Entrepreneurs, Entrepreneurship, Founders, Philippines, Startups

Top 10 People to Meet in the Philippines Startup Scene in 2016

2016 is particularly crucial not just because it’s an election year, but also because it’s a milestone for the early cohort of startups founded in 2008-2014 to see if they can make it to their next phase of growth.

It’s also an exciting time as Facebook is set to launch its Manila office, and Uber, Google, and other Silicon Valley giants are scaling up their operations in the Philippines.

These are the people who I believe will play crucial roles in shaping the Philippine startup eco-system in 2016. My criteria is simple, though admittedly subjective: they’re people who 1.) I’ve personally met, 2.) are incredibly competent, intelligent, and are in the top 10% of their field, and 3.) are generous with their time and genuine in their desire to help build the eco-system. You can check out my 2014 list here.

So, in alphabetical order, here are the top 10 people to meet in the Philippine startup scene in 2016:

1. Senator Bam Aquino. The neophyte senator is proving he can outperform the old guard in an institution known more for its grandstanding (those endless inquiries in “aid of legislation”) and coddling thieves of the highest level (the pork barrel scam). Bam’s the vanguard for progressive legislation. In just 3 years, Bam has authored entrepreneurship-focused laws such as Go Negosyo Law and the country’s first Competition Act.

In 2016, he’s working on a startup law that seeks to rationalize existing rules to make them more in line with the needs of the digital economy and make us more competitive with ASEAN neighbors. The ideas on the table: a limited liability company law (which requires amending the Corporation Code to allow for single-person corporations), immigration, amending the Retail Trade Law.

2. Pia Bernal & Alex Alabiso: Kickstart Ventures. In the 4th year of Globe’s experiment in seed and venture funding, Kickstart‘s practicing what it preaches by continuously iterating (disclosure: my startup is a portfolio company). Alex Alabiso comes in as head of portfolio development in Kickstart and has such a unique profile – he’s one of the investors with an engineering background. Pia Bernal, head of social enterprise investments and communications manager, has actually been with Kickstart from the beginning – but is now spending more time helping the portfolio with everything from training and development, to strategic partnerships. Mentored by Kickstart founders Minette, Dan, and Christian, Alex and Pia are undoubtedly playing a more active role this year.

3. Lawrence Cua: Uber. In the city with the world’s traffic, Uber has helped shape regulations for on-demand transportation apps. The app is undoubtedly loved by Filipinos, but 2016 will be a crucial year because it’ll help answer the question of whether Uber actually helps worsen or improve the traffic situation in Manila. The simple reason: unlike US cities, most Uber drivers aren’t car owners themselves but employees of entrepreneurial Filipinos who purchase small fleets and then plug them into the network. We’re waiting for Uber to publish more data to answer this question.

4. Diane Dugan Eustaquio, Goldy Yancha, Dustin Masancay, Kat Chan: IdeaSpace. With the new funding model in place (no equity!) and a new location along Arnaiz Avenue, the next iteration of the Ideaspace program will likely feature bolder and more diverse ideas that can attract a wider base of first-time entrepreneurs. With their grassroots reach across colleges and universities all over the country, the team’s crucial in spreading the gospel that there is an alternative path to a corporate job.

5. Mohammed Malik, GM, Thumbtack. The US-based local services marketplace employs over a thousand Filipinos to help grow operations. Why does it matter? The kinds of career opportunities Thumbtack presents to young Filipino workers is helping them realize that a call center job isn’t enough: that they can be part of a creative and entrepreneurial class of innovation-driven companies.

6. David Margendorff: Founder & CEO, Pawnhero. The country’s first online pawnshop has been super busy the past year, from winning Echelon in 2015 and the 2016 Osaka pitch contest in Japan, to securing funding from Softbank. With this background, David could choose to be anywhere in Southeast Asia – like the bigger market of Indonesia. But he’s chosen to bank on the potential of disrupting the technologically-challenged pawnshop industry in the Philippines.

7. Matt Morrison: CEO, A Space. With new co-working facilities in Makati, BGC & Cebu, A Space is evolving not just as an office leasing play, but as a hub for communities in tech, fashion, music, and the arts. Among their anchor tenants: Endeavor Philippines, Canva, and Grab. The creative mind behind the movement is Matt Morrison, a transplant from London who’s spent his career in media and advertising.

8. Henry Motte-Muñoz: CEO, Edukasyon.ph. Fresh from being named as one of Forbes 30 under 30 social entrepreneurs, Henry isn’t about to stop as he rides the momentum of building the first comprehensive database of classes and scholarships in the country. Don’t let the banking and private equity background get in the way – Henry’s also one of the nicest, most thoughtful, and most down-to-earth founders you’ll ever meet.

9. Jerome Uy, Founder MedGrocer. What do you call a product category that makes Php 100 billion+ a year, with a market leader that has 80% market share, yet with overpriced drugs and 80s-era IT? Ripe-for-disruption. To say that this is low-hanging fruit would be understating the opportunity. More like a huge, juicy, sweet mega-tasty round piece of fruit just yearning to be plucked. MedGrocer is the first to reach out before the lazy farmer notices someone is actually there. Plus: Jerome has a “never say no to a first meeting” policy.

10. Orlando B. Vea: CEO, Voyager Innovations. The co-founder of Smart has been driving the digital arm of the PLDT group for the past 3 years, and has been on a hiring spree as Voyager beefs up its diverse product portfolio in fin tech, e-commerce, and digital media. It’s an ambitious play, at a time when the core business is navigating a 3-year digital pivot. Among it’s flagship products: mobile money platform Paymaya, and Lendr, an online marketplace for loans.

Anyone else you want to mention? Drop their names and organizations in the comments section!

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Debate Notes and a Better Way to Test Presidential Candidates

Notes debates

Source: Screenshot from TV5 livestream

In Harvard Business School, majority of exams allow notes. That’s not because the faculty wants to make it easy for students. They want to make it harder.

In a typical Harvard case exam, students are asked to respond to broad, open-ended questions like “Should Uber launch a self-driving car?” or “How should Apple respond to federal requests for access to encrypted software?“. Not only do students have to write a convincing case, they have to do so with limited time and word count. It’s also hard because there are no right or wrong answers.

