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June, 2000
Introduction
Hong Kong's burgeoning Internet industry has generated tremendous interest among investors and local companies in the past eighteen months. However, amidst the excitement, people are bewildered by how companies incurring persisting financial losses could justify their escalating stock prices. What are the ingredients of Internet business model that make it successful? More specifically, if Internet business will define the new economy, does Hong Kong have the necessary skills to prosper?
We suggest that the role of an information intermediary holds the key to Internet success. Through customer empowerment and business collaboration, these processes could create enormous value for Internet business. Companies that are successful in this direction could replace and reform many existing intermediary services. Hong Kong faces limitations of its small domestic market and buyers' reluctance to spend on the Internet. However, the Territory's long valued middleman role and dynamic business community are its biggest assets to overcome these constraints. This leads us to believe that Internet development in Hong Kong has a bright future.
Internet Business Model
The Internet allows users to communicate with the rest of the world instantly. Buyers can obtain information, make purchases or send messages to anywhere around the world. Despite the powerful connectivity, the ocean of information available on the Internet is difficult for buyers to navigate and locate specific information. A new type of middleman to coach buyers in the Internet world is needed. This includes sorting through the vast number of suppliers and information sources. Thus, this entails a new economic role of an information intermediary or commonly calls infomediary. The role of an infomediary is to: 1) empower buyers with more bargaining power, and sellers with complete information on buyers; and 2) collaborate with buyers and then sellers to create a new order for the whole industry.
Customer Empowerment
The infomediary is able to empower buyers with information from which they could experience significant increase in bargaining power. This includes price and product comparisons, market trends update, and other market information. These are facts that customers want to know but suppliers have little interest to provide. The function of infomediary is to shift power from sellers to buyers. It can also provide other value-added services, such as personal web page. Through this process, customers will be gradually convinced that it is the vested interest of infomediary to give them more choices, better prices and more efficient services.
Secondly, in the Internet world, every action by customers can be recorded and analyzed. Frequent use of infomediary services leaves traces of information describing changing consumer behavior. Through the analysis of customer feedback, the infomediary will better understand buyers' needs and preferences. The infomediary can make this information available to sellers, helping them to better anticipate consumer demand and explore buyers' interest.
Business Collaboration
As the number of buyers and sellers using the infomediary services reach a critical mass, it will enter the second phase - business collaboration. The function of this stage is to create a new order in the existing business relations, which is characterized by changes of buyers' purchasing behavior.
Under the customer empowering process, individual information power is significantly enhanced. The existing patterns of buyer-and-seller relationships are no longer efficient. Many current commercial relationships will have to be broken down and reorganized in a new way to optimize economic benefits. However, the vested interest of the old commercial ties could hinder the changing process. The responsibility to push through the reform and to build the new business relationships falls to the 'third party' - infomediary.
Buyers' growing trust puts the infomediary in a position to introduce a new and more efficient business model. The ideals of this process are that the infomediary may provide an one-stop web page, centralizing all crucial steps concerning buyers. Taking business-to-business (B2B) companies for example, their web sites should contain descriptions of suppliers' information, product details, price comparisons as well as providing links to suppliers and other information sources. This will be the platform where managers can make, check or change buying orders around the clock, saving a lot of tedious communication work through telephone and facsimile. In some cases, suppliers can even access buyers' inventory databases to provide just-in-time deliveries.
Buyers' gradual adoption to the new methods will provide the infomediary with ammunition to influence sellers to fit into the new business model. Small and more efficient sellers are usually the first to welcome such change, as it helps them to lower operational cost through more outsourcing and bypassing unnecessary intermediate steps. It also allows them to reach wider customer spectrum. Their increase in competitiveness will force less efficient sellers to join in. As the reform process gains momentum, resistance from companies of the old business model will become futile.
In reality, not all business collaborations will lead to complete industry reorganizations. However, even partial reform will be of significant help to buyers. The ability of bringing buyers and sellers together to reorganize an industry elevates the roles of infomediary from a mere information provider to a market innovator and a business collaborator. Such collaboration produces enormous economic benefits to all industries.
Companies that are very successful in this direction are not necessary Internet middleman companies. Some are vendors, such as Internet bookstore Amazon, while others are traditional companies like Dell Computer that have been successfully transformed. But they all excel in their infomediary roles through reforming the business practices in their industries, providing customers with the best prices and services in the market.
Limitations and Comparative Advantages of Hong Kong in Internet Development
Limitations
Using the customer empowerment - business collaboration model, we can examine Hong Kong's potential for developing Internet business. Basically, Hong Kong faces two major limitations in Internet development. Firstly, Hong Kong has a small domestic market. The benefit of Internet empowerment is directly proportional to the size of the market. A large market represents a sizable potential customer base and makes investment more worthwhile. Also, a large market allows more delicate segments to cater specific customer demand. Hong Kong has a population of close to seven million. The small economies of scale limits the economic benefits unlocked by the empowering process. Many Internet business models that are performed well in large markets may not be successful in Hong Kong.
Furthermore, the small population hinders restructuring of industries in the domestic market. The major effect of business collaboration is to reorganize the operation of industries. This involves influencing sellers to change and to fit into the new business networks. The number of sellers in the market must be big enough in order to gather sufficient momentum. Otherwise, vested interests in the existing business networks can easily fend off collaboration attempts. Although Hong Kong has a free market system, its small population size is unable to generate sufficient competition among sellers. This may reduce the chance of successful collaboration.
