[Book review] How Asia Works. Success and Failure in the world’s most dynamic region, by Joe Studwell

I’ve just finished “How Asia Works – Success and allure in the world’s most dynamic region” (Amazon) by Joe Studwell, a book I found in the yearly recommendation from The Economist. Overall, it is a compelling comparative economic history of countries in North-East Asia (China, Japan, South Korea, Taiwan) and South-East Asia (Malaysia, Indonesia, Philippines, Thailand), with a few additional comments on Singapore and Hong-Kong.

How Asia Works Joe Studwell economic policy development china south korea taiwan japan philippines indonesia thailand malaysia singapore hong kong agriculture manufacturing finance economic warfare martin pasquier 1

The main thesis of the author is the following one. North-East Asian countries all followed a similar “one, two, three” pattern of development which can be summarised in developing agriculture through land reform, promoting manufacturing and exports, and keeping finance aligned with national interest through carrots and sticks. Far from your usual pro-deregulation soup, it really shows how states and governments can play a major role into turning a developing country into industrial powerhouses.

 

How Asia Works key #1: a land reform to redistribute opportunities and give jobs

First, a land reform maximises output from agriculture, while giving more jobs for the majority of people in these then poor countries. Increase in yields and a more even redistribution of wealth create surpluses for the whole country.

In emerging markets where agriculture employs up to 75% of the workforce, it is key to break the concentration of ownership and divide the land on an equal basis, making all new smaller landowners incentivized to increase yields. In Taiwan, says the author, “the transfer of wealth involved in the land reform was equivalent to 13% of the GDP passing from one group of people to another”. The land reform, a bold move from politicians who need to cut their links with landlords, usually a source of their support and income, must go with help on the infrastructure and marketing side as well.

How Asia Works Joe Studwell economic policy development china south korea taiwan japan philippines indonesia thailand malaysia singapore hong kong agriculture manufacturing finance economic warfare martin pasquier 3

Land reform is also key to long-term political stability, as rural poverty is a primary of instability, separatism and terrorism. An even redistribution of land creates equal opportunities and increases the level of social mobility. Overall, a good land reform will make the state richer (more export of crops = more money to buy the early technologies for manufacturing) and increase the spending power of individuals. Land is probably the economic asset on which the government has the more – if not all – control. So it’s up to a government, and only to a government, to decide to run this reform.

Joe Studwell concludes this first chapter of How Asia Works with a severe comment: “In short, land policy tells you how much the leaders know and care about their populations”.

 

How Asia Works key #2: promoting the export discipline within the manufacturing industry

Two, a national economic policy direct public investment and entrepreneurs towards manufacturing. This provides an exit for the best agricultural workers of the first stage.

Let’s define how it works with the author: “In manufacturing, a small number of entrepreneurs can, with machines, have an outsized impact on economic development by focusing on mechanised production”. The productivity gains of manufacturing make this scaling up possible, and the export of the production is the best way to get foreign currencies, which, in turn, help countries to acquire talent and new technologies. And the best: it doesn’t cost a lot as labour in a developing country (the farmers we talked about just above) is still cheap.

How Asia Works Joe Studwell economic policy development china south korea taiwan japan philippines indonesia thailand malaysia singapore hong kong agriculture manufacturing finance economic warfare martin pasquier 4

 

 

But manufacturing alone isn’t a guarantee of success, says Joe Studwell in How Asia Works. A country must be able to determine and enforce a strong “export discipline”, a key concept of this book. The argument is the following: if a country gives subsidies and help for the manufacturing industry without conditioning it to exports, the result is “rent seeking entrepreneurs”, who “will concentrate their efforts in obtaining subsidies […] without delivering the technological progress”. It means that governments must proceed to a selection of companies to incentivize them to export. For instance, in South Korea, most of the top 10 conglomerates (called chaebol) of the 1960s disappeared to give place to a new generation in the 1970s, and again a new one in the 1980s.

Bureaucratic support is another feature governments must have through administrations able to detect and buy foreign tech and talent. During all this period of development of a manufacturing, export-focused development, the economy must be seen as “an infant” and protected at all prices. Early deregulation and openness will only expose them to too strong competition or appetite from foreign countries. As a result, for instance, exports accounted for 9% of Taiwan’s GDP in 1952, and 50% in 1979. But as you can see, it takes time. South Korea recorded its first trade surplus in 1977 only, and got a consistent one only starting in the late 1980s.

Protecting “infant industries” and nurturing them with subsidies & grants, forcing them to export and culling the bad apples is an intense work which takes decades.

 

How Asia Works key #3: keeping finance on the short leash and aligned with national, long-term industrial interest

Three, finance is kept “on a short leash”, at least at the beginning, to counter the short-term propension of any investor, and align them with long-term, government-defined goals. “In other words, financial policy frequently accepted low near-term returns on industrial investments to build industries capable of producing higher returns in the future”.

