UK: Be prepared - Imperatives for TMT Executives, 2005-2010

The first five years of the 21st century have been both arduous and productive for the global technology, media and telecommunications (TMT) industry and its CEOs. Key challenges for many TMT executives have included: difficult economic conditions, volatile relationships with the financial sector, fickle consumers, a proliferation of technologies and the general insecurity following the bursting of the dotcom bubble. At the same time, constant, but cumulatively disruptive advances in bandwidth, processing power and digital storage have helped redefine existing markets and have created new and unprecedented opportunities.

As we reach the end of 2005, the TMT industry and its leaders need to take stock, understand the available options and hone strategies for the next five years.

On the one hand the TMT industry finds itself in the driver’s seat of the global economy – exerting a level of influence that has never been so strong – and will only get stronger over the next five years.

• Technology will continue to advance at an ever-increasing rate, leading to new products and services – and even new markets.

• Media companies will continue to offer their wares on an everincreasing range of devices – giving consumers new ways to consume media whenever and wherever they choose.

• Connectivity will continue to spread, with each connection raising the value of the overall network. The world is already significantly more connected than in 2000, with nearly two billion wireless connections and over 200 million broadband connections.

However, while TMT companies will enjoy unprecedented opportunities through 2010, it is not the time for complacency: the margin for error will thin unremittingly.

Through Deloitte Touche Tohmatsu’s (DTT) work with the world’s leading TMT companies – and dedicated research – TMT practices of DTT’s member firms have identified five of the most critical issues TMT CEOs will face over the next five years.

• Making sense of China and India – as suppliers and customers. China and India are valuable sources of low-cost manufacturing and offshore services; yet their massive populations also represent enormous but complex markets. Selling effectively in China and India could drive a TMT company’s growth for years or even decades, while the wrong approach could destroy significant value.

• Capitalizing on new and improved technologies. Each technology has the potential to disrupt existing industries and markets. The challenge for CEOs is to ensure their company is on the winning side.

• Knowing who your adversaries are going to be. Despite expectations for industry upheaval in 2000, today’s TMT industry includes only a handful of new global titans. Yet expectations for radical shifts are as great as ever. Industry leaders need to distinguish between their genuine competitors and the also-rans. TMT leaders need to be especially careful to invest their growing, hard-won cash reserves, on acquisitions that add value, rather than distract.

• Innovating the business model. Value creation in the TMT industry often comes from developing new business models for creating, distributing, selling and servicing existing products and services. Offshoring, build-to-order, and pre-paid telecommunications are just a few examples of changing business models. It is up to TMT CEOs to determine when to refine their business model – and when to replace it.

• Creating the next blockbuster. A TMT company’s market value is largely driven by future expectations, not just by the current pipeline of products and services. And the cost of guessing wrong is likely to be greater than ever – thanks to rising development costs, shorter life cycles, and increased competition. TMT CEOs must understand the key ingredients that lead to successful products and services.

Each of these issues is a double-edged sword, with success or failure hinging on the insight, preparedness and actions of the CEO and the senior management team.

This report, which was originally created for Disruptions 2005, a TMT CEO conference hosted by DTT and the TMT practices of its member firms, considers the outlook for each of these critical issues over the next five years. It also provides recommendations to help TMT CEOs make the right decisions.

On behalf of DTT and the TMT practices of its member firms, I wish you great success over the next five years and beyond.

TMT companies have been very interested in – and worried about – China and India in recent years. These two countries dwarf all others as potential markets. They are also having a significant impact on the way TMT companies do business today. India is the pre-eminent supplier of the increasingly accepted¹ market for offshore services, and its recently deregulated newspaper sector is one of the fastest growing in the world. China is the dominant force in technology manufacturing for the mass market, and its mobile phone market – at over 360 million subscribers – is already larger than every population in the world except India. For these reasons and more, TMT CEOs are under tremendous pressure to define and deliver business strategies that both accommodate and capitalize on these two emerging giants.