If you haven’t mastered the material, trained your mind how to think analytically, or break down issues in a structured manner, your notes won’t help you at all. If anything, they’ll make it harder to make a compelling argument.

In an increasing number of Harvard classes, the exams are  also practical: build an actual website that generates revenue. Or an app or a service that has actual users. Your notes would obviously mean very little for these.

(Personally, I would’ve advised Mar to just allow Jojo Binay to freely brandish his folders on stage. In the college debating world, we had this tactic of luring an opponent to spend a long time defending a position. And then in our speech, concede and agree to everything they just said – because it was irrelevant and the debate is something else entirely. Roxas could’ve pulled that trick. Think about it. “Sige po, Luchi – hayaan natin siyang gumamit ng codigo. Kaming tatlo, di namin kailangan.” Binay would’ve also looked like a bigger fool navigating throughout the paper work in a tiny desk, when everyone else spoke without notes.)

And that’s the biggest problem of debates so far: they tell us very little about the presidential candidates. I know they’re a necessary component in the showmanship of every democracy, but they barely scratch the surface. A major policy issue like climate change or drugs gets 2 minutes each. Half of the time is spent mud-slinging. They’re not real constructive conversations.

I think there’s a better way to assess: make each presidential candidate build an MVP.

No, no, not Manny V. Pangilinan. In startup parlance, an MVP is a “minimum viable product” – an early, rough prototype good enough to test a solution to a problem. In tech, it could be a bare bones website or mobile app. In retail, it could be product samples. The point is to have just a minimum number of features to a.) define a hypothesis, b.) build an experiment to test that hypothesis, c.) and gather data to validate or invalidate our hypothesis.

Here’s how it’ll work: we’ll ask each candidate to build an MVP for one, single issue they care about. They get to pick their own team of 5 people: engineers, developers, graphic artist, copywriters, etc. They’ll start on a Friday morning. They’ll each be filmed constantly – no cuts or edits – during the day from 9am to 6pm. On Sunday evening, they’ll be asked to demo their MVP in front of a live audience and streamed on YouTube. A panel of experts will ask tough questions.

Here are some ideas:

  • Jojo Binay likes to showcase the healthcare benefits Makati residents receive. His goal is to build an MVP for a site similar to Obamacare’s Healthcare.gov.   The site’s mission: provide universal health coverage for every Filipino.  At the end, he has to demo his work to a panel of doctors, HMO providers, technologists, and employers.
  • Grace Poe can build an MVP for a platform that centralizes all government and private sector services for overseas Filipinos, a constituency she leans on when critics question her patriotism.
  • Mar Roxas wants sustained economic growth. So he work on an MVP for an online platform that helps train senior high school students in data science, analytics, and computer science – three fields that are the next step in the value chain for our BPO industry, which obviously cannot rely on voice services to accelerate growth.
  • Rody Duterte likes local government, so he can build an app that enables participatory democracy, enabling citizens to take photos, report, and up-vote pressing local barangay and municipality level problems – think unfinished road repairs and empty clinics.

If it sounds like Startup Weekend, well it is. And more than any presidential debate or campaign rally, an exercise like this helps us understand:

  • How they think through tough problems. In the OFW example, is the problem to be tackled upstream opportunities for people who want to work abroad, or for existing OFWs? Grace’s answer will lead to entirely different MVPs. If she chooses the former, why? Why not the latter?
  • How each candidate prioritizes issues. In the healthcare example, do you start with building an interface for providers? Or for customer registration and validation? Why this sequence?
  • How they collaborate with a small team to reach an imperfect solution? What’s their management style? Do they ask a lot of questions? Or do they rely on personal domain expertise? Will they pick people who are smarter than they are? Or do they need to be the alpha in the room?
  • How do they deal with uncertainty? Do they go with their gut, rely on others, or leave the building to find data?
  • How they respond to feedback? How do they deal with tough questions?

In an earlier post, I wrote something on how the presidentiables can court the Entrepreneur Vote:

Make the candidates put themselves in the shoes of the entrepreneur. And not in a superficial way like visiting Aling Nena’s sari-sari store or manning a Jollibee counter for an hour. Each presidentiable will have 38 days to register a corporation. Why 38? Because that’s the World Bank measure of how long it takes. They have to get as far into the process as they can within that amount of time. I’ll give each candidate all the forms they need, and Php 5,000.00 each as initial paid-in capital. They have to fill up all the forms themselves in that event – no accountants, no lawyers.  Broadcast this live in front of the people. SEC Articles of Incorporation. By-Laws. BIR Forms. DTI. SSS. Pag-Ibig. City Permit. Barangay Clearance.

You get the drift: the idea is to make each presidentiable feel what every Filipino entrepreneur has to go through. All the presidentiables will be invited to a public forum to discuss their experience in front of small business owners.  This won’t be a debate format. Instead, we ask each candidate to answer the following:

  • Describe your experience in registering a company.
  • Diagnosis the process of starting the company. What were the bottlenecks? What worked? What didn’t?
  • Recommend the changes and how you would implement them.

*******

They can use all the notes they want in any of the above exercises. It’s not a debate, it’s real work. When the dust settles, we’ll have a treasure trove of data about each candidate. We get to have a glimpse into how a leader actually gets shit done.

The President is not just the head of state or the leader of the country. He or she is employee # 1. The President works for me. I’m the boss here. And so are you. I pay his salary every month. And so do you.

When we hire employees, we don’t just ask job candidates to tell us who they are and what their back story is. We get a sense of how they can actually get things done. A President is no different.

*******

As most of you know, I don’t proofread my articles – I write as I go along. All errors are mine. 

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How Would Martial Law Happen in 2016?

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The biggest irony today is that the freedom young Marcos supporters enjoy to voice an unpopular opinion (that the dictatorship was a golden age) is the same freedom that was taken away from their parents in the 1970s.

More time has passed between today and the start of Martial Law than the time between Martial Law and the end of World War II. So it’s no surprise that we have but the faintest idea of the Marcos dictatorship compared to that generation’s memories of the atrocities of war.

So re-watching Batas Militar made me wonder, if I were alive in the 1970s, what would happen to me? Obviously an incredibly difficult scenario to imagine, but this one’s easier: if Martial Law were proclaimed today, what would happen to me and the world around me?

