MARCH 22, 1999
International -- Asian Cover Story

Mahathir's High-Tech Folly

The Silicon Valley of East Asia isn't dead, but it is badly wounded

It looks like just another road in the Malaysian hinterland, flanked by the sleepy palm-oil plantations that have operated here for decades. Yet heavy trucks and powerful earthmovers rumble along it daily, shaking the ground as they go. They are heading for huge construction sites nearby, giant clearings where the scarred red earth bears the tracks of heavy vehicles. Here men are digging enormous trenches, preparing hundreds of kilometers of fiber-optic cables. Others are building new roads, new buildings--sleek structures that stand in sharp contrast to the traditional Malay villages they displaced.

This is one of the most ambitious state-run projects ever conceived in Asia. And despite the ravages of the region's economic crisis, construction goes on. It's Malaysia's Multimedia Super Corridor (MSC), the brainchild of Prime Minister Mahathir Mohamad. Mahathir set out to build--from scratch--Asia's version of Silicon Valley, a huge zone stretching 750 square kilometers, an area slightly larger than Singapore (map). The project, started in the mid-1990s, was to cost $20 billion and take two decades to finish. It promised fiber-optic networks, research facilities, tax breaks, and new "cyberlaws" to any multinational setting up shop. Malaysia would provide the best incubator on the planet for high-tech businesses and create an environment in which a native high-tech industry could take root and boost the country into the ranks of developed nations by 2020.

But there's something dramatically wrong with this picture. After more than three years of hype and $4.7 billion in government spending, Mahathir has failed to attract significant investment from the high-tech companies he needs. What's likely now--if the project is completed at all--is a significantly scaled-down version of his original vision. While recession is partly to blame, Mahathir's response to the crisis has dealt the most serious blow. His rhetoric blaming Jewish conspirators for his country's woes has dismayed multinationals. So have his moves to impose currency controls--and his decision to arrest Anwar Ibrahim, his former protege and Deputy Prime Minister, and put him on trial. "Mahathir's behavior has set back the MSC several years, even in a best-case scenario," says a Westerner who has advised on the project. "Worst case, it has destroyed the momentum."

Mahathir had hoped to attract $4 billion from giants such as Microsoft Corp. and Oracle Corp. But the total pledged so far is just a quarter of that. Even that $1 billion figure may be an optimistic forecast as companies question the wisdom of investing into a politically unstable country and continue to scale back plans. Microsoft, in one of Mahathir's biggest victories, had announced in 1996 that it would make the MSC its regional headquarters. But today, Microsoft Malaysia has just 15 employees, hardly the numbers expected. Instead, "Singapore is the operations center," says Managing Director Benedict Lee. Silicon Valley powers such as Sun Microsystems Inc. are now making just small investments after originally thinking big (table, page 27).

By all accounts, Mahathir was the project's biggest asset: a driven leader who was willing to bet on a bold project that would propel Malaysia into the Internet Age. But with the onset of the Asia crisis, Mahathir became the project's worst enemy, a politician whose repressive tactics and crude intervention in the economy have driven away the very investors he desperately wanted to woo. "People don't trust him," one foreign information-technology executive states flatly.

The tragedy is that Malaysia needs to move up the technology chain. With its manufacturing base squeezed by lower-wage countries such as China, Malaysia must become more of a knowledge-based economy. "If something like [the MSC] comes off, it gives Malaysia an edge," says Michael Leifer, a Southeast Asia expert at the London School of Economics. "[If not] it's a setback to its industrial development."

Mahathir once seemed to understand this. Indeed, he was regarded as something of a visionary in high-tech circles. The futurist writer Alvin Toffler, for example, has lauded him as "the only Muslim leader in the world with an Information Age vision of the future instead of an obsession with the past." Even before launching the MSC, Mahathir had successfully promoted Malaysia--specifically, Penang--as a site for high-tech hardware manufacturers such as Intel Corp. and Seagate Technology Inc.

"180-DEGREE TURN." The MSC would be the next step as Malaysia sought to move into the more innovative realm of creating software, multimedia products, and big-think ideas. Working with advisers such as Kenichi Ohmae, then a top consultant at McKinsey & Co., the Malaysian leader envisioned an IT nirvana. In a new city called Cyberjaya, Malaysians and foreigners would work side by side in "intelligent buildings" wired with the latest technology. Mahathir also pledged a new capital city, Putrajaya, where the federal government--including the Prime Minister himself--would work electronically. He drew up a set of "cyberlaws" to protect intellectual property and prevent computer crime. He proposed a new NASDAQ-style stock exchange, the Malaysian Exchange of Securities Dealing & Automated Quotation, or MESDAQ, to provide capital for local high-tech startups.

The project had its share of hubris. At one end of the corridor, Mahathir built the world's tallest buildings, the Petronas Twin Towers. At the other, 50 kilometers to the south, was the futuristic Kuala Lumpur International Airport. Traveling the globe to promote the MSC in 1997, Mahathir called the corridor "a gift to the world," and "a global bridge to the Information Age." It was quite a performance. "After his speeches, you had CEOs say this guy `gets it,' he is saying the right things," recalls the former adviser.

Mahathir attracted a who's who of the IT industry to give the project credibility. Rivals such as William H. Gates III of Microsoft, Lawrence J. Ellison of Oracle, and Scott G. McNealy of Sun Microsystems all agreed to sit on a 41-member advisory panel. With that star power, coupled with cheap land and an inexpensive, English-speaking workforce, Malaysia stood a chance of passing Singapore as the region's premier technology center.

Then the Asia crisis hit. The sudden recession had a deep impact on business conditions and would have slowed the MSC's progress in any case. But that's not the whole story. As Malaysia's ringgit and stock exchange began plunging in 1997, the Prime Minister reacted with such a scathing critique of the outside world that foreigners got scared. Compared with his business-friendly attitude before the crisis, Mahathir took "a 180-degree turn," says a regional executive of a Silicon Valley-based company.

