After spending a day acclimating to the Ulaan Baatar streets as modern nomads, it was our time to investigate the inner-workings of a new economy.  Mongolia, which had a GDP per capita of $1,573 in 2009, was now boasting a booming minerals extract sector.  This drove corporate profits and foreign direct investment up, making the Mongolian economy a veritable proto-kazakhstan, and explained the presence of Irish pubs, Lexus SUVs, and commercial bank branches which dotted the capital city.

Today was to be a lucky and fortuitous day, as we had the opportunity to wear the most presentable clothing we owned, which at this point was for both of us a pair of well worn jeans and shirts which were to hopefully ment to be worn wrinkled.  We polished our shoes in the divice provided at the door of the glorious and fortuitous Wen Zhou Hotel that morning and strolled into the blazing Mongolian sun before Ariunna arrived in her charriot.

Today we were to have the opportunity to speak to Jargalsaihan Dambadarjaa, chairman of Xacleasing and a seasoned financial professional known regionally for his adept employment of Social Media.  As a prolific blogger concerned with the well being of his countrymen, Mr. Dambadarjaa engages sociopolitical issues through both his publishings and the daily work he does at the head of Xacleasing, a member company of Tenger Financial Group.  With Ariunna, Dr. D’s daughter, at our side, we considered some final questions for the seasoned financial professional in this no doubt arduous and volatile financial climate.

XacLeasing, the firm which Dr. D chairs engages in what it discribes as a kind of Microfinance.  While generally considered a socially organized financial arrangement in which money is pooled to provide loans on the magnitude of 3 to 4 figures, microfinance in Xacleasing’s case deescribes loans generally considered small by international commercial banks.  In the case of Xasleasing, these loans to individuals, small ventures, and medium sized enterprises are collateralized by assets such as construction, transport, or mining equipment, and in the occasional case, real estate.

With Dr. Dambadarjaa, we discussed the nature of recent growth in the Mongolian economy driven by resources, the fledgling financial market, and the gigantic untapped potential on regional borrowers and lenders, most of whom were modest in size.

He encouraged us to continue our investigation of the economy through his firm, and to that end introduced us to the Philipp Marxen, a recent recruit from Germany who now headed up Tenger’s China investment office.

Philipp went into detail describing Tenger’s efforts in developing microsavings accounts with no minimum balance marketed toward first time bank customers in the country.  I could relate to the fellow as a lad with a taste for adventure and a penchant for frontier markets.  With experience leading investment project’s in Paraguay’s agricultural market and a licensed derivatives trader on the European Energy Exchange, Philipp  came to Mongolia seeking career development alongside the change to do something truly different.

After an informed explanation of the regulatory environment of Chinese consumer finance, Philipp invited us out for  lunch at a local Indian restaurant which apparently garnered some fame.  Sipping down Lassis, Philipp delved into his background further.  By the time we had finished, the Mongolian microfinance landscaped looked significantly more fascinating than it had when it was completely opaque that morning.

Strolling off the rice and curry, we walked to the splendorous main square in front of Mongolia’s parlament, the great Khan holding court atop a mighty steed.

Across the street, we saw a forlorn pink building in a fantastic location.  Upon further inspection, it revealed itself as the Mongolian Capital Market, commonly known as the Mongolian Stock Exchange.  Rapping on the door and speaking to the attendant, we were able to garner a guided tour through the establishment.  Each broker member of the exhage has a seat at the exchange to trade on behalf of its clients, and the exchange is open for one hour each day.  For most of Asia’s exchanges, the Mongolian Stock Exchanges trading hours represent a lunch break.

Fascinated by the exchange’s earnest and deserted interior, we perused the walls, looking at charts of bond issuance and stock offerings over the past couple of years.  We took a lucky moment to host a brief press conference in front of the marble backdrop of the press box.

Considering the challenges and thrills of operating in such an environment, our minds entertained ideas of new ventures in Mongolia.  Was this country to become the next Dubai or the next Kazakhstan as a result of its newfound resource wealth?  How much of the extracted value would recycle its way back into the economy of the nation?  Was the role of a small and illiquid equity market on its way to playing the role of its larger Indonesian counterpart?  We pondered thee thoughts over a small feast of mayonaise carrots.

And with that, we prepped our bodies for a next day of rigorous wheeling with a night of rest.

The Uzbek Sum

The Uzbek sum has been depreciating against the dollar over numerous inflationary cycles as a result of loose monetary policy, creating an excess in the money supply.  How much the currency has actually devalued, and since when, depends on who you ask.  At the time of this writing, the official exchange rate is 1,622 Sum to the USD, though the black market money exchangers quote the rate at 2,230 Sum to the USD. This makes it 37% more desirable to change USD in the bazaar with a man holding a black bag, rather than at any licensed exchange office.  Presumably, these money changers sell the dollars at a higher price to firms or individuals intending to trade abroad, or make a sizable domestic purchase such as an automobile.  For the country ranked 150th on the World Bank’s ease of doing business index, this is not surprising.

Both the official and black market rates go up nearly daily, though the black market rate seems to increase even faster, implying that the discrepancy between what the Sum is actually worth and what the central bank is claiming its worth gets greater and greater with each passing day.

In case the situation doesn’t seem absurd enough, the largest currency note is 1000 sum, or 45 USD Cents. This means that to change 200 USD, I’ve got to strap a bag around my waist to hold bricks of bills.  This, dear reader, you already know from our Uzbekistan dispatches — but it bears repeating.  Imagine your spending power limited primarily by how much you can physically carry. In the morning, we each pack our wallets with as many bills as they can hold.  The state capitalizes on this physical limitation as an instrument of monetary policy.  In an attempt to stave off another inflationary cycle, the National Bank of Uzbekistan has resisted printing larger notes, as non-portability is seen as one of the forces curbing inflation.

Market Information Experiment

Before Uzbekistan, we had never been to a place with such inflation and an ineffective monetary policy that creates such a liquid black market for dollars.  The information flow of this black market intrigued me, and I wondered how these informal currency traders shared price (and perhaps volume) information with each other.  Those who are in the know must call a trusted source and get “today’s rate” before going to the market.