Of course, to do so, the government must be able to direct and control finance, either via the central banks, or by limitation of ownership. In postware Japan, for instance, owners could not have more than 1% of a given bank, fragmenting the decision making, and making it easier for the MITI to direct investments.

How Asia Works Joe Studwell economic policy development china south korea taiwan japan philippines indonesia thailand malaysia singapore hong kong agriculture manufacturing finance economic warfare martin pasquier 5

Central Banks, on their side, is often using rediscounting policies. It helps banks to (almost) get paid to lend money to specific, government-decided industries, such as steel manufacturing, shipbuilding, or high-tech electronics. Again, these rediscounted loans were both targeted to specific industries and conditioned on exports, so that no entrepreneur could get an easy rent out of them. In South Korea, in 1983, says Joe Studwell, “the three biggest groups, Hyundai, Samsung, and Daewoo, were each consuming 10% of credit [available in the country]”.

Comparatively, South-East Asian countries did rediscount loans to unproductive industries (such as real estate), creating bubbles, bad debt, and no output or export to make cash come back. Money and “free money” must be directed to productive investment. In an incredible paragraph of How Asia Works, the author shows that the stock exchange of Kuala Lumpur some days exceeded the New York Stock Exchange, as a lot of money from the government wound up there (for short term gains) as it was not directed to long-term, industrial investments.

 

From economics to political power: how Asian countries fare in 2014?

As a former student of the Ecole de Guerre Economique in Paris, where we learn to read the world through the eyes of the economic interest (and warfare) of nations, this book is a perfect case study of why deregulated capitalism can not work to develop a strong economy. Joe Studwell stresses that deregulation is indeed the ultimate weapon of winning economies.

If you have pulled out your population from poverty through agriculture, created a strong manufacturing economy in a few decades, and kept finance aligned with your national interest, then, and only then, does it make sense to push for deregulation, especially deregulation of other countries where your companies would then have more probability to dominate the local market.

South China sea territorial dispute how asia works joe studwell martin pasquier china south east asia philippines malaysia indonesia vietnam china

The books also shows a sad and wide gap between an industrious and talented North-East Asia and a disorganised, corrupt and unmanageable South-East Asia.

  • In the North, enlightened dictators or leaders (General Park Chung Hee in South Korea, Deng Xiaoping in China, the MITI in Japan) had enough willpower to learn from the West (Prussia/Germany, UK, USA), while keeping an iron hand at home to direct the economic development. Teams of Japanese, Chinese or Korean top civil servants were often visiting and learning from the top Western government and industrial clusters. They also resisted a lot to the pressures of the World Bank and the IMF that were willing them to deregulate and open their economies.
  • In South-East Asia, the stories and analysis of “How Asia Works” in the Philippines is a collection of what corrupt and incompetent leaders do worst, from cronyism to intimidation and an evident lack of will to develop a strong economy. In Indonesia, the sheer size of the territory and the local “culture” of corruption and weak decision-making make it almost impossible to direct and lead anything. In Malaysia, again, the national preference (the nice word to talk of a legalised form of racism and segregation) for the local and dominant race called bumiputera create “rentrepreneurs” rather than enlightened ones, and push a circle of civil servants chosen on their race rather than on their skills to run the industrial complex.

This is truly terrible because anyone can see the results today, in 2014, of this growing gap between the two parts of East Asia: the North is eating the South, economically, politically.

  • On one side, China can expand aggressively in surrounding countries, buying large shares of these countries (a recent investment is from e-commerce giant Alibaba into Singapore’s Singpost), or just the ressources. They have also launched a campaign of intimidation in all the countries of the South China see, with warships, “fishing boats” and oil rigs to test and try the resistance Vietnam, Malaysia, Philippines and Indonesia can oppose (hint: not any). Products from South Korea are now flooding most markets, with items ranging from domestic appliances (Daewoo), cars (Hyundai) and of course, a big part of our electronic gadgetry (Samsung).
  • On the other side, Philippines remains an economical joke and a gigantic slum, with a huge diaspora of workers and maids providing the lowest skilled and paid jobs for the rest of Asia and beyond. They also need to submit completely to the US to get a decent – though dwarf – defence. Indonesia, despite a growing middle-class (of about 1.5m more each year), remains a land of inequality, over-dependent to the Chinese economy, where no business can be done without kickbacks, and where the capital city Jakarta is a showcase of unfinished infrastructure (you can see many high pillars for MRT or highways that obviously didn’t get enough kickbacks to get finished, some for more than 15 years). Malaysia is another under-performing country where the national preference for bumiputera makes other races (Chinese, Indian) look for better opportunities elsewhere in the world, and showing strong signs of consanguinity with all the defaults it involves. The missing MH 370 flight crisis showed clearly the blatant incompetence of both the government, the army, and the decision-making processes. And, I’m more than happy than Joe Studwell mentions the “futuristic and widely ridiculed Multimedia Super Corridor and Cyberjaya investment park projects around Kuala Lumpur”, as we showed in our startup report for Malaysia it was clearly a white elephant with barely any results.