Secondly, the reservation of general public to financial transactions on the Internet poses restriction on the development. The business collaboration process requires changes in buyers' purchasing behavior. The more radical the change the deeper the collaboration progress will become. The reluctance of some consumers in Hong Kong to spend on the Internet would become an obstacle to the collaborating efforts. For instance, the infomediary could not gain understanding of buyers' spending patterns if they do not make purchases on the Internet, the best evidence of buyers' support to the new model.
With improving technology to address the issue of security, buyers will eventually adopt the new purchasing methods. But this is unlikely to occur in the short-term. In the meantime, the development of business-to-consumer (B2C) businesses will be mostly affected. On the other hand, limitation of a small domestic market will continue to be a problem. Hong Kong Internet industry must find ways to explore overseas markets if it wants to become the major thrust of the Hong Kong economy in the future.
Comparative Advantages
Despite the unfavorable factors mentioned above, we believe that Hong Kong has three major advantages in developing Internet business. Firstly, Hong Kong has a dynamic business community. In business collaboration process, Internet business has to lure both buyers and sellers to participate in the new business networks. This requires a thorough understanding of the buyers' needs, and an effective strategy to motivate changes of sellers. Furthermore, it has to overcome resistance of the existing commercial ties, such as dominant sellers in the market, and to fend off challenges from Internet business rivals. Indeed, this is not an easy business. It requires an Internet business that is efficient, with a swift moving management style, accustoms to competition and willing to take risk. Hong Kong's business environment possesses these qualities. The latest ventures of many property companies on Internet businesses, and the numerous merger and acquisition deals involving Internet companies offer solid evidences of Hong Kong's advantage.
Secondly, despite Hong Kong's small domestic market, it has a vast market in the north. Hong Kong is the largest external investors in the Mainland, accounting for half of its HK$2,207 billion foreign direct investment. Investments are spread over manufacturing, tourism, real estate and infrastructure. In the Guangdong area alone, Hong Kong companies are estimated to hire about five million people. Meanwhile, Hong Kong is the major service center for the Mainland, providing transportation, banking, insurance and other business services. This commercial relationship could become a sizable platform for Internet companies to build their businesses. Also, these operations are linked closely to the local economies in China. They are the natural stepping-stones for Internet business to explore the Mainland markets.
The extensive business connections and in-depth understanding of local industries are crucial to the development of B2B e-commerce in the Mainland. Given the importance of personal relationship in Chinese business culture and the lower rate of Internet penetration in the Mainland, it will be more efficient for industry participants to initiate business collaboration in the Internet. In this connection, Hong Kong will still have an edge in developing e-commerce business in the Mainland.
Thirdly, Hong Kong's robust financial markets will strengthen the lifeline of Internet business. Internet business that does not have an effective customer empowerment - business collaboration model will not go very far. Even companies with right business models could go bust if they make wrong moves along the way. The higher risk makes it difficult for Internet business to get bank financing. However, Hong Kong stock investors and cash rich companies have strong appetite for 'high risk, high return' shares, as well as the interest to invest in the Mainland. These are crucial channels for financing Internet business. This makes Hong Kong to be a hub for developing Internet business for the Mainland market. This is consistent to Hong Kong's traditional role as the gateway of China.
As a result, we believe that Hong Kong has a comparative advantage in developing B2B Internet business in the Chinese market. The huge size of the Chinese market will be the answer to the limitation of Hong Kong's small domestic market. Compared to B2C business, B2B business has more room for business collaboration. This direction will provide plenty business opportunities for Hong Kong's Internet development.
Conclusion
In the new economy, the role of business middleman will remain but its functions and skills have changed. Traditional intermediary business optimizes profit through withholding business information. The rise of the Internet provides an efficient channel to collect and distribute this information. New intermediary business generates profits through helping buyers to overcome information barriers and adding value to it. Since every intermediary service on the Internet can be utilized by millions with little marginal cost, competition will not only be focused on pricing, but also on service sophistication and innovation. Users expect not only to have their needs fulfilled efficiently, but in an eye-opening fashion.
Theoretically, infomediary that offers better customer empowerment and accomplishes deeper business collaboration not only could replace the old economy companies, but also could eliminate its Internet competitors. The prospect of 'winner takes all' explains the surge of global Internet stock prices despite continuing financial losses. However, in reality, the rosy prospect is far from a sure thing. It takes time to prove whether an infomediary business model is a sound one, and there are endless challenges from rivals providing the same if not better services. Also, under such a competitive environment, there is question whether the infomediary can earn a lucrative profit without losing its market share. One suggestion is to create an innovative service with deep business collaboration that can generate customers' dependency. However, it will take time before the final verdict to come out. This explains the big fluctuations of Internet stock prices. We believe that each market will have its unique path, depending on the industry's characteristics and the infomediary's strategy.
If the Internet is to upgrade and not to eliminate the middleman role, we believe that Hong Kong has good potential for becoming the Internet hub in the region. The risk-taking, dynamic business community of Hong Kong, the vast market potential in the Mainland and our extensive experience in the market are among our advantages. However, entrepreneurs as well as investors must first abandon the shortsighted speculation approach, and learn to build Internet business that will add true value. Such transformation of the middleman role from physical world to cyberspace will be the next phase of Hong Kong's economic restructuring.
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