An interesting experiment would be to allow all market participants to contribute and share market data through text messages, which could be aggregated on a server and published both on the net, as well as on demand via SMS request.  Internet is still spotty in Uzbekistan with a low penetration of personal computers. However, the high penetration of mobile phones makes the SMS interface an attractive option.

Would the website get blocked?  Probably.  Would the SMS gateway numbers be shut down by the mobile operators?  Seems logical.  Though what if this information sharing created a transparency that slowed inflation and aided the National Bank’s effort to control the sum?  If the market data became valuable to participants, and did affect price, the experiment would no doubt have fascinating implications for information’s role in pricing.  The cost of the experiment would be low, and could potentially allow for a business model after development.

If similar projects have been done before, or if anyone well connected has an interest in making this a project of the Uzbek monetary authorities, by all means please comment.

Mobile Payment and Banking Opportunity

Employees are paid in a combination of physical cash (Uzbek Sum) and direct deposit into bank accounts.  These bank deposits are only nominally cash, since the banks themselves do not have the currency to dispense to the deposit holders.  However, these deposits can be accessed through a Visa debit card at supermarkets and some upscale retail shops.  In order to make any sizable purchase, one must carry large bricks of Sum around, or use US dollars, which are difficult to obtain.  With inflation continuing, lugging around cash to make purchases becomes only more of an annoyance.

There is an opportunity for a mobile phone-based transfer system that could act as a replacement for currency, allowing buyers to transfer cash-like credit to sellers through their mobile phones.  The payment transfer company could accept physical Sum, which would then be converted to “eSum” in the users account, and used as a medium of exchange through the phone.

Technologies like this are developing similarly in India and Sub-Saharan Africa.  With the right vision, technology, and relationships, solving this problem in Uzbekistan could provide a fundamental building block to the economy.

When Scott asked if I could write a post on Islamic Finance for the blog, I nodded with enthusiasm. To be honest I am a relative newcomer to this topic and a non-Muslim, and though while supremely curious I feel I run the risk of offending others on a subject that can be sensitive. Nevertheless, here we are.

The first thing that caught my attention about Islamic finance is its recent origins. Although religious scripts governing Sharia law have been around since Prophet Mohamed’s time, Islamic finance only emerged after the Second World War. It didn’t emerge as a result of new, groundbreaking economic principles, but as a response to a series of clashes between western and Muslim nations, which led to a rise in pan-Islamism.

Among the consequences of this movement was a change in the ways of commerce among Muslims. As Gulf nations withdrew petrodollars they held in the West and began dumping them in their own backyard, cities like Dubai and Kuwait emerged as hubs for the practice and display of Muslim financial piety. By the 1970s, Islamic scholars, economists, and intellectuals were busy studying and interpreting passages of the Quran for the creation of a framework for Islamic finance.

Theological Underpinnings

There are several factors that appear to make modern day Islamic finance different from conventional finance, the most important of which is the prohibition of interest. Wikipedia amply lists all these traits.

Al-Baqarah 2:275 Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah . But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein.

But this prohibition isn’t unique to Islam. The Old Testament also regards the charging of interest as immoral. Exodus and Deuteronomy specifically regard lending to the poor as a sin.

Biblical Parallels

Exodus 22:25 - You shall not give him your silver at interest, nor your food for gain.

Deuteronomy 23:19 - Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury

Leviticus 25:37 - Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase

It was only during the European Renaissance when Protestant reformer John Calvin changed the status quo. He argued that not all rules in the Old Testament set out for Jews (who were permitted to lend to gentiles) were applicable to Christians and that one must not interpret these passages in a literal manner. The bible should simply serve as a guide. But Calvin’s real concern was the exploitation of the poor through high interest rates. In Calvin’s letter to Oekolampadius, he writes that he is unwilling to condemn usury so long as it is practiced with equity and charity. Whoever borrows should make at least as much, if not more, than the amount borrowed, meaning that as long as one is fair and reasonable, charging interest should be allowed.

Calvin’s words were such a blow to the Church that interest became legalized across Europe. This was a major turning point in history. It is interesting that Calvin’s view, which forms a basis for modern day capitalism and bank lending, was effectively reversed by Islamic scholars in the 1970s. Is this to say that Muslims, who did business like others in corporate America up until the 1970s, were all of a sudden subject to the new rules of Islamic finance? Yes, in a sense. But there is a twist to it all.

According to Sharia scholars, a guaranteed rate of return on an interest rate is prohibited because the lender and borrower typically bear an unequal level of risk. For example, Sharia scholars prohibit the issuer of a bond to default on an interest payment and then go bankrupt, because those at the bottom of the pecking order virtually have no claim to their monies. Therefore much of Islamic finance is about creating a mechanism that reaps the benefits of bank lending with the appearance of profit sharing (Mudharabah).

Financing Structures

Consider a car loan. If I were to take out a loan in the UK, the bank lends me money and I repay the loan at a predetermined interest rate. Should I become unfit to service the loan, the bank revindicates (repossesses) the car, collects what is owed, and refunds the remainder (if any). If I were to go to an Islamic bank, the bank buys the car, and then sells it to me at a premium, also to be repaid at predetermined intervals (Murabahah). Although I end up paying the same amount under both scenarios, Islamic scholars believe that the latter scenario is only fair because should I default, the bank simply revindicates the car with no further claim on me. In the earlier scenario, the bank may further pursue me for any remaining principal if the repossession doesn’t provide enough. Thus Islamic banks do charge for the time value of money.

Another popular Islamic investment product is a sale/lease bond, aka Sukuk. Suppose I am a property developer and wish to build an apartment complex. I would sell a piece of real estate to a special purpose vehicle (SPV), which raises the funds by selling share certificates. The SPV leases the asset back to the issuer (me), thereby collecting principal plus interest and passes the proceeds back to the sukuk holders in the form of rent. At the end of the lease, the SPV sells or gives the property back to the issuer.

Other types of Islamic financial transactions exist. But to me the above examples are enough to suggest that Islamic finance is nothing more than smoke and mirrors. Islamic finance uses complicated structures to achieve the same goal as conventional finance, but with added cost and decreased transparency. At the end of the day, profit and interest by any other name is still profit and interest. It is hard to imagine that this was the Prophet Mohamed’s objective.