Yet China and India also present significant challenges, both internal and external, to match their tremendous potential. China’s ability to export is under constant threat of trade sanctions, and its financial sector may need a billion dollar overhaul to improve corporate governance and risk management². India’s billion-plus population is fragmented across millions of villages and hundreds of languages, and its infrastructure remains stubbornly creaky (although the Indian government has pledged half a trillion dollars for infrastructure development over the next decade³). In both countries, continued growth will likely be limited by shortages in a growing number of resources – from oil⁴ to water⁵ – and by rising prices for everything from building materials to labor.

China and India both represent, ultimately, a glittering prize. But in order to capitalize on their vast potential, companies will need to understand and correctly interpret each country’s massive complexity and maintain a long-term outlook based on measured expectations.

Healthy growth but still developing
The economies in China and India should continue growing strongly through 2010 (see figure 1) – as will demand for TMT products and services. For example, the two countries together are expected to purchase more than 250 million PCs through 2010⁶.

China’s middle class will grow to 100 million people during the same period⁷, surpassing the population of the largest European country. India’s upper-middle class already numbers at least 62 million⁸. Despite this healthy growth, the Chinese and Indian economies in 2010 will still be under development, with GDP per capita far lower than in developed countries. Even if China’s real income were to grow by eight percent per year until 2020, the average income for its 100 million richest households will still only match the current average in western Europe⁹.

In both countries, there is also tremendous disparity between rich and poor. The World Bank estimates that 35 percent of Indians and 17 percent of Chinese currently live on less than $1 a day¹⁰. The Food and Agriculture Organization estimates that 216 million Indians are undernourished – comprising a quarter of the world’s total¹¹. China’s wealthy are concentrated in the coastal regions, while parts of western China still do not have electricity.

Infrastructure in need of repair
China and India also have significant infrastructure deficiencies. China’s financial system would benefit from a major overhaul of its corporate risk management and governance systems, at a cost of over $1.2 billion dollars¹². Energy supplies in both countries are improving, but from a situation of relative unreliability. Only recently, 61 percent of Indian and 27 percent of Chinese manufacturing firms needed to own back-up generators¹³. And in both countries, bureaucracy and corruption may remain a disincentive for some western TMT companies¹⁴. India’s legal system remains a bottleneck – with an estimated backlog of 26 million cases – implying a significant delay for multinational companies if they were to require legal action¹⁵. However this statistic also reflects India’s historically strong respect for the law.

In China, elements of its transportation and communications infrastructure will likely continue to hamper growth in the short to medium term, particularly outside the Eastern provinces’ main urban hubs. China’s current trillion-dollar investment in improving its infrastructure is focused on western China, to upgrade a wide range of infrastructure, from health care to dams.

In both countries, connectivity is concentrated in the major cities, but the growing maturity of wireless local loop solutions¹⁶ should accelerate the rate at which all populations can become connected.

China for manufacturing; India for services
China will likely consolidate its position as the world’s dominant manufacturer of TMT goods. Growing price competition combined with steadily improving quality will lead companies to become even more dependent on China for manufacturing, particularly now that consumers are no longer put off by the label ‘made in China’. Yet in spite of these continuing gains, most of China’s TMT manufacturing output in 2010 will likely still be orders from foreign companies, rather than based on Chinese designs.

India is expected to strengthen its position as the world’s leading supplier of offshore services¹⁷, leveraging its considerable supply of English speaking technology graduates to supply the growing global demand for offshoring¹⁸. Many IT services and technology companies are already mature users of offshoring, and by 2010 it is likely that all but a handful of niche companies will have an offshore presence. The TMT sector will be one of the largest users of offshore labor for a widening range of processes. Even the relatively conservative communications operators are expected to offshore more than 275,000 positions by 2008¹⁹.

Both countries’ ability to maintain their leading positions as suppliers should be helped by their growing populations. By 2010, India is projected to add 83 million workers, China 56 million, the US 13 million and the European Union, just 100,000²⁰.