First, Rappler would be taken over. Marcos would strip Maria Ressa and her colleagues of their board seats and hand them over to cronies. A military rep will commandeer the passwords to their servers and software. Chay Hofileña, Maritess Vitug, Natashya Guttierez, Leloy Claudio, Patricia Evangelista and other brilliant / courageous writers who fearlessly speak truth to power would be taken in the middle of the night from their homes. The women would be raped at knifepoint. The men would be found weeks later, their testicles cut off, their guts full of water.

Second, Ernest Cu and Manny Pangilinan would be forcibly asked to turn over control of Globe and PLDT’s vital internet infrastructure to the government. Facebook would be blocked, China-style. YouTube will be swamped with content takedown requests from Malacañang.

Carlo Katigbak and Felipe Gozon would be made to report to the Palace (no, not the pool club) every week. All broadcast shows from ABS-CBN and GMA must require approval from the Presidential Communications Office. Guys like Arnel Cassanova, upright public servants who aren’t afraid to go after vested interests, will be out of a job, or worse, find themselves detained in Camp Crame. SWS and Pulse Asia surveys will be doctored. Leading opposition candidates Jojo Binay and Grace Poe would be behind bars. Brian Llamanzares, for showing off his shoes, would attract the ire of some Generals and will be found lifeless in a Tarlac ditch, his feet cut off.

Third, Marcos would use a rising China and the West Philippine Sea dispute as leverage to bargain for more military aid (fair game to skimming in the form of unaudited intelligence funds) from an American government keen to implement a Pacific Pivot. But he’ll also play two sides of the same coin. As Marcos covets US aid with his right hand, the left hand would be reaching out to excess Chinese liquidity and divert it to local investments through his cronies, naturally.

This generation’s version of the coco levy scam – a scheme so brazenly and intelligently designed for wealth transfer would involve using our strong foreign currency reserves to acquire overseas assets whose control would be given to the same cronies, with Marcos getting a healthy cut.

Taxes on overseas remittances will triple overnight. A Presidential Decree – which Marcos produced copious amounts that would put an Instagram Wife’s selfies to shame – will be required for new BPO licenses.

My startup would be shut down, disingenuously accused for trying to “endanger” a business of a Blue Lady. Kalibrr, Pawnhero, Lenddo, OLX, and more would be shut down for threatening established conglomerates. Bantay.ph will be censored and Henry would disappear. In the guise of protecting sari sari store owners, Lazada’s warehouses all over the country would be seized. Last night’s talk from Sequoia Capital wouldn’t happen as all interest from foreign VCs would evaporate. Expats like Christian Besler would be deported for being too opinionated in public affairs. The CBCP doesn’t like Carlos Celdran’s protest-as-art? Well they might find him with his top hat stuffed into his mouth in a Cavite swamp.

If I were still in college, debate friends from Ateneo, UP, UST, and DLSU – incredibly brilliant legal minds such as William Panlilio, Joan de Venecia, and Arlene Maneja – would slip in one debate and attract the ire of the presidential daughter and disappear Archimedes Trajano-style. Those who survive the purge would flee abroad.

So, yeah:

1. I would definitely not have survived Martial Law. And I think a lot of my friends wouldn’t either.

2. There are tens of thousands of independent minded, intelligent, and talented Filipinos who are either dead or have fled overseas. All our woes of not having enough good public servants, entrepreneurs, PhDs, etc could be traced back to those years.

3. The very fact young people are free to argue that Noynoy Aquino is a bad president without fear of Kris Aquino sending out her bodyguards in retaliation should make those same young people very very thankful – no matter how much the EDSA generation fucked up in the decades after.

So to my parents’ generation, thank you for giving me the chance to write this without fear. To guys like Primitivo Mijares, where ever you and your pen are, there are still a lot of the key players alive, rich, and well that we are waiting for you to fetch.

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Netflix, Philippines, Startups, Uncategorized

It’s Likely that the Philippines Will Block Netflix Too

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Today, the Wall Street Journal reported that Indonesia’s biggest telco has blocked access to Netflix.

State-owned Telkom concluded that Netflix didn’t have a permit to operate in Indonesia. Netflix also apparently contains violent and sexual content objectionable to Indonesian censors. Hey I’d feel violated too watching Francis Underwood do this to Zoe Barnes. Please don’t think of our very own Francis (Escudero) and Heart. Oh wait, now you just did.

Anyway, the big question is could the same thing happen to the Philippines?

Quite possibly… and in my opinion, very likely. There’s a weird set of interests that are at stake here. ABS-CBN and GMA would obviously want a strategic hedge, no matter how nascent the streaming market is. Bayan Muna and their leftist pals will decry the further encroachment by American capitalists (and do their loudest shouting, ironically, on Facebook). The BIR will want its cut. Congress will grandstand. The telcos will face a dilemma.

How could access to Netflix be blocked in the Philippines?

Here’s how I speculate this might play out.

One, in a rare display of haste, urgency, and cross-agency collaboration, the NTC, SEC, BIR, and MTRCB will band together to invoke Article XVI of the 1987 Constitution, which says:

The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens.”

They will argue that because Netflix broadcasts movies and TV shows, it must be considered mass media.  The framers of the Constitution clearly did not imagine the impact of the internet, which the Philippines connected to just 7 years after 1987.

Blockers will also use a strange SEC opinion that argues that any activity that in effect “disseminates information to the general public through the internet” may be considered mass media. This leads to a possible bizarre interpretation of the Constitution that because your Facebook feed disseminates information, this is considered mass media and Facebook should thus be 100% Filipino owned.

Two, Netflix will argue that it is breaking no laws because it neither owns nor manages any local company engaged in mass media. It can say it’s not mass media because it doesn’t need broadcast frequencies to operate. One needs to pay a subscription, unlike free-to-air TV.

It is also possible to argue that the framers of the Constitution intended to protect public opinion and news media from foreign interests and foreign propaganda, and since Netflix is not a news organization dipping its hands in local politics, it should not be considered mass media. I’m no constitutionalist, so I’ll leave it to guys like Oscar Tan to dissect the legalities. Suffice to say that there are enough gray areas to give the blockers legal ammunition.

Three, the BIR will want its cut. It could try to impose the 12% VAT or a 15% final withholding tax. As far as I know, neither Google nor Facebook pays either when they receive programmatic ad revenue. I don’t see anything on my ads receipts that indicate that they do so.