Interest in Indonesia

Having grown up in the world’s most populous Muslim nation, I want to share my observations on Islamic finance in this part of the world. In my opinion Indonesia sees Islamic finance like a dot in the horizon. I can assure you that the majority of business done in Indonesia is definitely not Sharia compliant. Even more fundamentally, more than half the population, which lives in poverty, has probably never even heard of Islamic finance.

The problem with Islamic finance is that it has no global standardization. It emerged in the 1970s in the Middle East, which explains its varying level of demand in different Muslim countries. And as Islamic finance continues to emerge in different parts of the world, it faces the danger of generating greater differences and inconsistencies. A recent Bloomberg article calling for certification among Muslim scholars is further testament to this problem.

Don’t the Saudis own shares in Citi? Are wealthy Indonesian Muslims putting their money into Singapore or their own Sharia banks?  As the market continues to develop, time will tell how market priorities interplay with religious doctrine.

Hong Kong has built its reputation as a city famous for transacting business.  Both an active market itself, and the great gateway to China,  the city boasts a fantastic cast of commercial characters.  During our time there, I met with a few old friends who are working on various ventures, in capacities ranging from entrepreneurial chief executive to dogged analyst in the largest transactions the global financial markets have ever seen.

Robert Neville – California Wine Supply

Rob, an eminent entrepreneur, rugby player, Brown alum, and childhood friend spends his time developing a business, California Wine Supply. He imports wine from our native California to the Hong Kong market.  Initially planning on selling to mainland China, Rob has chosen to start with the local market as a healthy foundation for the business.  Now his considerations range from logistics (how does one transport 20 cases of temperature-sensitive wine across the Pacific Ocean), to judging local tastes, to engineering price-points palatable for restaurants and retail, and securing available capital.  Luckily, regulations are on his side, as the import taxes on wine in Hong Kong have dropped considerably recently, allowing him a fantastic opportunity to build a new market.  What’s more, the most natural way he saw to market himself – social media – has become the darling medium of the consumer world.

Cool, calm, and collected, Rob serendipitously found himself in the position of the Social Media King of Hong Kong wine by releasing admittedly hilarious wine tasting videos from his time in Hong Kong and Shanghai.  Furthermore his Twitter feed attracts followers of the Hong Kong wine scene, and earned him a spot as an organizer of the Hong Kong Tweetfest and as the social media guru for upcoming wine shows in city.

What kind of an appetite will Hong Kong, and eventually mainland China, have for California wine?  In a market dominated by French vineyards, it will take a bold character like Rob to innovate and produce a product for sophisticated consumers.  Some prototypes now include blended varietals inspired by European tastes from regions in California previously wedded to wines consisting of single grape stocks.  Packaging too, he claims, could use a revamp, as that’s how most buyers, in conjunction with price, choose a wine.  Imagine a single piece of duct tape in place of the front label:  title optional, with only regulatory labeling on the rear.  Whatever the market demands, he’ll no doubt imagine and engender a set of imaginative solutions.

Mr. Josh Z. – Banker Extraordinaire

Mr. Z has quite a different approach to his career than Mr. Neville.  Mr. Z worked tireless summers in New York and Hong Kong during Brown University summer breaks at the finest investment banks in the business.  Upon graduating, he turned down admission to Stanford’s graduate school to take a job with China International Capital Corporation (en – 中文), the Beijing-based state-owned investment bank that co-underwrites IPOs for major Chinese corporations.  There, under a strenuous schedule, he worked on the initial public offering of the Agricultural Bank of China, which, if the bank chooses to exercise their full offering of shares, will be the largest IPO in history.

Completing that, he was poached by a global top-tier investment bank to work in Hong Kong under a senior advisor responsible for taking some of the most venerable firms in Silicon Valley (like Amazon, Google, and Cisco) public.  At this new bank, he takes responsibility for a swath of clients in the technology and media space, most of which are Chinese variants of western Internet super-phenomenons.  Curiously, these firms choose to go public as the successful firms of Web 1.0 did, while the largest western players in Web 2.0 tend to get acquired or stay private.

We met at his offices in Central and hustled over to a street of Lan Kwai Fong.  There, we sat down at the Luk Yu Tea House, one of the last surviving in Hong Kong with interiors ornately decorated in the Old Shanghai style.

After ordering an array of mouth-watering dishes, he began to describe the professional life that was now his own.

His schedule:

• Monday to Wednesday: Work in office from 10:00 am to 5:00 am
• Thursday: Fly early morning to Beijing to meet with clients; fly to Shanghai in evening.
• Thursday night: No sleep – prepare meeting materials for the clients in Shanghai.
• Friday: Meet with Shanghai client; fly to Hong Kong in evening
• Saturday and Sunday: In the office from 1:00 pm to midnight, catching up on sleep while not at work

What exactly does he do during these many working hours?  Model financial statements, produce pitch books, proofread, prepare filings with regulators, and author massive investment prospectuses.  As we spoke, he punched away on his Blackberry, communicating with high-quality, highly confidential printers in Hong Kong and on the mainland whom the firm would pay $100,000 to print 10,000 three fingers books.  Some of these IPOs, he mentions, generate $1,000,000 in fees for printers alone.  “I should be in the printing business,” he quips.  Quite amazingly, these printers will reprint the prospectuses again and again for the bank if any changes need to be made in the text.

He admits that it’s putting a tremendous amount of stress on him, letting his body and social life deteriorate.  He flies first class on Cathay Pacific every week, and stays at the nicest five-star hotels in the cities where he travels, but he couldn’t care less about those perks.  Without much entrepreneurial freedom, and mostly fighting exhaustion, he quizzes me on start-up life and on getting involved with high-tech ventures.  While tense to witness, Mr. Z is admittedly making history, taking gigantic Chinese banks public and participating in the IPOs of the most notable Chinese tech companies.  It’s bankers like Mr. Z who empower entrepreneurs, their customers, and their users by providing providing the ultimate liquidity of a public stock offering.  China needs people like him, supporting these entrepreneurs in high-technology, high risk ventures.  Where he will go next? To the start-up side, or to the investment buy-side? It is yet to be seen, though we will no doubt revisit him on AsiaWheeling 3.0 as he continues to seize his destiny.