At a political level, How Asia Works is a clear advocate of a strong, directed economic policy for emerging markets, at least to optimise the agriculture, turn part of the workforce into manufacturers and then develop an efficient financial system to make it work for the long-run. Countries in this region – and a few comparisons with Africa and Latin America make it clear – can’t hope to develop any strength or economic independence by following the western model, especially now that in Europe and in the US, the trend toward even more deregulation is so strong. Emerging markets need, just like the West need a few decades ago, to protect the industries they want to develop. And to hold the direction for decades.

How Asia Works Joe Studwell economic policy development china south korea taiwan japan philippines indonesia thailand malaysia singapore hong kong agriculture manufacturing finance economic warfare martin pasquier 5

In a nutshell, How Asia Works is a detailed history of how countries in an extremely populous and dynamic place of the world are competing for economic power. The details, depth in historical research, and even road-trips Joe Studwell takes to have a local view of the topic, makes it a brilliant story. It really helps to give a broader view of a big chunk of the world and how the last few decades can explain what is happening now.

 

 

 

Book review: “The everything store: Jeff Bezos and the Age of Amazon”

I’ve just finished “The Everything Store: Jeff Bezos and the Age of Amazon” and wanted to share a few thoughts about this amazing book. A bit like Steve Jobs’s biography, you feel like walking alongside Amazon’s founder and get to know more how he works.

the-everything-store amazon history jeff bezos martin pasquier

Actually, the whole substance of the book is summarized right from the beginning by this quote from Jeff Bezos himself: “We are genuinely customer-centric, we are genuinely long-term oriented and we genuinely like to invent”. The next 300 hundred pages just make this statement reality:

  • Amazon is a frugal company, with no perks ever for employees, no seats in business class, no free parking, not even other desks than the notorious “door desks”. When Amazon begin its growth, the pression is higher for providers and suppliers, but all, ALL is given back to the customer with the concept – taken from Walmart – of “everyday low prices”. Amazon didn’t know any profit for quite a umber of years, but instead, their market power has been only increasing.

 

  • Jeff Bezos thinks on a scale of decades, not years, and not even months or weeks. Thanks a few investments (early investor in Google) and a majority stake in Amazon, he’s able to overturn a quite conservative board. He puts money for long developments (3y+ for the Kindle, for instance), tries a lot of things, and goes through both the dotcom burst and the financial crisis of the late 2000s with pain, but consistence.

 

  • Last but not least, it’s crazy to see at which point Bezos himself is challenging everything, from top executives to customer service or potential partners, investors. Nothing is taken for granted, all is open to debate, and with a character not far from Steve Jobs’, innovation is permanent, with highly risked bets, such as opening new categories on Amazon (toys, music, apparel…) to Amazon Web Services, the Kindle, and, who knows, grocery, hardware and other stunts.

 

the-everything-store amazon history jeff bezos martin pasquier amazon stock price since beginning

 

The book also shows

  • how e-commerce is redefining retail, notably through data and the possibility of a personalized relationship with each customer or visitor (customized suggestions from the algorithm based on what you bought, searched, liked)

 

  • why platform strategies work so well with technology companies. Once they have built an infrastructure, they can leverage it by allowing other parties to use it… at a price (30% cut on Apple Store, pressure on prices and competition on Amazon, etc)

 

  • how Amazon strategically played in the low-margin field, asserting that companies which aims high margins such as Apple attracts too much attention from competitors (Samsung in the case of smartphones). Low-margins with huge market size makes pressures and negotiations more easy for Amazon. Big players like Google, IBM or Apple would think twice to compete against Amazon from their high-margin point of view.

 

  • the way communication is completely associated with a  malfunction of the organization. For Amazon, the ideal are a collection of creative, autonomous teams (known as “two pizza teams” because two pizzas are enough to feed them for an all-nighter), which work closely on a topic. When communication is needed, it just adds layers of management and makes decision and innovation less likely. The counter-example is of course Microsoft and its army of managers.

 

  • the power of the crowds, when Amazon puts reviews online for every seller of each product, and it disrupts the old “gatekeepers”, in particular in the book industry. Until then, editors had a high hand on what would be published, price-wise as well as content-wise. Amazon changes it all and reviews are a key part of the sale potential for each object.

 

I highly recommand reading this book, and would also recommend making a combo with Steve Jobs biography to be able to compare how these two great minds just don’t give a sh*t about what other people think and how their stubborness is one factor which make their companies successful.

 

A demo day in Nairobi, Kenya: local innovation rules

During the Afrikoin conference in Nairobi, we were lucky to attend the Demo Day of the Savannah Fund, a Kenya-based VC betting on startups all over Africa.

Because sometimes (even for me!), a picture is worth thousands words, I’ll just leave you browse this Slideshare. Startups are all working on local behaviors (gifting from the diaspora, gap of information in the forex market, distribution of aid vouchers, strong need for mobile e-commerce platforms).