Netflix will do its best to comply until they fully realize the extent of red tape they have to go through to comply with local tax laws. They’ll realize that the BIR is on the losing end of enforcement anyway and will go on business as usual.

Four, some honorable gentlemen in Congress – possibly the same guys that want to give Pia Wurtzbach a tax exemption because they don’t have anything better to do than fantasize that they get a chance of dating her by passing this law – will file a resolution blocking Netflix, similar to what these guys tried with Fox International.

Five, the TV and cable networks will join the fray, in a bizarre alignment of interests with leftists like Bayan Muna. They will naturally argue that Netflix is a long term threat to the domestic entertainment industry and to thousands of jobs. They’ll be on a wait-and-see mode, perhaps licensing some parts of their library but not too much to prop Netflix up. A young guy who gets it like Carlo Katigbak might be willing to play a smarter accommodation strategy. An older guy like Felipe Gozon might want to block them altogether. Or he might not care or be digital savvy enough to realize how big a thing streaming is in the first place.

Six, the telcos will be caught in a dilemma. Admittedly, it’ll be a more complicated tradeoff for the telcos. Each has its own streaming platform. But the lure of higher data revenues would be too enticing.

I’m wishing all this actually happens. No real damage will come out of it in the long term anyway. It’ll bring about the much needed public anger and discourse to push Congress to finally revise our absurd foreign ownership restriction limits. Maybe it’ll open the public realm to candidates like Bam Aquino who actually understand digital. Maybe it’ll push the next president to appoint our first cabinet-level CTO.

Streaming video is here to stay. A growing Filipino middle class with more choices will opt to pay that Php 370 a month. It’s tough to bet against a change of this magnitude. And we’re not even talking about the entry of that other streaming behemoth – Amazon.

So yes, let’s get the ball rolling. Filipino dinosaurs, let’s seek to block Netflix.

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Entrepreneurs, Entrepreneurship, Founders, Philippines, Startups, Uncategorized

How the Next Philippine President Can Win the Entrepreneur Vote

Mar is probably the most business-friendly of the bunch, though he is no entrepreneur. Jojo will find it hard to claim to be an entrepreneur because it runs counter to the narrative that he didn't get rich off Makati. I don't believe Grace had any business experience at all. Photo credit: Rappler.com

Mar is probably the most business-friendly of the bunch, though he is no entrepreneur. Jojo will find it hard to claim to be an entrepreneur because it runs counter to the narrative that he didn’t get rich off Makati. I don’t believe Grace had any business experience at all. Photo credit: Rappler.com

When Johannes Guttenberg invented a printing press based on movable type, it set off a chain reaction of events with profound consequences across the world. For the first time in human history, books could be printed in large quantities, versus being copied by hand. It was bound to unlock the sum of human knowledge to the masses of people still reeling from the Black Death and living under a system of feudalism and serfdom.

This was in 1445.

By the 1460s, the printing press could be found in France and Italy. In 1476, William Caxton established one in London. It was soon in Spain. Books were printed. People started reading. Writing blossomed. Thoughts were reproduced.  The media was born. Ruling a country would never be the same.

The Guttenberg Press

The Guttenberg Press

It was a different story in the Ottoman Empire. In 1485, Bayezid II ordered a decree forbidding Muslims from printing stuff.

“What the fuck is this machine?” he must have muttered to his aides. “No way will I have these pieces of paper circulating all over the empire.”

Unlike Emperor Palpatine who so graciously embraced technology of planetary scale to annihilate his enemies (albeit failing to solve the fly-by-the-trench problem), Bayezid II viewed the new technology with fear and distrust.

The geopolitics of it all was understandable. There were revolts all over the empire. A few years later, Bayezid would tussle with Ferdinand of Aragon and Isabelle of Castille for kicking Muslims out of Spain as part of the Inquisition. Any tech out of Europe was to be seen with suspicion and distrust.

It was only in 1727 that the printing press was allowed in the Ottoman Empire. Ibrahim Müteferrika was granted a royal decree allowing him to have a press.  Still, its use had a lot of restrictions.  Müteferrika needed the approval of a panel of Muslim and legal experts before publishing anything.

I'd look pissed too if I had to ask for CBCP permission for this blog.

I’d look pissed too if I had to ask for CBCP permission for this blog.

It’s like asking the local parish priest, Fr. Joey, for his approval before posting a Facebook status update. You had to enter the confession box, phone in hand, supplicating to Fr. Joey. He may say no. He may say yes. He may ask for a hug. Maybe a little more than a hug. It sounds ridiculous but that was in effect what Müteferrika faced.

The effects were damning. Müteferrika only got to print 17 books. And by 1800, only 2% of the Ottman Empire were literate, versus 60% of adult males in England.

The rest, of course, was history. Great Britain would lead the Industrial Revolution and Europe would soon follow. After a long period of decline, the Ottoman Empire fell after the First World War.

*****

In the book Why Nations Fail (from where the example above was lifted), the printing press was a critical juncture in history. The printing press was technological innovation that, along with other technologies, would form the backbone of literacy, knowledge, and education that gave rise to the Industrial Revolution.

The way that nations respond to technological innovations are shaped by their political and economic institutions. England, France, and a young colony in the Americas embraced technology. Others, like the Ottoman Empire, blocked it.

We’re at that critical juncture today. Today, the Philippine Republic is the Ottoman Empire. The printing press is the Internet. The Industrial Revolution is the legion of empowering technologies that the Internet enables, from e-commerce and social media, to artificial intelligence and data science. And it’s the way our political and economic institutions are structured that hinders their adoption.

ActionStack.org


Entrepreneurs, engineers, and students at Action Stack’s Data Means Business workshop. The deluge of data is giving rise to new technologies that can form the backbone of a new industry in the Philippines.

Perhaps that’s the legacy of the Aquino administration: remarkable progress in our macroeconomic growth (GDP, credit ratings, fiscal & monetary policy), but without significant institutional reforms of a critical scale to ensure that technological innovation happens across the economy.

*****

We’ve been at this critical juncture before. Twice actually. The first was when the Americans took over and we had the chance for a Great Reset in our political economy (that didn’t happen as I’ll explain later). The technologies of that time were electricity, the automobile, aviation, industrial machinery, and more.