Ben Rudick – Doing Good and Doing Well

I originally met Mr. Ben Rudick by inviting him and Mr. Nathan Wyeth to join Woody and me for dinner in Tokyo at the delicious Korean yakiniku restaurant Ton Ton Tezi.  At this restaurant, the plate that fries the meat is slanted, with meat upstream and cabbage at the bottom of slant, thus coating the vegetable in delicious fatty oil.  In Hong Kong, we met for lunch, and I snapped this portrait of him outside his office in central, joking that he needed a photo for the back of his book cover.

At the time, Ben and Nathan were working for the Shoenfeld Foundation identifying projects for investment in the social enterprise space.  Now in Hong Kong, Ben is focusing much of his effort on being director of the program for “Empowering Chinese Social Enterprise Leaders” (ECSEL) This fantastic program provides full scholarships in the U.S. for young Chinese social entrepreneurs to develop their businesses and engender positive change.  The program was launched at the Clinton Global Initiative in 2009. Pictured below are two of the 30 scholarship winners, Jingji Zhang and Wang Jun, next to Ben Rudick, Bill Clinton, and Bill Shoenfeld (of his eponymous foundation).

Ben’s efforts continue to grow in the social enterprise space, with future possibilities for investment and further cultivation of Chinese social entrepreneurs.  Graciously, Ben provided some invaluable advice for my own ketchup business over don-katsu lunch from the delicious cafeteria in ThreeSixty (more below), and for this I am forever grateful.

Beyond these fascinating characters, there are a few other phenomena in Hong Kong worthy of an Adventure Capitalist mention.

Pick Your Poison – Signing with Currency Choice

My blue polo shirt became stained, ripped, and eventually lost at some point on AsiaWheeling and thus I was happy to visit my favorite Japanese clothing retailer, Uniqlo, to acquire an identical one to replace it.  At the cashier, I was surprised to see a receipt in which I was to circle which currency was preferable to pay with my credit card- U.S. Dollars or Hong Kong dollars.  Before this, I had not come across this, and wondered what the value was in giving the customer this choice.

The Hong Kong Dollar is soft-pegged to the U.S. dollar, so the discrepancy in values would not be great, though I wonder if credit card issuers may add fees to purchases in foreign currencies.  Thanks to CitiBank, this was not a concern, though I encourage more hypotheses for why this system developed.

A Day at The Races

Horse racing, the only legal form of gambling in Hong Kong remains phenomenally popular among the people of the city.  Cabbies have their favorite horses and study the odds published in the sporting press, while expats attend the races to socialize and punt on random horses, and all over the world gamblers can place bets thanks to the advanced online betting system set up by the Hong Kong Jockey club which organizes the races.

I was lucky enough to be invited by a group of expats to watch a race in Happy valley, which was quite a visual experience.  Elderly ladies with FM radios gather around each other to chat, while middle aged men swill skol beer and roll up their pantlegs.  All in all, it was most definitely a spectacle to see these beasts race, as well to consider the races a a popular point for socializing among the many expats, many of them British.

Brand and Retail Evolution

Hong Kong has also gained in retail sophistication since my time studying there, and while not all the below firms are new to the city, they warrant a mention.

Aesop, a Aussie line of skin care and cosmetics that AsiaWheeling highly regards has expanded to Causeway Bay.  Their scientific  presentation, black, green and white color scheme, and codified simplicity of packaging make them a joy to behold.  The brand respects consistency as the aesthetic extends from the product, to the marketing collateral, to the retail store design.  While much less complex and developed, they rival Apple in their ability to immediately convey calming value to the onlooker.

Another is Greenfingers in central, which provides plants and accessories for home gardening with a striking aesthetic.  With all the growth in urban farming, I’m curious to know trends about houseplant purchases in cities worldwide.  I remember colleagues of mine investing in Christian Tortu designed indoor plants at Tokyo Midtown and being quite curious about the market for these beautiful inanimate green pets.

Great Food Hall, City Super and ThreeSixty are three phenomenal gourmet grocers which have also continued to grow.  Focusing on the highest quality products and shopping experience for a market increasingly conscious about a natural and organic origin of their foods.

Ketchup Adventure

Finally, it behoves me to mention much of my time in the city was spent researching how to ply the local market for the gourmet ketchup which my partners and I market primarily in the states.  Serendipitously, ketchup, a cantonese word (茄汁-k^he tsɐp), actually originated in the regions surrounding Hong Kong as a fermented fish sauce.

This experience involved a wonderful creative session at a local print shop to produce our pitch book, as well as meetings with retailers and distributors which led me all across the city.

From riding the trams of Admiralty, to meandering the midlevels, to late-night meetings in private clubs while wearing Sri Lankan sandals (the only shoes I owned), the adventure was a fantastic success in dipping into our first market abroad.

Tokyo Envy

Flying into Bangkok from Sri Lanka, we alighted from the plane and promptly began searching for food in the airport. The most obvious choice  seemed to be a ramen restaurant, which appeared fast, easy, and relative to airport food, reasonably priced.

Odd, I thought, sitting down, that our first meal in Thailand wasn’t the world famous Tom Yum Khaa or Green Curry we had been dreaming of. Watching people pass in the airport as I dined on these noodles, it seemed there was more of Japan in Thailand than just the food.  Clothing worn by the glitzy airport patrons brought me back to my time in Tokyo. The emphasis on and intensity of cosmetics on the light faces of women passing by matched Japanese standards of beauty and public presence.  All around the airport, customs officials and idle waitresses read Manga translated from the Japanese. Throughout Thailand we found that 7-11 (owned by Japanese Seven & I Holdings) does a brisk business, with over 5000 locations in the country, despite pricing goods at a premium over family-owned bodegas.

The aesthetic experience of Japan has permeated Thailand and become a point of desire held by a large class of consumers. Food packages, media design, retail experiences, and public transportation feature Japanese-style iconography.

