Cyber souffles

Our greatest mistake was confusing the upstart dotcom industry with the new knowledge economy. We were so dazzled by the daily announcements and claims of fantastic valuations that we never paused to ask all the obvious questions. How could, for example, an Internet travel agency be valued higher than a major international airline when all the money it made could only be a tiny fraction of the aviation business? How could, in short, click-and-portal businesses make money if not on the back of brick-and-mortar? A mere dotcom industry without the substance of real products, real consumers and real assets was only going to be a souffle economy: Nice to look at, nice flavour, but cut it with a knife and you’d only find fluff and air. That truth we are now beginning to realise, even if reluctantly.

Merely because the `new’ economy stocks look so sexy on the bourses, or riots break out in Hong Kong during dotcom IPOs, we should not fo-ol ourselves into believing that the old economy is a thing of the past. A more ludicrous notion has not been promoted in a country where Internet penetration is first about half a per cent of the population and where nearly 90 per cent of the people have never even seen a computer. We are also getting confused by the very visible success of the NRIs in the new economy. That NRI success story is piggybacking the terrific, decade-long growth of America’s so-called old economy. And here we are being sold the idea that we have an opportunity to leapfrog that decade of hard work just because so many NRIs have made money in dotcom and IT start-ups.

This is truly dangerous for many reasons, and could have sociopolitical implications. Imagine a situation where just a couple of crore or so of the richest Indians now begin to even trade within themse-lves on the Net, cutting out the neighbourhood grocer, the bookshop owner and so on. A distinctly privileged elite could indeed secede from the poorer mainstream in this manner except then, the massive valuations for the Net stocks won’t be justified. For that to happen this basic market has to expand a lot more from 50 lakh families, or about two crore people. This population base will only grow if the conventional economy grows, generates surpl- uses in the hands of many more people so they can buy more products.

Excessive, obsessive focus on the stock markets and valuations has persuaded us to believe that the new and old economy are fundamentally different and contradictory to each other. That there is no fit between them. This is not only untrue, but also outrageous, in a country in desperate need to build physical and human infrastructure, roads, schools, railways, bridges, ports, airports, hospitals, all of which will require cement and steel, bricks and mortar. The new knowledge-driven industry and ideas must power this growth. The two economies will survive only if they complement each other. That is the way the equation is in the richer countries, particularly the US. How could we then imagine the two going their different ways in India?

In the first flush of the high-tech cr-aze, the traditional Indian industrial ho-uses had responded in reflex, announcing their own Internet start-ups and hoping that that would arrest the free-fall of their share prices. Now, many are realising that rather than being intimidated by the upstart or making fools of themselves by joining the main-bhi-dotcom insanity, they were better off leaning forward to embrace the new knowledge industry, to use it to reinvent and reinvigorate their own businesses. At the CII’s session on knowledge economy, a spectacularly revealing presentation by the international consulting firm, Monitor Co., made this point well. Am-ong companies which benefitted most of all from open-minded ideas and notions of the knowledge economy are some that, if conventional wisdom was correct, should have died out.

Xerox, for example, should have had no future as a copying company as the world moved rapidly into computerisation and electronic data storage. But Xerox saw it coming, employed new technology as an ally instead of fleeing from it and, starting a dotcom, re-engineered itself as a digitalised document management services company and its fortunes zoomed. So, of course, did its share price. Understanding and application of the knowledge economy has even helped a sunset industry like steel to make a turnaround. The Monitor study quotes the example of the US steel giant Nucor.

The problem with the new versus old debate is that its very grammar is loaded. It should, on the other hand, be seen as the mainstream, continuing ec-onomy, and new knowledge, ideas and enterprise that are today poised to cha-nge it quite radically. The difference the advent of the knowledge economy has made is that a nerd with enterprise and profits is no longer an oxymoron. By implication, therefore, shouldn’t he be considered a part of the conventi-onal, mainstream economy? The companies that accept and appreciate that truth are the ones that will survive in this old-new marketplace. Already, valuations around the world show a changing trend.

Instead of mere Internet companies the ones that are now being valued higher are those with substantive businesses that adopt new ideas and are willing to engage and draw upon the global knowledge explosion.

This is a vital lesson for us if we are to recover from this dangerous phase where money has been vacuumed out of the infrastructure sectors into a bloating, fancy, souffle economy. To become a worthy player in the click-and-portal world, India first needs to build its brick and mortar.

Fortunately, as we come out of the high-tech daze, it will be simpler to see why there is no contradiction between the two. In fact the only way brick-and-mortar industry can click is if it embraces the ideas, the knowledge, the force multipliers and drivers of the new economy. Hopefully that process is beginning and, if it gathers pace, we may see sanity return to our markets.