potential of Penang and Melaka. But it still took the inspired decision of the then administrators to build the infrastructure, establish the network and train the local population to turn Penang and Melaka into major entrepots of their time.

While the world and its modes of commerce and trade have evolved greatly over the past several hundred years, the Straits of Melaka has sustained its position as a preeminent trade route.  Today, Malaysia is the gateway to the 630 million consumers of the ASEAN region – collectively the world’s sixth largest economy at over US$2.4 trillion annually.

Malaysians’ commercial sensibility is a key underlying factor in the growth of Malaysia’s digital economy. Entrepreneurship and understanding, producing and trading the goods markets want are deeply ingrained among Malaysians. As Datuk Yasmin observed, “we are traders – locally, nationally, and internationally, giving the various programs undertaken by MDEC and others access to a deep talent pool that is readily adapting to the possibilities and opportunities of digital.”

This dimension of our culture also affords Malaysia the ability to have a highly inclusive agenda for building its digital economy, one that touches a large proportion of our people, extending their outlook and what they already know into exciting new digital endeavors. Datuk Yasmin outlined the scale at which this was being undertaken: “on a national level, we are doing things to expose our entrepreneurially-inclined population to digital entrepreneurship.  Digital marketing and digital e-commerce instruction is now a formal curriculum in our vocational schools.  We will have over 400,000 vocational school graduates each year who have had in-depth exposure to digital marketing and e-commerce.” This program is now being expanded to the university level.

After only two years, the transformative impact has been phenomenal.  We already see cases of successful young e-commerce entrepreneurs going from renting a small house to being to buy a house for their family, and then having sufficient demand for their product to warrant moving production from their backyard into a brand-new factory. International expansion of the markets where these small and medium-sized enterprises (SME’s) do business is the next step, and one, given our trading culture and heritage, that is coming naturally, and now more easily, leveraging the partnership between Alibaba and the Malaysian government and the capabilities of Malaysia’s recently launched Digital Free Trade Zone.

Datuk Dan E Khoo is the President of MDEC Americas Inc; a Silicon Valley organization established to drive the global expansion of Malaysia’s digital economy.