Technological advancement in Asia is disrupting traditional industries and becoming an increasingly important factor in investment decisions. Rebecca Xu, Co-Founder and Managing Director at Asia Alternatives Hong Kong Advisor Limited, told SuperReturn Asia that investors could not afford to ignore the impact of technology on businesses in their portfolios.
Uneven technology uptake across Asia
The uptake of technology varies widely across Asia. With its ageing population and traditional business models, Japanese companies have been slow to innovate. But Yuji Kimura, Founder, President & CEO of Polaris Capital Group, expects this to change going forward, as the government encourages companies to make use of new technology. He added that with the technological landscape changing so rapidly, management’s capability and their understanding of technology had become a key criteria when making investment decisions.
By contrast, Korea is the world leader in terms of the contribution internet-related activity makes to GDP. Sanggyun Ahn, Managing Partner at Anchor Equity Partners, explained that young Koreans have embraced technology, with e-commerce now accounting for 20% of all retail sales. He said it was important to focus on the younger generation, their behaviour patterns and how they bought things when thinking about where to invest.
China is also a rapid adopter of technology, with the highest level of internet users and online sales in the world. Stuart Schonberger, Founding Partner of CDH Investments, explained that CDH had stopped investing in bricks and mortar retail businesses five years ago due to the challenge posed by e-commerce. But he said: “China is different to the rest of the world in its reaction to the e-commerce threat, in the sense that the offline businesses are in the best position to react to it.” He explained that many companies were less than 30 years old and had young management that was quick to adopt the new technology. “Our view is that we can invest in bricks and mortar retailers, help existing management bolt on e-commerce technology and be a winner in the future,” he said.
Sanjay Kukreja, Partner at ChrysCapital Advisors LLP, said India was currently undergoing radical change driven by government policy which was encouraging the take up of technology. He explained that the government was pushing a financial inclusion package which has seen 3 million people open bank accounts for the first time. This had been coupled with the introduction of a national biometric identity scheme, under which 1.2 billion people have been given unique digital identities by the government. He explained that the technology the scheme was built on was open source and open stack. It was scalable and private companies can build on it. As a result, the system was driving down the cost of digital payments. He said India had also seen a rapid rise in smartphone penetration.
Which sectors should investors be careful in approaching?
Given the growing threat to traditional industries from technology, Xu asked the panellists which companies they would avoid investing in because they feared disruption. Kukreja said he avoided sectors where government regulation played a big role. He explained that his company had invested in the fourth largest telecom provider in India, but five years later the government had issued more licences and the company’s market share came crashing down. He added that while financial services were still a long way from being disrupted, investors still needed to think about how they would respond to disruption in the sector.
But Schonberger takes the opposite approach, believing that if you invest in traditional industries in China, growth is not fast enough without new drivers, such as disruption or technological change. Instead, he thinks the manager of a business can be the deciding factor in whether or not to invest, pointing out that if a manager is not willing to adapt or change there is nothing you can do about it.
Ahn agreed about the importance of finding management that was willing to embrace technology. He gave the example of a mushroom farm Anchor had invested in where they had worked with management to apply technology to a very traditional business to help contain price fluctuations in the market. They did this by analysing historical data on temperature and humidity and using the information to regulate their supply into the market, which, as one of the largest mushroom providers, helped to stabilise prices.
Adoption of technology amongst PE?
Despite the emphasis the panellists put on the use of technology among the companies they invested in, many of them were not making use of it themselves. Schonberger conceded: “we are not a cutting-edge technology shop, it is still pretty labour intensive and people-based.”
Kukreja said his firm had recently set up a digital group to research new technology and see how it could impact the companies in which it was investing, but it was not using technology itself. Kimura said his firm was considering using an artificial intelligence interface for investors, but it had not done so yet.
Only Ahn’s firm was making extensive use of technology, with the aim of trying to make information more highly available to staff.
Xu concluded the session with a precautionary note to private equity crowd: “we are a traditional industry, so beware of disruptive technology.”