Controlled capitalism in China
China will continue its transition into a market economy, but it will most likely not be complete by 2010. This may well have implications for opportunities in its TMT sector.

Media output in China is controlled to a variable degree by the State²¹ and while controls are likely to overall relax through 2010, the extent of change is not certain. China’s Ministry of Culture has recently announced tightening of controls on foreign companies importing foreign books, video games and the Internet²². However in the movie business, only distribution is controlled. There are restrictions on the degree of ownership of non-governmental newspapers by foreign companies.

Government influence over TMT markets in China includes technology standards in use. China’s intent is to be a key player in the development of global technology standards²³. In some cases this may involve companies of any nationality being encouraged to use Chinese standards when operating in the Chinese market. For example the largest tranche of 3G spectrum is being made available for 3G operators using TDS-CDMA, China’s proprietary 3G mobile standard.

The next Microsoft? Someday
Most likely, only a few Chinese or Indian TMT companies will have become the dominant player in their sector by 2010, although some may well graduate to being among the world’s largest multinationals – in any sector – in the following decade. At present, there are only two Chinese and three Indian TMT companies in the Forbes Global 2,000²⁴. And only one, China Mobile, is a market leader, ranked, by a significant margin, the world’s largest mobile operator measured by subscribers.

A Chinese or Indian TMT titan will likely emerge in one of the following ways:

• A company that currently dominates a niche retains leadership when that niche becomes a mainstream TMT sector. Chinese and Indian TMT companies to date have typically only dominated in relatively minor markets, such as online games (Shanda Networking), offshore services (Tata Consulting Services) or international bandwidth (Videsh Sanchar Nigam Limited²⁵ (VSNL)).

• A domestic champion reaches global player status further to financial and management investment from a foreign company. For example, Yahoo has recently invested $1 billion in alibaba.com, a Chinese online marketplace.

• A Chinese or Indian company purchases an established brand. Lenovo, TCL and China Netcom have all recently acquired major western brands, a trend that should continue for the next five years.

• A company with national presence acquires experienced global management through partnership or acquisition. This provides the company with the ability and confidence to expand globally. One of the biggest challenges for Chinese and Indian TMT companies over the next five years is expected to be making the leap from national to global markets. Chinese and Indian companies will increasingly look for foreign partners and talent²⁶ to help them develop an international presence.

• Mergers between domestic players, such as the recently announced fusion of Great Wall and China Electric Group, will create companies with greater scale.

• A Chinese or Indian company attains global recognition and funding through listing on a western stock exchange. This year alone, over ten Chinese companies have listed on NASDAQ, the best performance for ten years.

Bottom line
The TMT sectors in China and India will certainly blossom as markets – but that growth will be steady rather than meteoric, and it will be many decades before China or India delivers the full potential that many TMT companies are impatient to realize. A TMT CEO that is going to succeed in China and India must accept that patience and a long-term approach are likely to be a prerequisite for success. Many of the foreign enterprises enjoying success in China and India today have been doing business there for decades, and their current initial returns are the direct result of a significant long-term investment in local knowledge and understanding.

The TMT practices of DTT member firms’ key recommendations to TMT CEOs are as follows:

1. Treat China and India as key suppliers in the short-term and key markets in the long-term
Sourcing from China and India is fast becoming a competitive necessity – and for some TMT companies has been an imperative for many years. In the short-term, it allows TMT companies to reduce costs and improve margins. In the long-term, it can also provide first-hand experience of doing business in these two increasingly important markets – knowledge and understanding that will help them capitalize on the opportunities that emerge as ownership restrictions are relaxed and disposable income rises. China and India are very different from western markets, and traditional assumptions and business practices often do not apply. A local presence provides an active listening post that makes it easier to assess threats and identify opportunities – and to separate fact from fiction.

Although the best opportunities may take years to materialize, TMT companies must start investing now to build a foundation for future growth. As investment in China and India will take a long time to generate its full return, the CEO must spearhead the initiative, potentially as a legacy for his or her successors. It must also receive the investment and management attention it requires today to deliver on its potential tomorrow.