These designs are characterized by simple geometric shapes to communicate meaning (such as flavor, function, or usage directions), anime-style illustrations, cartoon characters, and often Japanese writing, as if to suggest their progenitors or intended export destination. Japan, as a tourist destination, commands much attention among the Thai. Bangkok itself even has a surprisingly high number of Japanese expatriates, complete with associated neighborhoods of book shops, restaurant-filled streets, and cafes.

Korean cultural artifacts also have been in high demand among Thai consumers. While not as present in packaging and products, the K-Wave has swept across Thailand in the form of pop music, film, and fashion that has made Korea the new “cool” for Thailand. This wave of Korean and Japanese influence is especially interesting, as it can be considered to be unseating the U.S. and Europe as the cultural producers whose styles and products are interpreted and consumed in developing Asia. As Thailand looks to Japan and Korea as  trading partners, tourist destinations, and marks of high quality products, what are the implications for the future?

Overseas Chinese Entrepreneurship

Bangkok’s business community seemed to be the most pronounced example of a phenomenon we experienced in Indonesia, Malaysia, and Singapore: Overseas Chinese entrepreneurship. In Thailand it came as a surprise to discover Chinese heritage, as the vast majority of overseas Chinese business families in Bangkok had migrated long enough ago to adopt Thai surnames. The name Bangkok itself was given by Chinese traders who populated it as a port city before it became the nation’s capital. Vast numbers of Hakka, Fujian, Chaozhou, and Cantonese people settled in the metropolis to found manufacturing companies and create a financial infrastructure to support them. These Chinese now represent an engine of growth in the Thai economy, both producing manufactured goods that make up the bulk of Thailand’s exports, as well as driving growth in Bangkok’s upmarket institutions that firmly place it in the category of “world class city” as it would like to be defined. How far do these Chinese bonds go? Will they facilitate trade and partnership in the new wave of Chinese foreign investment in infrastructure and industry that has occurred over the last three years?  The sheer quantity of Thai-Chinese business families will no doubt make it a space to watch.

People’s Hero

AsiaWheeling visited Bangkok at a time of political upheaval, experiencing street demonstrations and all night speeches projected onto giant screens near a democracy monument. Hundreds of thousands of farmers and fishermen from rural areas came to rally, spill their blood, erect bamboo barriers, and demand elections be held. On the surface, this movement for democracy, against corruption, and against urban favoritism is one of altruism, making it easily encouraged by outsiders’ encouragement. The individual nearly deified on these red shirts is Thaksin Shinawatra, the former Thai Prime Minister who held office from 2001 to 2006. While the protesters demand new elections for a number of candidates, the understanding is that this will allow Thaksin to be re-elected.

Why should the Red Shirts favor Thaksin, other than the fact that he may be monetarily compensating both the leaders of the movement and the commoners for participating in the rallies? He’s a billionaire businessman and Thai Chinese (see above) who represents the elite old guard, who, one would assume, is out of touch with the needs of plebeians. However, during his time at the helm, Thaksin discovered the key to growing his popularity in terms of sheer number of supporters was to satisfy the rural poor. To achieve mass appeal, he instituted the “30 Baht per visit” healthcare policy, allowing Thai nationals to pay only 30 Baht ($0.90) per clinical visit and receive medical treatment at no additional cost. Additionally, he instated rural credit expansion programs, allowing individuals to borrow against their future incomes at very low interest rates, essentially nationalizing the payday loan industry.  Thaksin  legislated direct injections of cash into village development funds, and instated the “One Tambon One Product” stimulus program that  identifies superior goods in each sub-district and formally provides these products with marketing exposure on the national level.

However, something about Thaksin’s behavior doesn’t align with the Red Shirts’ cries to end government corruption. He has been accused of selling strategically valuable national assets to foreign governments, as well as for exhibiting illegal and nepotistic sales of Bangkok real estate to his family members. Now jet-setting around the world, Thaksin operates the Red Shirt puppet show in Bangkok from stopovers in Dubai, Moscow, Brunei, and London.

Before he was a politician, Thaksin was simultaneously a police officer and businessman who experimented with a number of failed ventures including a silk shop, a movie theater, an apartment building, public bus radio services, and security systems, which left him over 50 million baht in debt. Finally, with the help of his police connections, he founded Advanced Information Services (AIS), nominally a computer rental business, but one that went on to capitalize on mobile phone growth in Thailand just as the sector was beginning. Started in 1990, the firm gained a 20-year monopoly concession on 900-MHz GSM mobile service from the Telephone Organization of Thailand, growing rapidly and getting listed on the Thai Stock Exchange. One year later, it became the largest mobile phone operator in Thailand.

Thaksin would later grow his holding company, Shin corporation, into an entity that held large stakes in:

• AIS – The aforementioned mobile phone operator carrying the majority of Thailand’s wireless voice data.
• Shin Satellite – The first Thai company permitted by the Ministry of Transportation to launch satellites
• ITV – A major Thai television station acquired from the King’s Crown Property Bureau, with a 30-year concession to operate UHF frequency broadcasts
• Other portfolio investments include additional media, telecomunication, and information technology firms, as well as Thai Air Asia, the local branch of the low cost carrier.

In 2006 Thaksin and his family then sold their 49.6% stake in Shin Corporation for US$1.88 billion to Temasek Holdings, the sovereign wealth fund of Singapore. He has received considerable judgment for this sale, both because of the national information infrastructure assets that are now owned in large part by a foreign nation, as well because many of Shin Corporation’s business lines benefited favorably from legislation that was put in place when he was at the helm of government.  The fact that this sale was free of any capital gains taxation, based on Thai securities and investment law, further angered many.

In 2008, Thaksin was found guilty by Thailand’s Supreme Court of arranging the sale of plots of land at government auction for a discounted price, violating the National Counter Corruption Act, which prohibits officials and their spouses from entering into contracts with state agencies for such purchases. Sentenced to two years imprisonment, Thaksin continued on his self-imposed exile abroad, requesting political asylum in Britain stating that the case against him was politically motivated. Repeatedly, Thaksin has ignored the arrest warrants and bail terms and failed to appear in Thai court. Since then, he has lived as an elite global fugitive, spending the bulk of his time in Dubai, Manila, the UK,  and Germany, and obtaining status as a diplomat of Nicaragua.

