Software: the new frontier for Asian economies

02 March 2016

In an era where software has become the primary force in technology, new entrants to the sector are finding it increasingly difficult to compete in a market dominated by a relatively small number of companies.

This, says Macquarie Securities Head of Regional Technology Research Damian Thong, is the conundrum Asian economies face in the next two decades.

“Whereas once upon a time you had hardware define the functionality of a machine, today the software defines the functionality,” Thong says.

“You can use your phone as a camera and as a recording device, basically software is its functionality. Once you turn everything digital you can progress to more and more functionality in software.”

Asian economies have so far had more success as producers of hardware due to the aggressive expansion of the manufacturing sector in countries such as China during the past two decades, as well as the ready supply of cheap labour.

This style of production, Thong says, "doesn't necessarily work well in software". Indeed, the past 20 years have been a lesson for Asia as the emergence of software giants such as Google, Apple and Microsoft saw the United States erode the power once held by Japan in the technology sector.

Thong says the unique economics of software – which is cheap to replicate but is labour intensive in its research and development phases – have turned it into a global “winner takes all” industry.

He cites ride-share application Uber as one example of a product where it is very difficult for smaller versions to compete.

“Asian economies will need high levels of entrepreneurship and innovation, coupled with the removal of barriers to trade to become competitive and to succeed in the sector.”

“If you expand from that, the next battlefield in Asian technology is whether Asian firms can provide viable alternatives for what seems extremely likely domination by relatively few software firms,” Thong says.

Coming years will bring opportunities for companies in areas as diverse as healthcare and diagnostic technologies and automated vehicles, he adds.

Asian economies will need high levels of entrepreneurship and innovation, coupled with the removal of barriers to trade to become competitive and to succeed in the sector.

“If software is the primary engine of value creation and it’s ‘winner takes all’, then it’s very difficult for Asian companies to replicate the success of those existing firms unless governments or entire societies change themselves to be more open and more innovative,” Thong says.

“The one obvious example is China because it’s a very closed market and we are already seeing entrepreneurship and innovation.”

At the other end of the spectrum, the rapid pace of technological advancement presents enormous challenges for developing nations.

Macquarie’s analysts highlight that the rising deployment of automation and artificial intelligence could displace manufacturing workers in third world countries before they are able to capture the wage gains from advances in productivity.

Thong says there is a risk that “premature deindustrialisation” could lead to more disparity between rich and poor nations.

“Places like India or Vietnam which haven’t reached industrialisation phase yet will never get those jobs,” he says.

“At that point, we will have to try very hard to figure out changes to the education system, to the social system, and how you deal with the increasing disparity that comes from technological advancement.”