Seeing pitches in different country, I was also struck by the professionalism of the teams and their decks, full of stats, on the market size, but also more intimate data like their trials, roadmaps and business models.

Enjoy this piece of tech from Africa 🙂

Martin Pasquier

Singapore and “Little India Riot”: When demographics knock on the door again

Yesterday night saw Singapore having its first riots for more than 40 years, so you can imagine it’s the hot topic everybody is talking about this December 2013. Incidentally, I’m living in Little India area too, and went to bed hearing the not so common police siren, so I told myself, ok, let’s see tomorrow morning what’s happening.

singapore little india riots december 2013 martin pasquier blog

The blunt facts: a bus running over an Indian or Bengali worker at 9.30pm. Apparently no police or security forces for 30min. 400 angry men around rioting and destroying the (guilty?) bus, and, when security forces at last arrive, they burn the ambulance (which explodes) and flip a few police cars. After 2h, a few dozen of the rioters are arrested and everybody goes back to bed.

Living in Little India, let me please explain exactly how things work on Sunday nights (worth also for the other days, but with less intensity):

  • Traffic is high. Little India is crossed by at least two large roads (Serangoon eastwards, Jalan Besar westwards), all 4 lanes (or 5?), with buses, cabs, construction trucks.

 

  • Population density is super high. Of the 600 000+ “Indian” (Bengali, in fact) workers in Singapore, I would bet that at least 100 000 of them are on Sunday night in the rather small district of Little India. Streets are crowded with young men treating themselves a few drinks after a 6-day, 10-12h a day week of work building (or rebuilding) Singapore.

 

  • Drink level is high too. Workers are drinking almost every night in our back alley, but then again, how do you compensate for a 10-12h workday knowing that all other entertainment in Singapore is very expensive, and that they’re rarely compatible with the culture of these workers (who just like to sit down in streets and drink)

 

  • Jaywalking is super high: The large roads in Little India are almost sort of highways, and you have to wait a lot before you can cross. The sidewalk is crammed with shops where there already are customers so people can not do else than flock to the street. Especially on Sundays. In the same time, drivers that go through Little India are quite nervous too: they know people will jaywalk and they need to pay double attention, but Singapore is not a paradise for pedestrian and cars/buses are not especially trained to drive in high pedestrian areas, this is obvious.

 

All this converge to a higher risk of accident, and it’s a miracle there’s not this kind of collision every week when you look at the circumstances.

Now, let’s zoom out and try to figure out the bigger picture to address a few concerns seen in comments or on Twitter:

  • “Do these Indian/Bengali riot at home whenever there is an accident” – Surprisingly, yes. It’s a common sense advice that whenever and whoever you have a car accident in Indonesia, for instance, you should never, never stop. Run at the 1st police station, but don’t stay on the spot of the accident. I would bet the same apply in India and Bangladesh, where the super high density of people + a culture of closeness between people hard to understand in Chinese or Western culture makes any accident on a “member” of the crowd a trigger for hysteria. Most workers in construction in Singapore are from Bangladesh and India, and there is no or little cultural adaptation to clean and orderly Singapore. It’s like to put an ice cube in hell, a match in Antarctic: you can’t barely think of two cultures more extremely opposed in terms of human interaction and group behavior. Happy to have feedback on this sensitive point, and please, keep non-judgemental, it’s just this way the same that we French people go to the streets for no reason.

 

migrant population in Singapore 2012 2013 immigration indian workers little india riot 2013 martin pasquier

 

 

  • “Why don’t we send back all these Indian/Bangala guys back home” – This is where Singaporean expect an answer from their government, and this is where the trap of their economic model lies. There are about 600 000 construction workers in Singapore, as the “garden city”. Paid around $500/month with a 1 or 2 year contract, 1 holiday per week and national holiday (not all as I see/hear them working everytime in a nearby hospital). 10-12h of work every day, with an average 33° and 80% humidity. On the other hand, Singaporeans (citizens or PR) make an average $2000/month, with 2 holiday per week + national holiday + 15 paid holiday per year. I don’t think I need to push further the calculation: no Singaporean would ever work as these construction worker do, period. Besides, Singaporean are not making babies anymore, and needs a lot of foreigners to make the economic engine work.

 

 

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  • “Do we need to build so many things anyway? Why not just keep Singapore as it is for a few years?” – Not possible. With a fast aging population, Singapore need hospitals (two are being built in the 500m around my home in Little India). WIth a population growing from 3M in 1990 to more than 5M today, and an expected 7M in 2030, Singapore needs roads, residential buildings, transportation (there are 7 existing MRT/metro lanes today, and no fewer than 15 more are planned or being built right now). If you don’t build, expect some social bumps down the road. MRT is already super crowded, and traffic quite high at peak hours. Besides, the position of Singapore as a transportation and oil & gas hub is clearly threatened. Other capital cities in South-East Asia are growing fast (KL, Bangkok, and Jakarta to a lesser extent), and with the opening of a northern way through the North pole to get oil & gas go from Europe to Asia, traffic in Singapore port *will* decrease (another mega project has Thailand and Myanmar work over a canal and a huge port, but it’s not for today or even tomorrow”

 

Singapore MRT/metro before (now) and after (in years to come)
Singapore MRT/metro before (now) and after (in years to come)

 

So this accident and subsequent riot, despite its sadness, is a catalyst of the situation of Singapore today, be it regarding its economic structure or its immigration needs.