As of the time of this writing, the Red Shirts are still demonstrating on the streets of Bangkok, sporting Thaksin’s image on coffee mugs and tee-shirts, under banners proclaiming “Truth Today” and “End Corruption.” How are the beliefs of the Red Shirts and the actions of Thaksin reconciled? Could it be  possible that, in the eyes of the Red Shirts, Thaksin’s siphoned cash and refusals to face justice are inconsequential in relation to the vast improvement in their quality of living? Or is it that the current government is, in fact, worse, exhibiting both corruption and ignorance of the farmers’ plights?

One thing is for certain.  If Thaksin is indeed seeking revenge on Thailand’s current government, he’s doing an incredible job of unleashing fury on Prime Minister Abhisit’s regime.

All around town, we had been seeing billboards promoting Ask Laila, a mobile, local search engine.  Now we were lucky enough to be ascending the staircase in an office building on one of Bangalore’s happening roads to the very office of this firm.  Nikhil, our Bureau Chief, checked us in at the front desk and we entered a room of work spaces.

It was well past 6:00 pm on a Friday, and the engineers were hard at work in front of computer terminals running command line scripts.  We were warmly greeted by Ask Laila’s CTO, Birla and his team, and seated in a corner conference room.

He began by explaining that Ask Laila was a tool for individuals to find local resources, such as hardware stores, plumbers, and restaurants, from their mobile phone on the go.  The service, he explained, is also popularly accessed from the web, as 60% of web search traffic is looking for local results.  Ask Laila can also be used as a tool for business owners, who can claim their listing, keep it up to date, and populate it with information that may ingratiate it in the eyes of potential customers browsing lists of results.  In these ways, Birla explained, the model is comparable to Yelp in the U.S.

However, as we learned from Indus, Birla reiterates that creating something like Ask Laila in India isn’t as simple as porting over the Yelp model.  For example, in the United States, one can purchase a vast index of businesses, addresses, and phone numbers akin to a digital yellow pages to incorporate into a local search engine.  In India, this did not exist until Ask Laila painstakingly located, called, and catalogued the businesses into their own proprietary database.  Furthermore, while there is a large group of users searching on their mobiles, as well as searching on the web, it’s more difficult to reach out to business owners to populate their profiles and keep them current.  Such shopkeepers and business owners are not generally web savvy, and especially outside urban areas do not have immediate access to a computer.

The technology must also accommodate users whose first language is almost certainly not English, which creates non-standard spellings of words as search inputs.  For example, the name Nandani, a girl’s name in India, may be spelled in a variety of ways illustrated below.

Ask Laila’s team has created a series of rules for grouping these non-standard spellings of words to produce the intended search result for the user, even if the spelling is not exact.  This allows people to search naturally and find what they are looking for.  Additionally, this series of relationships has not been catalogued as of yet and could prove both useful for other web search businesses, as well as fascinating for linguistic studies in the country.

But the tall tasks Ask Laila has had to take upon itself have placed it in a rarefied competitive position. Ask Laila now powesr mobile local search for AirTel, one of the India’s (and the world’s) biggest mobile phone providers.  This partnership has allowed Ask Laila to scale its technologies and optimize its search rules, like the one illustrated above, with a vast number of users.

The engineers at Ask Laila were sharp as tacks, and impressed us both with their understanding of the business and product, as well as their love of cycling.  At the onset of the company, they bragged that 50% of the employees cycled to the office, as it was much faster than facing traffic in a car, bus, or motorcycle.

After learning about their projects in greater depth, we bid farewell and safe cycling to the team and set off on the road for dinner.

In Bangalore we were to spend the next two days meeting with individuals and institutions that embodied innovation and entrepreneurship.  The meetings began in the garden patio of the Bangalore Leela Palace, where we wagered the coffee would be strong.  Nikhil, our India Bureau Chief, had arranged for us to sit down with Indus Khaitan and discuss how technology is engendering change in communication, information access, banking, and education in India.

Indus has made a life for himself as a serial entrepreneur and early-stage investor.  In May 2009, Indus joined The Morpheus as a partner.  The Morpheus is an early stage investment firm that works with startups in the first 12 to 18 months of business, a period known as the “valley of death.“  As a firm, they act as a “limited-cofounder,” in a hands-on capacity to assist founders by offering their wide breadth of experience, making critical introductions, and providing a nominal amount of capital.  The firm refers to this combination of support as its “Business Acceleration Program.”

The comparison that most people make with a project like Indus’ is Y-combinator, an early stage startup incubator created by Paul Graham, active in Silicon Valley and Cambridge, Massachusetts.  However, Indus is quick to point out that one can’t so quickly draw direct parallels between the Silicon Valley startup world and that of Bangalore.  This rings true both in the business models of the startups themselves, as well as the role institutional investors play in startup growth.  The Morpheus’ portfolio companies not only include web startups, but also real estate firms, retail businesses, and professional service providers.  The Indian markets pose challenges for startups in all sectors, and The Morpheus is able to provide support across many industries.   As Indus says, “India has a lot of unsolved problems.”  This allows The Morpheus to branch out from the traditional technology-focused institutional angel investment model, while retaining the possibility for exponential growth across a broad base of portfolio companies.

Indus introduced himself in a reserved, yet youthful manner.  After dispensing with the small talk about his time in Northern California, as well as the experiment of AsiaWheeling, we began discussing the sea change occurring in the Indian consumer market.

Negative Interest Rates?

We began the conversation with an uncommon financial phenomenon seen rarely outside the dark offices of Swiss Banks: negative interest.  The story began with a team of Indian railway laborers maintaining track in the country’s north, and earning heightened wages as a result of the National Rural Employment Guarantee Act, legislated in 2005.  Not accustomed to earning such wages, and because of the cost and difficulty of remitting it to the village in which their families  resided, the laborers would squander the cash on vices.  Beginning to regret the errors of their ways, the workers began requesting their supervisor to physically retain their wages in the worker’s custody.  For this custody, the supervisor charged a fee, essentially creating a deposit account for the workers with negative interest.