2. Avoid the fallacy of ‘one size fits all’
TMT companies must recognize that China and India are diverse, heterogeneous markets. Although the two countries are often discussed in tandem, they are in fact very different on a number of key dimensions: language, culture, literacy, consumer behavior, access to technology, attitudes towards intellectual property, buying preferences and, most importantly, purchasing power.

It would be unwise to address these two unique markets with a single sales approach: indeed a plural sales strategy, with different approaches for each of the main type of market, is more appropriate. Within both China and India, there is tremendous difference between the various market segments. For example, a mobile phone with a prestigious global brand may be very appealing to China or India’s wealthy urban population, yet may have little appeal – or simply be unaffordable – to the rural majority. The latter segment is generally far more interested in utility than prestige. TMT companies should also identify which markets are already saturated and which are up and coming. For example, thus far few multinationals have targeted China’s second tier cities and non-coastal regions.

TMT CEOs must follow the lead of those in other sectors such as consumer goods, who have learned the hard way how important it is to tailor their offerings to different segments and income levels. Now is the time to take advice, to listen and to learn.

3. Prepare for the emerging middle classes
India has a growing middle class whose disposable income is rising steadily. So does China, although this is currently smaller. These emerging segments represent a lucrative market for products and services. However, they will probably not be as accessible as their western equivalents. To capitalize on this new class of consumers, TMT companies will need new strategies, new routes to market, and adjusted business models. Simply replicating formulas that work in the west will not be good enough.

Technology disruption is one of the single most potent threats – and opportunities – for TMT players. The Internet, wireless communications, digital broadcasting, cable distribution and other innovations have delivered both uncertainty and growth to the sector. Each new technology has the capacity to bring ruin, as well as bestow riches.

Technological advances will continue to disrupt TMT markets around the world through 2010. The never-ending march of technology will destabilize the sector in three principal ways.

• The introduction of entirely new technologies, such as broadband fixed and mobile networks, file formats, devices and media is likely to further unsettle markets that are already highly dynamic and unpredictable.

• The transformation of technologies from niche to mainstream. Over the next five years, it is likely that technologies such as broadband, Global Positioning System (GPS) and Radio Frequency Identification (RFID) will undergo steady – and cumulatively steep – rises in adoption, with a significantly destabilizing impact.

• The reinvention of existing technologies. Successful technologies are unlikely to ever stand still: they are under constant evolution (see Figure 2). For example, the functionality and capability of call centers is currently being enhanced by the growing maturity of Voice over Internet Protocol (VoIP). Corporate email systems are increasingly featuring a cellular mobile capability.

These three forms of technology disruption should create vast opportunities for value creation – or value destruction. TMT CEOs must therefore ensure that their companies have appropriate strategies and capabilities not only to capitalize on new technologies, but also to profit from existing technologies to the full.

Rising research and development (R&D) will fuel technological disruption
Spending on the development of new technologies is expected to continue to increase steadily over the next five years. Both governments and corporations²⁷ will likely commit increasingly large sums of money to the science, research and development (R&D) that provides the raw material for much of the TMT sector.

Austria is aiming for R&D to represent 2.5 percent of GDP by 2006, Germany 3 percent by 2010 and the UK 2.5 percent by 2014. Canada aims to be among the top five OECD countries in terms of R&D investment, and Korea has committed to doubling its investment by 2007²⁸. The trend will, of course, continue – with more countries committing ever-greater sums towards R&D, as each nation seeks to earn its place at the table of the global knowledge economy.

TMT businesses will follow suit – not only by increasing spending on R&D, but also by forging stronger links with governments and the academic institutions who conduct the majority of government funded research. Indeed, it is likely that corporate sponsorship of university labs will increase way beyond 2010. Intel, among others, has already founded mini labs at a number of leading research institutes²⁹, in order to capitalize on the concentration of intellect and multidisciplinary nature of academic research institutes. Sited on university campuses, such corporate-funded labs will become an increasingly important part of the broader TMT research environment. And the more investment devoted to new technology development, the greater the chances of truly disruptive technologies being identified and commercialized.