The second was more recent, during the EDSA Revolution, when we had the chance to do a wholesale revamp on how we as a country pursued free enterprise. It was only in the early 2000’s that the BPO industry picked up steam. What we should takeaway from the BPOs is not that it is on track to bring the economy $25 billion in annual revenues, but the fact that it could’ve happen sooner in the early 1990s. In tech, the 10-year head start matters. Look at India. While we were getting our act together in the 90s, India was already rapidly surpassing us in information technology, building upon their strengths built since the 1970s. Today, the CEOs of Google, Microsoft, and soon SoftBank trace their origins to India.

The pace of technological change will only accelerate, and it’s not just about playing catch up in a linear rate of growth anymore. That’s why you have initiatives like the DOST’s 256k Internet plan being the laughing stock of the local tech community. When we have neighbors like Singapore planning for 2030 (led by a Prime Minister that knows how to code), it’s not fun that we’re planning for the world of 1998.

*****

Sure, we allow free enterprise on paper. Article 12 of our Constitution demands it.  Our media celebrates it. Our leaders extol it. But underneath the surface, there exists a wide gap between rhetoric and reality.

There are several facts to support this, and i won’t rehash them in detail for they are widely known:

1. Our Internet speeds are the slowest in the region.

2. Our ease of doing business is horribly messed up. We rank 165th in the world in starting a company. It’s easier to start a business in Afghanistan and Mongolia than in the Philippines. This World Bank Report is actually remarkably optimistic. For instance, it says it takes 3 days to register a corporation with the SEC. Anybody who’s gone through that process will attest that this is impossible.

3. Even if you’re successful in registering a business, getting electricity, acquiring property, getting a construction permit, accessing credit, paying taxes, getting import / export permits, and paying taxes are all messed up.

4. The complexity of complying with the law means you are bound to fail, and that creates opportunities for corruption. Every now and then, you’re victimized by petty low level corruption, from the local fire department requiring you to buy a fire extinguisher from a preferred supplier, to the immense syndicate at the BIR.

5. Our infrastructure remains substandard. We rank 8th out of 10 ASEAN economies in infrastructure.  Laos and Cambodia did better in that list.

7. You’re faced with cultural dogma that celebrates being rich, but looks down on getting rich – because of our a) disdain for failure, and b.) distaste for young people who display ambition and intelligence.

*****

Why are the stuff above happening?

One big reason is that our political institutions aren’t set up to unleash the power of free enterprise, and by extension technological innovation. Why?

To answer this question, we have to briefly detour back to the end of the Filipino-American War.

In 1902, the United States slowly began to devolve power to their little brown brothers. But there was a catch. Only members of recognized families – the principalia – could be nominated to stand election in the Philippine Assembly, the lower legislative house established by the US Congress’ Philippine Organic Act of 1902.

And so the Assembly was filled with rich landowners, former encomenderos, already established businessmen. What happens when you give the powerful more power? Well, that’s like asking what would Hydra do if given the ability to combine Zola’s algorithm with precision-guided laser beams from three satellite-linked helicarriers.

That too was perfectly understandable. If you’re an old man with 300 hectares of farm land, very low productivity, four kids to feed (maybe three more from that nice young mistress from the other barrio. She reminded you of that Maria Clara character from that Rizal novel in the 1890s.), peasants who joined the Katipunan a decade ago, and constant fear that remaining guerrillas like Macario Sakay could commandeer your land, you wouldn’t want some other young guy in the other barrio discovering a new way to plant palay and sell more grains than you. You would rent-seek as much as you can to get more cash flow while keeping your expenses and investments (i.e.: new technology) down.

Landed lovers of Maria Clara. Photo credit: PCIJ

Landed lovers of Maria Clara. Photo credit: PCIJ

And so that state of affairs – our extractive economic institutions, preferential Filipino ownership in theory but oligarchic control in practice,  the persistence of political dynasties, the collusion of big business and politics, and our distaste for foreign competition and investment – enshrined itself into the affairs of the State.

Today, these dynamics result in some really weird stuff going on at the grassroots level:

1. Close to 80% of GDP growth being captured by the top 40 families.

2. Science, technology, and entrepreneurship getting almost zero mentions in the President’s State of the Nation Address, despite the rhetoric of jobs and inclusive growth.

3. The US Secretary of Commerce showing more personal interest in technology startups any high official from the Philippines, with the remarkable exception of Senator Bam Aquino.

4.  A Startup Conference where a glaring majority of speakers are not from startups.

The bottom-line is that we have created two worlds of free enterprise.

In the first one, it’s easy to do business because you’re part a big conglomerate. Want to set up a new division because the Investment Committee just approved Php 500 million for a new venture? Sure, just get the legal department to handle the papers. It’ll be back in less than 30 days. We do have a directly line to the SEC, BIR, DTI, SSS, Pag-Ibig, and Makati City Hall.

In the second world, starting a business is a struggle. You’ve worked ten years and have managed to cough up meager savings. Now that you’re ready to set up a business, you have to endure months registering it. That’s not counting the hours you have to stand in line at the SEC, BIR, DTI, the local Municipality, the Barangay Hall, and other agencies to get your permit. That’s not counting the days traveling back and forth in Manila traffic. And even when you get all your documents, that’s not counting the cumulative time it takes to get an internet connection, a construction permit, financing, or other special permits. This doesn’t even count the time spent in your actual business.

The goal of the next president is merge these two worlds, and bring the second one closer to the first.

******

There are over 1 million business enterprises in the Philippines. That is at least a million people who are business owners. 99% live in the second world. They’re influential. They have employees. They have customers, suppliers, partners.

They might seem invisible because they’re not the most vocal on social media. Instead of ranting about the productivity drag of traffic and the huge number of government-mandated holidays, they just buckle down and get to work.

This is a large base and there are two ways the presidentiables can win the Entrepreneur Vote.

The first one is to do it the old way. Write some fancy sounding slogans. Hire a “PR expert” to craft the right messaging. Make a jingle. Get celebrity entrepreneur to sing it. Make a music video of the jingle. Air on TV. Post some catchy updates on Facebook. Blame the current administration.