My girlfriend asked me this morning, as I’m a big fan of games, “if you were in Sim City, what would you do?”, and really I couldn’t find an easy answer. Betting on new industries (rather than oil & gas) is fine: Singapore makes a lot for entrepreneurship, innovation, environment… But it takes time, people, and infrastructure, and at least for the two latter, you need more people from foreign countries.

More in Immigration & Demographics in Singapore in a previous post

Martin Pasquier

Real-time stock price for African farmers: a case study of connected agriculture with M-Farm in Kenya

There’s three reasons for us to showcase the story of M-Farm, a startup which connects and empower agriculture with financial information.

  1. First, because we’re not focusing only on web technologies during our world tour of innovation, we’ve tried to showcase stories about universities in the UK and healthcare in Iran.
  2. Second, because we’re in Kenya, a country with a fondness for technology, especially when it addresses local needs such as agriculture.
  3. Last but not least, because it’s the magic of iHub, the community tech space of Nairobi, to be able to chat for a while with very different entrepreneurs.

MFarm_02

Agriculture is both an issue and a huge opportunity for Africa. To win against under-nourishment, African countries must be able to sell at a correct price (especially when they compete against subsidized economies such as Europe of the US), and to improve their efficiency.

The African Union had its members pledge for 10% of their budget to be allocated to agriculture. In several countries (Burkina Faso, Ethiopia, Ghana, Guinea, Malawi, Mali, Niger and Senegal) this target has been reached and even exceeded. But in Kenya, a mere 5% is allocated, when 30% of kids under 5 are still struck by undernourishment.

mfarm kenya afrikoin nairobi connected agriculture africa agribusiness martin pasquier

M-Farm connects small-scale farmers in Kenya (STAT) to the price of crops in real-time. The app, accessible through SMS (as Mpesa, in a way), consists of two features:

  1. Price info: it gives information on prices in 5 markets (Nairobi, Mombasa, Kisumu, Eldoret, Kitale) for 47 products such as peas, sugar snaps, avocado, passion fruit, peanuts, potatoes, cassava and mangos
  2. Group selling: an advanced feature, which allows an agent to aggregate demand and supply of Central Kenya Farmers

MFarm is connected to Mpesa, Kenya’s mobile money system, which allows unbanked farmers to manage their revenues easily (other can still connect a bank account).

The value proposition if to decrease the influence of intermediaries which all take a cut. Thanks to MFarm, farmers have been able to double their sales, on which the startup takes a fee. They have now around 3 000 users on the web and 6 000 on mobile through SMS.

mfarm-africa-food-map

Martin Pasquier

An education to entrepreneurship in Africa: from hack schools to long-term capability building in innovation

The story of Njeri Chelimo is a compelling one, and a case study for the proverb “where there is a will, there is a path”. This 20 y.o Kenyan girl had planned to attend a hack school in New York a few months ago. The 12-week program was free to attend, and would be a great place both to improve her skills and meet people. But even with justifying she had matters to attend in Kenya and no will to stay over the legal period, her visa was refused. The end? Quite not: “I decided I would start my own hack school here, in Nairobi.

http://www.youtube.com/watch?v=sF2wL5cFAsY#t=11

When I met Njeri, her students were quite busy as they had 4 weeks left (out of 12) to finish a project they can do by groups. This is a way to turn a lesson into reality, and put to practice what all the mentors and teachers have been sharing the last 2 months. For the faculty, Njeri turned to her network and Twitter, where she grabbed every occasion of a foreigner dropping by Nairobi to share his experience with the students. She was able to have coders, creatives and entrepreneurs from San Francisco, Australia and other countries.

The school is free, but of course it has a cost for Njeri, be it the two rooms she rents in a shared residence nearby iHub, the main tech community of Nairobi. “The first room is where we have the courses. The second room is to allow each team to brainstorm and work on their projects, I want to put more big pillows and couches, and also boards to put post-it notes everywhere”. The rent is the main chunk of her budget, but again, social media was the best way to fund the project. Her $15000 crowdfunding campaign on Indiegogo pays for roughly a year of the project, then, she will have to find another source of revenue.

Welcome to the Dev School of Nairobi !
Welcome to the Dev School of Nairobi !

The value proposition of the school is not coding as such: tutorial are widely available online. Njeri wants to work “around the code” on the business, the management, the marketing, the consumer needs, so that the students would work on tech that fits to Kenya right now. 2 of the students projects are on on the travel industry, a key asset of the country, where ICT can definitely improve the experience – and the conversion – of visitors.