Why didn’t the workers simply open a real bank account?  The fact Indus shared, is that 81% of India is unbanked.  Because of the personal identification required, poor rural branch proximity, illiteracy, and a host of other issues ranging from trust to regulation, most Indians do not have bank accounts.  This opportunity, in particular, is one that has been rediscovered by technology firms.  With the emergent developments such as sente and airtime banking in Africa, the players positioned most obviously are the mobile phone providers.  With excellent rural penetration and customer trust, these mobile providers could potentially turn every basic phone into a device for sending, receiving, and depositing cash.

However, Indus explains, the mobile providers like Airtel and Vodafone aren’t licensed to engage in such activities;  regulation prevents it.  In their place comes a recently formed consortium of firms: Nokia, Obopay, and Yes Bank.  Nokia, the hardware firm that dominates the handset market in India invested $70M in Obopay, the mobile software startup. Together, they have partnered India’s Yes Bank to capitalize on this opportunity, which represents the first step to providing scalable options for the now unbanked.  Game on.

Learning from the Liquor Business

Conversing about this opportunity allowed us to analyze one of the truly massive oligopolies of India: the mobile phone market.  India has over 700 million mobile phone subscribers, with anywhere from 400M to 500M active at any given time.  Indus specifies that 95% of the connections are prepaid, offering ease to the consumer in budgeting and activation, as well as ease to the provider in reducing credit risk.

Moreover, Indus mentioned that many of the lowest-income users of these phones do not know how to save or recall a number in the phone book, using the phone purely to receive calls (which is free), or simply call the last number dialed in the phone.  AsiaWheeling and Indus brainstormed for a while on how one might design a phone to suggest common numbers for saving, which could be driven by an interactive voice interface.  While such innovations would increase the cost of each phone in both hardware and an initial phase of software development, the decreasing cost of manufacturing and huge scale of the consumer base may soon warrant a similar technology. No doubt, firms like Nokia are undertaking such research across the global south.

While India looks strikingly modernized sitting in the garden patio of the Leela Palace, the reality is that 70% of Indians reside in rural areas, subsisting on farming and fishing.  One of the major challenges faced by both Indus’ portfolio companies as well as giants like Airtel is reaching this vast, disparate, and relatively unconnected population.  In fact, Indus exclaims, these rural areas command 60% of the marketing budget for such larger firms.

How does one market in a village?  Many of the villages these companies seek to market to are not even on the books of the local government, and require a re-discovery by the private sector, a theme we saw repeatedly in India.  Almost quaintly, firms like Airtel will send mascots dressed as mobile phones to villages to strut around as loudspeakers play music and corporate slogans.  Radio, one of the most pervasive and low-cost mediums of mass communication, is used in conjunction with such physical appearances, alerting the populous of an event or giveaway in the village.

Outdoor marketing is commonly strategically placed on temples and shrines, which welcome the income and serve as a fantastic replacement to the billboards that are non-existent in the vast majority of villages.  Where did they learn these marketing techniques for the fragmented rural market?  Who taught companies like Airtel how to sell to the common man?  Indus elucidates for us in a hushed tone: they learned from liquor companies.  While we were initially surprised, it became clear that the liquor industry’s marketing has been some of the most original and effective. As AsiaWheeling was told in later interactions, the liquor store is the easiest shop to find in India, as it’s the only business with a queue.

Extremely Lucrative Schools

Ask Indus what he’s looking for in terms of talent to staff the startups in his portfolio, and he’ll tell you that specialists are the most desirable.  Whether it’s in marketing, software architecture, or engineering, a specialist proves a critical asset to the firm.  This comes as no surprise, given the value of experience in any labor market. Particularly, Indus looks for those who have a proven knack for marketing, which, he quips, is so sorely lacking in many Indian firms.

This brought us to learning about the phenomenon of for-profit educational institutions that have been on the rise to cater to the many new entrants to the “knowledge labor” pool looking to ingratiate themselves to potential employers.  Many of these schools are tiny, ad-hoc institutions using space in an office building, peddling meaningless degrees.  However,  operating such an institution proves to be “extremely lucrative.”  Because of regulatory and bureaucratic obstacles which would otherwise let new entrants in easily and drive down profitability, 90% of such schools are started by former politicians.

Interestingly, he notes that in funding and hiring new grads he puts no stigma on not having graduated from an IIT or IIM, which are the de facto top schools in India for engineering and management, respectively.  Indus claims that the drive of those graduating from second-tier schools is often heightened because they have more to prove, and their level of intelligence and training proxies that of a tier-one grad.  However at any level, he reiterates, the soft skills of persuasive communication, interpersonal coordination, and branding are in demand.

Exacting in conversation, with a swift recollection of figures and percentages, Indus proved to be a fantastic introduction to AsiaWheeling’s time in Bangalore.  The broad, yet interconnected nature of India’s evolving consumer-facing industries provided a firm foundation for the remainder of our investigation of innovation in India through the lens of this city.

Singapore is famous for its capitalism.  In some ways, the state itself has grown and continues to function as a kind of corporation, with citizens playing the role of employees subject to strict policies and the role  of shareholders, benefiting from the success and prudence of management.

Separated from Malaysia in 1965, perennial statesman Lee Kwan Yew oversaw its rise from an underdeveloped colonial outpost to a first world Asian tiger.  It ranks 23 in the 2009 Human Development Index, above Hong Kong, South Korea, and Greece.  The de facto financial center of Southeast Asia, Singapore boasts enviably high rule of law, investment in education, and shrewd policies attracting the globally educated to immigrate.

A friend of AsiaWheeling and Harvard graduate plans to move to Singapore before the year is out.  Because of his high caliber education, he can receive a passport to the nation-state within two years.  With tax and regulatory concessions available for industries the government wishes to encourage, a growing number of alternative investment managers and global financial institutions are migrating their legal entities, their employees, and their (albeit low) tax dollars to Singapore.