The second is a new way. Simply, it means candidates putting themselves in the shoes of the entrepreneur. And not in a superficial way like visiting Aling Nena’s sari-sari store or manning a Jollibee counter for an hour.

This idea will sound completely ridiculous to the political establishment and their campaign handlers.  It’s brazen and has never been been done. And that’s the point.

This is how it’ll work.

1. Each presidentiable will have 38 days to register a corporation. Why 38? Because that’s the World Bank measure of how long it takes. They have to get as far into the process as they can within that amount of time.

There will be milestones – in the form of 3 public events, live streamed to the public.

2. The first day will be a publicly-held event. During this day, we’ll even make it easy for them. I’ll give each candidate all the forms they need, and Php 5,000.00 each as initial paid-in capital. They have to fill up all the forms themselves in that event – no accountants, no lawyers.  Broadcast this live in front of the people. SEC Articles of Incorporation. By-Laws. BIR Forms. DTI. SSS. Pag-Ibig. City Permit. Barangay Clearance.

3. Some of these steps can be done electronically. We’ll leave it up to them to figure out which ones by finding it online. We’ll give them laptops. And a few thousand pesos for a portable broadband connection. They can choose which provider they want.

If they want, they can pick a Negosyo Center of their choice to begin the registration process.

4. At the end of that day, we’ll have a panel check who filled up the forms correctly.

You get the drift: the idea is to make each presidentiable feel what every Filipino entrepreneur has to go through. It doesn’t have to be exactly this process below – I leave to that to the media or academics who can probably design a better simulation. But since we’re at it, humor me for a few more minutes.

5. Once they finish the forms, the candidates will have to visit the various government agencies for the next 38 days. They’ll have to file the forms themselves. Go to the SEC and BIR and line up like everyone else. No aides. No assistants.

6. They’ll have to collect the output – such as the SEC Certificate and BIR Form 2303 – themselves. They’ll have to go back to each time on their own.

Their progress will be tracked online in a dedicated website.

7. Once they get the necessary permits, that’s not where it’ll end.

I’ll give each candidate a free TackThis! or Shopify account. In a second public event, they’ll have to use these services to set up an online store from scratch.  They can choose whatever they want to sell online. At the end of the day, we check who was able to sell the most.

Why selling online? Because it’s a great way to truly understand young entrepreneurs who are likely to use the Internet to enable their ventures. Selling online brings all of these skills together – from knowing your target customer, selecting & managing inventory, understanding the cloud, social media, and digital payments.

8. On the third public event,  all the presidentiables will be invited to a public forum to discuss their experience in front of small business owners.  This won’t be a debate format. Instead, we ask each candidate to answer the following:

  • Describe your experience in registering a company.
  • Diagnosis the process of starting the company. What were the bottlenecks? What worked? What didn’t?
  • Recommend the changes and how you would implement them.

The “how” part is going to be crucial one. It’s easy to write into a campaign speech that we need better internet and easier ways of doing business. It’ll be the hard implementation-related questions that will be worth pondering.

For instance, it’s tough to get the SEC to adopt electronic registration because its employees’ cooperative is dependent on selling paper forms. How do you make it easy for businesses while at the same time combatting organizational inertia?

Another is slow internet. Sure, it’s easy to say that we should hold telcos accountable. But how? Do we reclassify internet services as a public utility? Do we liberalize the auctioning of spectrum? Do we staff the NTC leadership with engineers instead of lawyers? How do we make it easier for telcos to build a physical network, with the current plethora of national and local permits?

This isn’t a perfect exercise, of course (you can imagine most trying to game the system, by asking for expedited processing from some agencies, for instance).

This is 100 times better than simply asking the presidentiables how to encourage entrepreneurship and getting the standard answers in response. That’s also the purpose the public forums serves – you can kinda guess who gamed the system based on the level specificity and empathy of their answers.

And neither is all this limited to national candidates when arguably local politics matter way more in welfare of local vendors and sari-sari store owners. The accomplishments of Leni Robredo and Rodrigo Duterte are proof.

When the dust settles, we’ll have a treasure trove of data and insight about each candidate. We’ll know who can win the Entrepreneur Vote.

*****

In the late 1920s, Stalin led the drastic reformation of the Soviet economy. The whole economy was to be planned by the state. Factories and farms were given targets. Prices were controlled. Agriculture was nationalized by the state. That meant no free enterprise. Part of the plan meant killing kulaks: independent, relatively affluent farmers who owned property and businesses and threatened Stalin’s regime. They even had a word for this: dekulakization. Over 6 million were killed or sent to labor camps.

100 years later, young Joseph Stalin could be mistaken for an entrepreneur from Brooklyn

100 years later, young Joseph Stalin could be mistaken for an entrepreneur from Brooklyn

Thankfully, nobody’s getting murdered for opening an eatery in Quezon City. But it’s still death by a thousand cuts. If we want inclusive growth, then it’s high time we elect leaders who appreciate and have gone through the struggles of free enterprise.

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E-Commerce, Entrepreneurship, Philippines, Retail, Uncategorized

A Blueprint for SM’s Digital Future

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In 2014, TSC announced that SM will slowly grow its e-commerce business. Photo: Rappler.com

 

In 1846, Austria’s Vienna General Hospital had a maternity ward that was notorious for killing mothers and newborns. The deaths were caused by puerperal fever. You see, Vienna General was also a teaching hospital where doctors trained by cutting up cadavers. After handling corpses, doctors would head straight to the maternity ward to deliver babies.

One of the doctors, Ignaz Semmelweis, wondered if puerperal fever was transmitted from the corpses to mothers during delivery.

This was an era when doctors let blood stains on their gowns build up over time like a badge of honor. Like that old boyfriend of yours, hygiene wasn’t really a thing. When Semmelweis convinced some doctors to wash their hands, the death rate dropped enormously from thirty five to two percent.

The medical community vigorously rejected Semmelweis’ hand washing idea, despite the clear evidence that hand washing saves lives.

Semmelweis’ observations challenged two millennia of dogma that ruled medicine since the time of Hippocrates. The first is humorism, the belief that the body is composed of four fluids – black bile, yellow bile, phlegm, and blood – and that good health meant the balance of the four. The second is miasma theory, the belief that diseases are caused by inhaling “bad air”.