Where to locate the Nairobi Dev School in the local startup ecosystem? “Well, even before something like Startup Weekend”, says Njeri. “With both tech and business skills, you can then go to a hackathon with more impact. Developpers need to write, to identify problems, to have this impact”.

Say hi to 20 y.o Njeri and her hack school!
Say hi to 20 y.o Njeri and her hack school!

Njeri’s project needs to be thought about in the broader context of innovation in Africa. Eustace Maboreke works at Afralti, a center for excellence in ICT operating for more than 20 years, and Martin Obuya is a polyalent profile (though engineer in satellites communications) at iHub. They both envision iHub in Nairobi as a blender where the maximum collision must be created between people, projects, and potential funders. As both actors and keen observers of the tech scene in Kenya ans in Africa overall, they also warn against short-sightedness. For instance, the success of MPesa has pushed many developers and entrepreneurs into the world of finance and banking. As a result, other local needs are less addressed, such as the digitization of culture, one of Africa’s asset, or solutions to the jams of Africa’s cities.

Rather than just focusing on breeding startups in community workspace, which is common in most parts of the world, Eustace’s mission is to have the core concepts of the startup economy (prototyping, incubation) migrate to the more traditional SMEs and big corporations, so as to turn them into intrapreneurs. Startupify the old business, in a nutshell. To do so, Afritel runs programs of incubation, but also assessment of skills for a better placement of the youth. “For kids, right now, it’s all about apps, but maybe they have a profile that can fit better elsewhere”, says Eustace.

Afralti and a delegation from the UK signing a deal on Fibre Optics training
Afralti and a delegation from the UK signing a deal on Fibre Optics training

Building a genuine capability for innovation also means learning to deal with potential and funders. The difference between “impatient” (VCs, angels to a lesser extent) and “patient” (mostly government-sponsored, through grants) investment must be learnt. Many ecosystems players know it: turning a generation of successful entrepreneurs into mentors for the 2nd generation is key to ensure that a culture is growing. In Kenya, it’s easy to be seduced by a few millions, then buy a car, go party, and retire early. “We need to incubate not necessarily for growth in a first time, but to retain entrepreneurs”, says Martin.

The potential of Africa is huge, with 60% of the population under 25, but it has to be harnessed within a long-term frame to gain in autonomy and avoid being squeezed by short-term financial stints.

Martin Pasquier

A archeology of innovation and startups in Kenya with Mbwana Alliy from the Savannah Fund

As you may know, we were in Kenya both to attend Afrikoin, a conference on mobile money, and to continue our exploration of innovation ecosystems. How do countries, cities, are turning to entrepreneurship? What are the fundamentals and best local practices when they try to build and nurture communities of innovations?

SavannahFund Mbwana Alliy martin pasquier interview afrikoin kenya ecosystem of startups success stories mpesa africa internet mobile phones

After Afrikoin, we had a quick but fruitful discussion with Mbwana Alliy. Mbwana runs the Savannah Fund from Nairobi, which invested in 9 startups in Africa. He told us how Kenya became what it is today.

For Mbwana, there is “the conditions, the atmosphere” of the ecosystem, and “the sparks, what makes it move in a direction or another”.

A few key traits of Kenya can explain its readiness for innovation:

  • It’s the biggest economy in East Africa, and as such, it’s also a transportation and aviation hub for East Africa. Talents are flowing in, from and through Nairobi.
  • It’s a capitalistic country. Not so long ago, the USSR had also a large influence in Africa, and countries like Tanzania are still socialist-leaning. Kenya, as a former British colony, leans on “the other side”.

 

Kenya economy diversification afrikoin startup innovation martin pasquier

  • It’s an English-speaking country, as it was previously British. Even in South Africa, the native language is not English, and the tech world definitely is made in English
  • The economy is diversified, and is not resource-based as it is the case in Nigeria (which everybody thinks it’s another key market for innovation). Tourism, exports, manufacture, services make it balanced, and allow innovation to stem from many industries. In Nigeria, if you want to success, it can be mostly, if not only, within the oil & gas industry.

 

Then, there’s the sparks, these key moments that make planet Kenya be an innovative country.

 

  • 2002-2005: the drop in the prices of phones made it accessible to more and more people
  • 2005-2006: Kenya lands down a first undersea cable to connect to the internet, and is now at the heart of the East Africa coast in terms of connectedness. The 3G network is also being built at the same time and allow the first ISP to grow (Africa Online).

 

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  • 2007: MPesa is born! Not until 2010 it becomes the mainstream mobile money payment system for Kenya. This innovation allows the unbanked to pay and get money, and new services are built around this platform (as you can see with the latest startups working on bridging Bitcoins to MPesa for remittances)
  • 2008: The election crisis saw the development of Ushahidi, a project which crowsdources crisis information through mobile.
  • 2010: “The Ushahidi mafia”, in turn, made possible the development of iHub, today’s main spot for innovators and startups in Nairobi. A bit like the Paypal mafia in the US gave birth to other key innovation (Youtube, Tesla Motors, LinkedIn, Yelp…). They now have a supercomputer and a Research Lab, all projects launched by people who gravitates around Erik Hersman, the founder of Ushahidi.
  • 2013: A new “Vision 2030” is approved by the government, with a new place proposed for Konza City, an innovation cluster, out of Nairobi. Price tag: $14.5bn.