For TMT CEOs, therefore, one of the key issues arising from these shifts will be the level of management attention given to the development of new technologies, the anticipation of competitors’ technology activities, and the overall route map for technology deployment within the TMT sector. TMT leaders should also be wary, however, of confusing gross spend on R&D with results: R&D must lead to profitable products, otherwise it could end up becoming an expensive hobby³⁰.

It will become increasingly important for CEOs to have not only a comprehensive grasp of technology developments – disruptive or otherwise – but also, a firm view on which technologies, if any, to back.

Many new technologies will fail
If recent history is any guide, the majority of ultimately disruptive technologies fail – at least first time round. When disruptive technologies first appear, they almost always offer lower performance in terms of the attributes that mainstream customers care about³¹. This is largely because disruptive innovation is discontinuous – and by implication has a much greater inherent risk of failure than the incremental innovation that typically characterizes core TMT markets.

It is likely that the number of potentially disruptive technologies launched into the TMT arena will grow in absolute terms. Greater R&D, more intense, global competition, fragmenting markets and more sophisticated consumers will all serve to swell the number of new technologies that make it to commercial launch.

But proportionately fewer potential disruptors will ever see longerterm success.

There are several reasons for this. First of all, disruptive innovation will tend to become more and more dislocated from the needs of customers. The hype surrounding technology disruption will push companies to innovate at breakneck speed – often pushing technology to its limits, but too often at the expense of losing sight of customer need.

Innovation for the sake of innovation has plagued the consumer electronics industry for decades – but the practice may well spread across the TMT space – affecting not only consumer products and services, but also the broader, and indeed deeper, technology choices that TMT players have to make regarding infrastructure and technology standards, as illustrated in Figure 3.

The winners, therefore, will likely be those TMT companies that both not only anticipate technology disruption, and, to an increasing degree, control it. It has long been known that much of the disruptive power of a new technology derives from an entirely indirect source – the competitive response to it³².

Winners in technology disruption will probably be the TMT companies that are able to avoid being repeatedly drawn into pointless tussles with companies promoting dead-end disruptors, and focus their efforts instead on backing technologies that are capable of delivering long-term value growth.

Established technologies can be the most disruptive
There is an additional reason for TMT companies to resist disruption – over the next five years, some of the most profound technology disruptions will likely result from incremental improvements to existing technologies, or from increasing adoption of existing technologies – as opposed to entirely new, disruptive innovations.

Incremental advances in processing power, digital storage, bandwidth availability, miniaturization and nanotechnology, digital displays, battery power, encryption and other technologies are likely to deliver significant value and revenue through 2010. Such incremental changes will build on existing experience and expertise, reflect customer behavior’s ability to change only slowly, and deliver appreciable, understandable benefits – often in a sequential, logical fashion.

The portable games console is a good example. Incremental improvements in processor speed, battery performance, screen technology and digital storage have enabled the commercial launch of a new generation of portable games consoles. These new devices have driven much of the 180 percent growth in US electronic games hardware sales in the last 12 months³³.

Technological advances alone may not lead to revenue growth
Over the next five years, many other existing technologies are expected to undergo steady, sustained improvement across a range of parameters, from performance to cost. But these improvements may not always produce a corresponding growth in revenues.

Consider the broadband access market. In five years’ time, Fiber to the Home (FTTH) technology will have been deployed by many telecom operators in many countries as a replacement for existing ADSL and cable provision. Indeed, in South Korea, Sweden, Japan, and Italy, strong residential FTTH deployments are already underway, thanks to the encouragement of the telecommunications ministries in those countries³⁴ – and these are expected to extend to many millions of households by 2010.