Malaysia's political upheaval since the arrest and trial of Anwar adds to the uncertainty. As the country prepares for elections sometime before April, 2000, a smoldering reformasi movement, led by Anwar from prison, is demanding that Mahathir step down. One government official has conceded privately that if an election were held today, opposition parties could win a big victory. The events raise the question of who will succeed the 73-year-old Mahathir--and what that will mean for the MSC. "The MSC is Mahathir's pet project," says a Kuala Lumpur-based diplomat. "It isn't necessarily going to be the next leader's pet project."

Just as damaging to the MSC, however, is Mahathir's reversal of a promise to refrain from censoring the Internet. That was one of his key pledges outlined in a "Bill of Guarantees" to any investor in the MSC. Yet following Anwar's ouster last September, rumors circulated on the Net of ethnic unrest--and Mahathir had police track down the sources. Then, in another move designed to chill free use of the Internet, Mahathir's government in December ordered all cybercafes to register users and provide the information to police.

Such blatant reversals have made some early supporters wary. Toffler, who sits with Gates on the advisory panel but boycotted the last meeting, has written two letters of protest to the Prime Minister. "The essence of Silicon Valley is not fiber-optic is the creative, innovative drive, with large numbers of people racing to create new ideas," Toffler told BUSINESS WEEK. "That's hard to sustain in an atmosphere tinged with political repression."

In the corporate world, it's not just high-tech giants that are having second thoughts. U.S. accounting firm Ernst & Young had planned to build a regional technology center in the MSC but has put that idea on hold. "We're waiting to build anything until there is certainty about what's going on," says Frank Smith, an Ernst & Young partner in Singapore.

DAMAGE CONTROL. Little wonder, then, that the head of development for the MSC now spends a lot of time on damage control. "We have to work harder to allay some fears and misconceptions," says Othman Yeop Abdullah. One task is to explain that companies operating in the MSC are exempt from Malaysia's currency controls. The controls, now slowly being eased, have scared away many venture capitalists interested in local startups (page 28).

Other protectionist measures are taking a toll. While foreign Internet service providers such as U.S. company PSINet Inc. have acquired ISPs in other parts of Asia, in Malaysia they cannot own majority control. As a result, Malaysia has just two locally owned ISPs. Companies claim their service is unreliable, slow, and expensive: A 256K, medium-speed line costs about $16,000 a year--about 10 times the cost in the U.S. So it's a giant hassle to arrange for the transmission of large volumes of data in and out of the MSC.

The biggest beneficiary of Malaysia's problems has been Singapore, where Prime Minister Goh Chok Tong has quietly pushed forward with plans to attract multinationals. Sun Microsystems, for example, is devoting far more resources to Singapore. While Sun has just 30 workers in Malaysia, it employs about 200 in Singapore and is working with its government on developing research facilities, training programs, and a venture-capital fund. "The best showcase in the region is Singapore," says Lionel Lim, Sun's executive managing director for Southeast Asia. "It has a much more developed, thoughtful implementation and vision."

Hong Kong, too, is now trying to steal Malaysia's thunder. It is earmarking $1.7 billion to develop a new IT zone. Shanghai also has high-tech plans. Meanwhile, Malaysia, forced to cut costs, has delayed a planned smart-card project and has scaled back development of telemedicine--a plan to use the Internet to diagnose and treat patients. The government insists it is proceeding with the projects, albeit more slowly. But with money now harder to come by, some noncore elements of the MSC seem wasteful. The money the government is spending on its new capital Putrajaya--where Mahathir plans to move his office within months--would have been better spent supporting IT projects, says Leifer. "It's been a misallocation of resources," he says.

NO SURRENDER. Multinationals are feeling the pinch, too. The government forced a consortium led by Fujitsu Ltd. to cut its bid significantly to win a contract for an electronic system that will allow bureaucrats in Kuala Lumpur to monitor infrastructure projects. With the discount, "it is not profitable, honestly," says Iwao Shindate, general manager for Fujitsu Malaysia.

Yet the big foreign companies are reluctant to walk away. "We really want to support the nation's building," explains Ng Kien Lock, a general manager for IBM Malaysia, which is working with Fujitsu's consortium. Support, yes--but not too much. Even though Mahathir also landed IBM Chief Executive Louis V. Gerstner Jr. on his advisory panel, IBM has yet to apply to set up shop in the MSC. Ng says the company began the process, but "there were too many things happening that slowed things down" last year. IBM is deciding whether to rebid this year.

The MSC can boast some modest successes. Nippon Telegraph & Telephone Corp., the Japanese telecom giant, is putting the finishing touches on a big research center. From there, NTT hopes to develop software to provide new services for telephone calls connected over the Internet. The company, with 60 employees and plans to hire 40 more, knows it's unusual. "The government has been doing its job mostly on schedule," says Akio Hotta, head of NTT's subsidiary in the MSC. "But on the demand side, some foreign investors have gotten a little bit hesitant."

Demand or no, the MSC will move forward as long as Mahathir is around. And some investors are optimistic that the MSC will survive him. "Malaysia won't give up on it," says Ron Cattell, chief operating officer of Singapore-based Datacraft Asia, which has sold network-integration equipment to Telekom Malaysia. "The MSC will come back again."

But no amount of positive spin can make up for the rare opportunity that Malaysia has squandered. Other countries as far away as Ireland are starting their own Silicon Valleys, or "Siliclones." Mahathir's powerful vision helped make the MSC a reality. Now his actions threaten the future of his dream.

By Bruce Einhorn in Kuala Lumpur, with Sheri Prasso in New York