 

Konza City plans
Konza City plans

 

On top of this historical approach, Mbwana insists that we’re not in the Silicon Valley. Rather than a global approach, startups here should serve their market first, even before thinking of entering other African markets, all unique and different (a reflexion we had also with Samuel Gichuru from Nailab, an incubator located 2 sets of stairs from the Savannah Fund).

With Ethiopia and Tanzania around, that’s already some 120 million people to serve.

Martin Pasquier

A year as an entrepreneur

A year ago this day, I began my path as an entrepreneur in Asia. The start was harsh, as I decided to join a local startup first, but the seed of setting our own co was neatly set up by my partner Mathieu who (courageously) stayed in Paris.

After (not even) two months of marketing at this startup, I left, with “mood in the socks” as we say in French, not knowing at all what to do. I jumped on the opportunity to do a new media reporting of SXSW in Austin, and started a crowdfunding campaign. After 18 days of craze, we made it to get the necessary $7000 to reach the US, produce news, and come back in France and Singapore to share what we saw.

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I still needed to set up something for good to get my mind busy, so I eventually accepted to set up a branch of the social media marketing agency I was a not-so-present partner of in Paris. I went through the ups and downs of setting up a legal entity in a foreign country, got my visa, so, well, now was time to get clients at least to paid for the expenses of the company, right?

I spend 4 months of business development where I met an average 10 new business leads each week, working on our content, website and other stuff in the meanwhile. I joined BNI, a networking association with weekly meetings, thought it was a meeting of Alcoholics Anonymous at first, then enjoyed the way I could gain trust among Singaporean businessmen and women.

The few first deals kicked in late August, a few hundreds bucks here, a few thousands there, with companies ranging from startups to large MNCs with global reach. These are extremely rewarding moments, even if barely pays for the bills, but, yeah, someone is giving you money for your skills. And you keep this money, you don’t give it to your boss 🙂

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In parallel, I set up a project of world tour of innovation with another partner in crime from Paris. We began a few weeks ago and since then have already “covered” trends, contacts and best practices of innovation in Malaysia, Iran, Kenya and Belgium. We’ll be early next year in Dubai, Nigeria, China, India, and later on in Chile, Canada, Russia, and South-East Asia.

I now know that the path is still uncertain and will be for a few more months, but I know also that this is a main turning point in my life (a timely one: I just turned 30 and lost a few years in the 20s on Call of Duty). My biggest fear is to come back some day in a company which is not mine, and it gives wings to keep on meeting, negotiating, twisting my brain so as to GET. THE. MONEY.

So I’m wishing myself another fruitful year, would love to thank too many people for the place I have here, my family (they pushed me first outside the country), my friends here and there, my partners Mathieu and Nicolas, and my girlfriend who is now almost used to my u-turns, roller coasters as an entrepreneur, maybe I should act as if I were a bored employee for a few days to see her reaction.

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I will hopefully keep travel a lot (134 000km in 33 flights), get a new passport, and spend all my money on travels. I’ll keep drinking two (free) glasses of white wine in each flight and watch a crappy movie or the clouds.

Martin Pasquier

A brief history of Kenya mobile money system M-Pesa

During Afrikoin, the first mobile money and digital currency held in Nairobi, I’ve met with Brian Muthiora. Brian joined the local branch of GSMA, the telecom operators professional association, after 5 years at Safaricom handling the regulation issues for MPesa, the mobile money system designed by the Kenyan telco. And during an hour or so, I had the opportunity to have a history of MPesa told by an insider.

 

Yes, that's €12 billion in 5 years
Yes, that’s €12 billion in 5 years

 

MPesa remains a bit mysterious. It’s a sure hit in mobile money, with €12bn exchanged over the last 5 years, but only in Kenya. Even nearby Tanzania, which share some of Kenya’s ethnies, cultural practices and economy, doesn’t pay in MPesa. The research for MPesa’s success is still ongoing, but a few explanations can already help understand it better:

  • MPesa has been designed and rolled out by Safaricom, the dominant telecom operator in Kenya, with almost 80% market share. Any innovation of feature can then be promoted to a huge user base. But, as Mbwana Alliy from the Savannah Fund and Brian from GSMA add rapidly, other countries with dominant operators have not done so well, so this can’t stand as the main factor behind MPesa’s success.

 

  • Safaricom proved to be a clever product designer, especially in the user experience field. In the early days, MPesa was thought of as a way for cooperatives of women (known as chama) to pay for the laundry service on a monthly basis. The women in each test group began to use the service to send and receive money between each other. As a telecom operator making money on each transaction, it was obvious than making MPesa a mobile money service was more profitable than a monthly laundry payment service.