Citizens of Singapore are healthy, courteous, and enjoy much greater income equality than Hong Kong or New York, alleviating many social class pressures.  A businessman in Hong Kong once told me, “If you ask a taxi driver in Hong Kong how big his apartment is, he’ll tell you it’s 389.27 square feet exactly.  If you ask a Singaporean taxi driver, he’ll tell you it’s somewhere around 400 square feet.”  Singapore’s social and economic policies have resulted in this relaxed, non-competitive attitude, which encourages community involvement and a sense of social responsibility.

On the MRT in Singapore, we saw a young man in a fitted baseball cap volunteer his seat when an elderly man boarded the train.  On the Tokyo subway, even the priority seats for elderly, disabled, and pregnant are filled with dozing salarymen during rush hours.  Singapore smacks of a utopia.

But Singapore has a dark side.  It’s a place where drug addicts are caned, rounds of layoffs can happen under the guise of a fire drill, and the government’s tactic for squelching dissidents is to sue them for sedition, bankrupting them with legal fees.  Multicultural harmony is advertised and prided, though the city still suffers from racial divisions and sports neighborhoods that double as ethnic enclaves.

Road crews and other blue collar jobs appear to be dominated by the Tamils, whose script is invariably last on the multilingual municipal signs. Singapore’s multicultural composition can also spark conflict.  For Chinese New Year, McDonald’s released a set of the 12 zodiac doraemon, but had replaced the pig with a doraemon holding a heart.   Chinese New Year happened to fall on Valentine’s Day, and the pig was certainly not Halal.  In an attempt not to alienate their Muslim customers, they outraged the Chinese community,  and began producing a new toy zodiac pig, and posted the apology below.

Prostitution finds its way into a legal gray area, with the odd-number buildings of certain districts designated as mid-rise brothel/bar complexes.  Karaoke bars of ill-repute lubricate business deals by allowing expenses to be reimbursed by what appears to be a shockingly high bar tab.

With punishments for petty crimes so high, desperation seems to reign, as human nature enjoys a bit of sin.  Singapore’s underbelly proves that the city is not fully the nursery rhyme it purports to be. Dig deep enough and you’ll find plenty that smacks of a dystopia.

Many of those to whom we explained the experiment of AsiaWheeling admitted they would have loved to have engaged in such a project in their youth, but even with the means, it was simply not in their consciousness.  The education system, which churns out highly analytical graduates, coupled with the mandatory military conscription, which teaches hierarchy and teamwork, somehow misses out on equally developing creativity.

Frank Lloyd Wright said, “Give me the luxuries of life, and I will do without the necessities.”  In the increasingly interconnected global economy, analytical minds will be the backbone of competitive development.  However it will be this analytical firepower, coupled with creativity and passion, that will really define innovation to come.  Without developing the creative faculties of its people, Singapore may find itself in an unexpected state of imperfection.

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The Hutton Lodge was in a place called Georgetown, named after Britain’s King George III, and breakfast at the Hutton Lodge was quite nice, and as a nod to the British, served in the courtyard. We munched on buttered toast and a kind of banana lemon poppy cake, while washing it down with cup after cup of lackluster instant coffee, lightened with nonfat powdered milk.

Feeling quite refreshed and refueled, we took to the streets.

The first waypoint was Citibank, where we were not surprised to find that CitiGold status here too would not allow us to change currency, only withdraw funds. The Citigold lounge with free coffee, filtered water, and plenty of Chinese fellows chilling out was almost enough to make us forget all about it.

We stopped at a beef bone noodle joint for lunch and were invited into the back kitchen for a lesson on local coffee preparation. The Penang style, we found, was to take raw beans and fry them in butter until they were very dark brown.

The coffee was then made by boiling these buttered beans in water and filtering them through a kind of sock.

The resultant brew was creamy and oily black.  The coffee was truly some of the best we’ve had on all of AsiaWheeling, up there with Cafe Grumpy in New York City, Pointage in Tokyo, and Pablo’s in Denver.

The fellow also took a moment to explain to us another local delicacy, which was a kind of sweet nutmeg drink, served hot or iced.

Back on the cycles, we worked our way toward the looming forested mountains that back the city of Georgetown. They seemed to be collectively called “Penang Hill,” but to this Iowa boy they seemed to be much more like a bunch of small steep mountains.

At the base, we selected one of the many small snaking roads that worked its way up into the hills. We climbed for a while, eventually finding ourselves at a kind of park. Turning off the main road, we noodled into the park, where we spent about as much time riding as we did portaging the cycles over stairs and other obstacles.

One quite steep descent and a bone rattling ride over some frighteningly large bits of gravel later, we were back on the road, wheeling toward the city center, calling waypoints from time to time to explore some of the stranger and more beautiful pieces of Penang’s modern architecture.

A short waypoint was called to investigate a Protestant cemetery that felt like something out of a Washington Irving tale rather than a feature of this Malaysian island.

Back on the cycles, we decided to indulge in a wheel through Penang’s “Little India,” enjoying the music as we traveled.

There we made special note to revisit a very interesting looking coffee joint, advertising a kind of siphon coffee. My suspicion was that this was a variation of vacuum pot coffee, but it would be interesting to see how it was implemented in a retail setting.

At the advice of a local Tamil magazine vendor, who was also able to provide us, to our great joy, with an issue of The Economist, AsiaWheeling’s favorite publication, we tore on toward a local giant shopping center called “Pacific.” The Tamil fellow had explained to us, through his very large mustache that we would find the largest selection of chips and snack-food there. This was true, but we found ourselves almost unable to enter the establishment due to the blisteringly loud broadcast of its theme song, “Pacific, Pacific… something in Malay, something in Tamil, dedicated to your customer value!”

We barely escaped with our sanity and a load of local chips, the most delightful of which displayed a small child struggling as though immersed in some kind of viscous fluid. The chip itself was a fish-flavored curl of fried lentil flour. Highly, highly, recommended are these Murku Ikan.

That evening we dined at a local Indian restaurant. This was the first re-introduction of authentic Indian cuisine for AsiaWheeling since our time in that strange and wondrous land during the pilot study. We instantly became very excited about our upcoming travels in India, and delightedly dug into our dosas, tandoori chicken, paneer naan, and vegetable biryani, knowing there was plenty more where that came from.

Exhausted and happy, we settled into our room at the Hutton Lodge, and quickly drifted to sleep.

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