Yet there is evidence that consumers and enterprise customers are not placing much value solely on bandwidth – indeed, research has shown an average 25 percent fall in broadband prices across Europe in the last 12 months alone³⁵. So although FTTH delivers a quantum leap in terms of bandwidth and speed of connection, there is little reason to believe that customers will be prepared to pay a premium for it. But the cost of deploying FTTH is more than five times the cost of deploying DSL – a cost that needs to be recouped somehow.

The winners in these, and other, circumstances will likely be those TMT companies who position themselves such that they not only deliver the technology, but also the services that most clearly demonstrate its value to customers – in other words, the services (and content) that make it worth paying for.

Making the transition from old to new
It is entirely natural for TMT industries to move from one technology to the next, particularly as customers become more demanding and sophisticated, and as legacy technologies begin to show their age. Yet that transition from old to new is where trouble is most likely to arise.

Ironically, technology disruption follows a very stable and predictable cycle, as illustrated overleaf in Figure 4. Established technologies typically undergo a sustained period of growth, until the markets which they serve reach maturity (as perceived by the companies selling or operating the technology, and by the customers they serve). Once that point is reached, competitors race to find a new technology that will fuel the next period of growth. And with each repetition of the cycle, the stakes get higher.

This cycle will likely continue through 2010 and well beyond. At each transition point, the level of disruption will probably be amplified, due to an increase in the number of technology options and a higher total market value. With each transition, there may well be more at stake – more customers and more revenue to lose, more costs to absorb, and more complexity to cope with. And of course, mistakes are expected to become more costly, as successes become more lucrative.

The winners should be those companies that can understand both which technology will be successful and when this will happen. Timing will become increasingly crucial, as part of the management of transition. CEOs must know when to push the button, and more importantly, when to hold fire. It is a fine balancing act – knowing when the value of existing technology has been effectively exhausted; when competitors are likely to make their move; and when customers are ready for something new. There is, of course, no single right answer – but success will derive from a steady and well-informed hand at the helm.

Bottom line
The constant march of technology has always favored the organizations that are best prepared – and probably always will. There is rarely a role for luck. Understanding and planning are the most important ingredients. The following recommendations can help TMT CEOs minimize their risk and maximize their returns on technology innovations.

1. Constantly monitor new and existing technology
Rapid, destabilizing technological advances require careful and constant monitoring. TMT CEOs should assign a team to identify and assess new and evolving technologies – and support them with robust systems and processes.

Include representatives from all parts of the company, particularly engineering, sales and marketing, and the executive suite. The team’s primary job must be to filter out the important technologies from the also-rans. For many TMT companies, the ability to say ‘no’ to the wrong technology is even harder than saying ‘yes’ – particularly in the face of media hype and impetuous competitors.

Ultimately, the most important criterion is the value a technology creates for the end-customer. It is the CEO’s role to balance the technological advancement of the company along with the needs of the customer – to create, and sustain, value growth. The world simply does not need another Internet refrigerator or networkenabled light-switch.

2. Focus on the transition
Technological advances do not transform the world overnight. They happen over a finite period of time, moving in largely predictable stages. And in most cases, a company’s success or failure is determined by how well it predicts and manages that transition from old to new. Simply picking the right technology is not enough. Every technology shift creates value for some businesses and destroys value for others, as customers reassess their existing services and suppliers, and contemplate their options. To emerge on the winning side, CEOs must ensure that the company’s stakeholders, from its employees to its shareholders, have a clear and detailed route map – that describes the process of transition from one technology to the next, and illustrates how the transition delivers new value and benefits for customers, creates new revenue opportunities for their firm, and allows for sustainable value growth. All of which needs to happen – before, during and after adoption of the technology.

3. Make technology one part of a broader, winning strategy
Technology – disruptive or otherwise – is just one tool for attracting, retaining and growing revenue. While technology is very important, it is rarely capable of delivering value growth all on its own. It must be used selectively as part of a fully integrated approach to developing new products and services – an approach that combines technology, customer service, communications and other key functions to deliver real and lasting value.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.