 

Low-tech UX for the win!
Low-tech UX for the win!
  • Then, the support of Safaricom to train its teams to this new service proved critical. Rather than a top-down innovation that sales people have to try to sell with little knowledge or conviction about it, a separate branch was set up to build, sell and operate MPesa within Safaricom. Silo work is not so popular in the digital age, but for once, it proved useful as usually, the telco world reacts poorly to innovation.

 

  • Safaricom had then to create a network of agents. Before MPesa, it was already possible to buy and sell airtime as a virtual currency. Agents were buying wholesale airtime, and they made comfortable margins with little interaction with end users. MPesa could not be a good deal for them: too many contact points with customers and less value on each of this transaction. So Safaricom turned to the kiosks, which are small convenience shops selling cigarettes, fruits and basic products a bit everywhere in Kenya. These agents were offered an additional source of revenue (taking a cut on each transaction) and also an IT system of administration of the mobile money, without which the reliability of each agent couldn’t have been so solid.

 

  • More friendly than your typical banker
    More friendly than your typical banker

    The marketing of the solution also proved clever, with one promise: “Send money home”. Brian remembers the first time he used MPesa: My mom told me she had a fundraising for our church back in the countryside, so she expected me to take some time during my day at the office to do the transaction, but I could now do it with a simple message, without leaving my office”. If Safaricom thought the main use would be urban workers sending back money home to their families, they quickly saw a boom in inter-rural transactions. The typical property in rural Kenya consists of a small shack and a big chunk of land which serves to grow veggies, fruits and a few animals. Neighbour to neighbour daily commerce of these goods was soon better done with MPesa.

 

Initially, what was a P2P service for families and neighbors (with features such as send money, receive money or buy airtime), turned into payment service with features to pay bills and buy goods. The government vision for the next few years is to have all transactions done electronically, including the tax/bills/fine/benefits between the administration and the citizens. MPesa may not be the ideal candidate: it’s mostly perceived as a payment option for daily transactions rather than “serious” payments. And as most taxpayers have a bank account, transfers and credit/debit card payment is on the rise too.

 

Well, at least in Kenya
Well, at least in Kenya

 

The future of mobile money with MPesa is all but certain. Afrikoin panelists all wanted their share of the cake, from VISA with credit cards to BitPesa or Kipochi with Bitcoins up to the aggregators of payment systems.

A sure thing: mobile money will happen and continue to innovate in Kenya, now that the competition between banks and telco (and, to a lesser extent, startups) is set. It’s harder to see how European and American markets can follow suit, with a banking industry acting as a vested interest and for now, little competition to the legitimate players, including Paypal and other payment services.

If you’re interested in MPesa, you should also read Money, Real Quick by Tonny K. Omwansa.

Martin Pasquier

Intercultural awareness and innovation: can startups really go global?

To continue our exploration of Kenya as an innovation ecosystem in fringe of Afrikoin, I’ve met with Samuel Gichuru from the Nailab incubator. A fast-paced and jittery conversation proved useful to pinpoint a key challenge of entrepreneurs: the management of cultural differences.

If Kenya is the kingdom of mobile money, through its MPesa system, it’s an isolated one. No other country happen to be using mobile money at this level, be it richer countries (South Africa), more populous ones (Nigeria) or even countries close to Kenya (Tanzania, Uganda). Each market is unique, and more, within each market, sub-segments make scaling for startups a true challenge.

Yet another part of Nairobi's tech ecosystem
Yet another part of Nairobi’s tech ecosystem

Innovation ecosystems, Samuel says, are not driven by the same thing everywhere:

  • In Kenya and developing countries, necessity and poverty are the mother of innovation
  • In the US and the Silicon Valley, innovation is driven by aspiration, and it’s no coincidence Hollywood is very close, they “sexify everything”, including lately entrepreneurship (think of Justin Bieber or Ashton Kutcher to name a few)

If startups are to succeed, they must get to know the local contexts, which are multiple, obscure, intangible, and it takes time to get this understanding key to penetrate other markets. In Africa, for instance, Nigeria is both a highly religious country where status is mostly reached through the oil & gas business. In Kenya, the population is more diverse, but also has its “niche” population which won’t be adressed in the same way. Internet make everything smaller, but cultures keep strong, and they make different markets.

hollywood does silicon valley afrikoin martin pasquier nailab nairobi kenya mobile money innovation ecosystems

In the end of the day, we both wondered of what was a good “model” for startups to be both innovative and scalable, when so many cultural walls seem to be on the way to “be big”. Unilever, for instance, has a model where innovation is more in marketing perfectly a same product to different markets, with different brands, colors, marketing positioning and even pricing. We see today that even the world of social startups is fragmented and maybe reaching a post-Facebook era with messaging apps.

Startups need to learn and be exposed to intercultural awareness, but even more to go, try, fail, and try again, as it’s the only way to discover and possibly penetrate a new market. Until this point, they should rather focus on the local market and serve it well first, as it is the case for instance with MPesa.

Martin Pasquier