The idea that diseases could be transferred from cadavers to humans contradicted these strongly held beliefs. One doctor reacted that the idea of something being transmitted from doctor to patient could not possibly be true because doctors are gentlemen and a “gentleman’s hands are clean.”

Semmelweis was confined to an asylum where was has placed in a straightjacket and beaten continuously. He died after two weeks. With no one to supervise Vienna General, the doctors stopped washing their hands and the death rate went back to previous levels. It wasn’t until the time of Louis Pasteur did we discover germs and their role in diseases.

As we’ll see later, it’s dogma that prevents retailers from embracing their digital future.

*******

SM fascinates me. I think it holds the key to the digital economy in the Philippines. No other local company can bring our e-commerce future to fruition in the same way SM can.

Let me explain why.

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Imagine you’re a 25-year old Filipino. You’ve been working for four years now since you graduated from college. You work in Net Plaza in the Fort. The business process outsourcing firm that employs you just handed your first promotion. That’s a big increase in pay, and in your credit limit on your BDO credit card. You seriously consider a car loan for that new Vios model. You eat out more. You buy more groceries. You upgrade your wardrobe. You watch movies on Imax more often. You’ll reluctantly make the weekend trip to City of Dreams because your girlfriend sees Leo’s face all over town. There’s that concert too at SM Arena.

As the years go by, your savings grow and you finally have enough to make a down payment on that condo. And when you do, you’ll need to buy furniture, of course. You marry said girl and next thing you know, the kids spending your cash at Toy Kingdom. When vacation time hits, you take a trip down to Cebu, and stay in Radisson. During Christmas, the visting pinsans from abroad want to buy some handicrafts at Kultura. You’re in your late thirties now, and you decide to start a business. You hear Chinabank is offering loans for working capital, and that Citymall is offering new store space for tenants.

In every single transaction above, SM made money.  SM’s business spans many industries: retail, property (mall operations, residential, commercial and hospitality), banking, gaming, and even mining.

SM business units 031615_0

An overview of SM’s business. Source: http://www.sminvestments.com

If you peek at the official government stats on household expenditure, you’ll see that SM makes money on every single line item of consumer spending with the exception of communications.

Wait, actually they do – indirectly – when you pay your Globe / Smart bill in an SM payments center.

That is absolutely phenomenal.

SM is the ultimate platform business in the Philippines. SM owns the Filipino consumer. Every single Filipino alive today and born from this day forward will contribute to SM’s bottom line at some point in their lives. Let me give you a few seconds to digest that.

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How would SM start? The intuitive bet is that they’ll start at e-commerce. They’ve announced this. Online banking and online real estate listings seem more like channels than business models from SM’s point of view. E-commerce is where they can leverage an unfair advantage nobody else has.

To understand why, let’s first take a detour to Seattle, USA, then to China.

If you look at the history of e-commerce in every major market, there was always a unique set of circumstances that catalyzed the industry’s hyper growth in the early years.

In the United States, e-commerce was subsidized by cheap capital. The capital markets gave Amazon an outsized valuation that allowed it to aggressively grow its customer base and its physical distribution infrastructure without much regard for profitability. That’s something that can only happen in the US.

In China, the popular opinion is that e-commerce growth was driven by internet penetration, the growing middle class, and nascent demand from secondary cities. However, a prominent VC once told me that the oversupply of cheap, counterfeit goods available abundantly on Taobao was the underrated driver of e-commerce – a historical anomaly that is unique to China.

In the Philippines, it’ll be SM that drives e-commerce growth. Not Lazada or Zalora. Not Ayala Land or Robinsons. Not even Globe or Smart.

The popular view is that the two biggest barriers to broad e-commerce adoption are logistics and payments.

Well, SM already has both.

As the experience of Macy’s has shown, it turns out that a network of stores make great warehouses and fulfillment centers. Nobody talks about click and collect in-store because it’s boring, but in France, there are already 3000 e-commerce pick-up points. Two thirds of Europeans do it.

Nobody else has the network of fulfillment centers SM has – a network of fully-stocked, accessible warehouses for e-commerce. These warehouses are called SM Malls, and they are 50-strong all over the country. Add a cloud-based inventory optimization layer, and we can rock and roll.

SM needs to overhaul its inventory management if it wants to do omnichannel e-commerce.

SM needs to overhaul its inventory management if it wants to do omnichannel e-commerce.

No other retailer has a BDO, a leading issuer of credit cards, debit cards, and online banking accounts that can subsidize the initial purchases of first-time e-commerce buyers. As far as I know, it’s only BDO that has automated online installments. Not even BPI or Citibank has this.

Nobody else has the power to arm twist the country’s biggest tenants to participate by allocating inventory to an online B2B2C marketplace, lest they suffer unfavorable lease terms.

Lazada and Zalora don’t have the ability to drive down customer acquisition costs the way SM can, by simply adding a “thesmstore.com.ph” to every single mall signage, shopping bag, elevator door, parking entrance, and store receipt.

Robinson’s has a far smaller retail footprint. Ayala’s new business teams are focused on health care, education, and infrastructure. San Miguel is focused on the big PPPs. Smart / Voyager’s local e-commerce operation will never have the omnichannel scale SM has. LBC is still figuring out its IT infrastructure, after its cancelled IPO.

SM can do all this to catalyze e-commerce growth – that is, if SM wants to. And that’s gonna depend on how big SM thinks e-commerce can be.

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So how big can e-commerce be for SM and what will it cost?

Let’s look at current benchmarks. The grapevine says Lazada Philippines is doing a run rate of Php 2 billion a year. That’s too small for Tessie, in my humble opinion. She sells more than Php 3 billion in movie tickets each year.

So let’s say Tessie will only start looking at this seriously when she believes SM can do Php 4 billion in annual e-commerce sales. 40% of SM’s P197 billion retail revenues is non-food, so P4 billion is 5%. That’s reasonable given that global non-food retailers see 8% to 20% of sales in e-commerce.

What will it take to achieve this?

A reasonable assumption is that an average order in non-food e-commerce is worth P1,000. A Php 4 billion business implies 4 million orders each year. Let’s assume that the average customer orders 2x a year, so that’s 2 million customers. There are 34 million internet users in the Philippines, and 4 million with credit cards. Lazada has also shown that the market is willing to buy via COD – 60-70% of orders in fact. So 2 million online customers isn’t smoking pot.

If we assume customer acquisition cost ranges from P300 to P800 per customer, then that’s marketing spend of P600 million to P1.6 billion a year. If we assume that the fully loaded annual labor cost per head is P700,000 and an FTE of 500 people doing e-commerce, then that’s labor cost of P350 million.

The biggest barrier is rebuilding SM’s inventory management system to allow for real-time omni-channel retail. Some of the use cases are:

  • Order online but pick up in-store
  • Order online and get fulfillment from the nearest SM Store
  • Dynamically show products popular and available within a specified area
  • Allow third party merchants to use this platform as a marketplace.

This is a gargantuan task (it took Macy’s three years and counting…) so let’s say it’ll cost P400-P500 million pesos for an IT initiative of this scale (guesses on my end).

The total e-commerce investment (marketing, labor, IT), will thus be P1.35 to P2.45 billion. The combined 2015 capex budget of SM Investments (retail, banking) and SM Prime (property) is P82.8 billion. To dominate local e-commerce, SM just has to spend 3% of capex. A large scale e-commerce program is totally feasible.

******

The problem is that SM’s corporate planning people will measure ROI wrongly. The assumption is that e-commerce is just another store format. They’ll do something like this: open a Microsoft excel file, estimate future sales from its online store (which, according to Similarweb, has shockingly less traffic than our niche online boutique AVA), tally up the costs, peg a discount rate, and get a net present value, IRR, and payback period.

But e-commerce isn’t a channel. It’s a business model. Treating it like a channel for ROI analysis neglects:

  • The impact of omnichannel (higher sales per square foot, higher inventory turnover, more optimized inventory, higher customer loyalty),
  • New revenue streams such as search and display ads on an SM-powered marketplace for tenants, and
  • The second-order effects of an e-commerce platform (higher payments volume on BDO, higher property prices on SM condos in areas covered by same-day delivery, the intangible value of creating a strategic deterrent against market entry by Alibaba, Rakuten, or Amazon).

Smart retailers like Walmart and Macy’s have learned to measure ROI not on online sales, but on total sales.

******

This brings us back to Semmelweis and hand washing. In my humble opinion, the reason why it’s hard to make this intellectual leap for any local retailer is that the market is simply dominated by unsubstantiated dogma.

Take this misinformed Cushman & Wakefield report for instance that proclaims that Filipinos “still prefer the traditional bricks and mortar stores“.

Filipinos also love their mobile phones and social media. Online and offline aren’t mutually exclusive. They’re just different use cases. At AVA, 40% of our purchases are made outside of mall hours. To say that consumers “prefer” offline is missing the point – both are part of today’s shopping experience that customers expect. In a few years, there will be no such thing as “e-commerce”. It’ll just be “commerce”.

Another blind spot is the belief that e-commerce is just a website with a checkout page. And because it’s a website, it can be outsourced to a web development agency. Of course, that entirely misses the point because e-commerce requires an organization steep in product management, software engineering, digital marketing, data analytics, operations, customer service, and logistics – a very different skill set from a typical retailer’s.

As an illustration, if you search for “SM Store”, you well get these results.

Slide2

Any normal user will click on the first link.When you land on the homepage of thesmstore.com, you’ll think you can shop on this site. The nav tabs show “Men”, “Women”, “Kids” and so forth. But when you click on a category, all you’ll see are display ads for existing promos. If you want to actually shop online, you’ll have to do the extra work of either a.) finding the “Shop” button on the upper right (which as any UI person will attest, is less prominent than the upper left side), or b.) go back to search results and click on the second link.

Sorry to be blunt but if the person who designed this UI worked at Rocket Internet, Voyager, or Metrodeal, he’d be fired instantly.

Slide1**********

But that’s a minor point.

The more dangerous, deeply held dogma has something to do with how SM (and all local retailers) view their businesses.

In 1979, at the Royal Perth Hospital in Western Australia, pathologist Robin Warren peered into his microscope and saw bacteria in a person’s stomach.

Since the beginning of bacteriology, the dogma was that bacteria could not survive in the human stomach. It was too acidic and thus sterile.

After much research, Warren and a colleague, Barry Marshall, discovered the bacterium H.pylori,  debunking decades of dogma. H.pylori was found to cause ulcers. In 2004, Warren and Marshall won the Nobel Prize.

What’s strange is this: Warren wasn’t the first pathologist to see H.pylori in the stomach. Before Warren, samples had to be taken from stomach cadavers where information was already lost.  In the 1970s, the invention of the flexible endoscope allowed doctors to extract live tissue from the stomach. Tens of thousands of stomach biopsies were being made yet no doctor or scientist identified H.pylori.  They had seen it, but it remained invisible. When everyone reviewed their previous biopsies, they clearly saw H.pylori right there staring them straight at the face. One scientist said, “Failing to discover H. pylori was my biggest mistake“.

In the book “How to Fly a Horse“:

“When Robin Warren accepted his Nobel Prize, he quoted Sherlock Holmes: “There is nothing more deceptive than an obvious fact. H.pylori hid in plain sight for more than century because of a problem called “inattentional blindness”. Douglas Addams defined this as “Something that we can’t see or don’t see or our brain doesn’t let us see, because we think that it’s somebody else’s problem. The brain just edits it out; it’s like a blind spot. If you look at it directly you won’t see it unless you know precisely what it is. It relies on preople’s natural predisposition not to see anything they don’t want to, weren’t expecting, or can’t explain.”

The scientists saw what they wanted to see – because of the “obvious facts”.

********

The obvious fact that is causing inattentional blindness is how you look at SM’s business. SM is in retail, property, and banking, right? That’s an obvious fact. In every investor relations material, SM sees its business this way. Everyone sees SM this way.

But consider this future possibility.  Let’s start with your BDO credit card. It knew you bought a pair of shoes on Zalora and will thus retarget you with a better offer on the SM Store e-commerce site. When you check-out, you can either have it delivered to your Net Plaza office (geo-tagged, of course – because SM owns Net Plaza – no need to fill out the delivery form), or pick it up at Aura. If you choose the latter, it gives you 50% off a cinema ticket, or a P500 grocery voucher. Oh, by the way, when you order your groceries from the SMCart app (modeled after Instacart, naturally), you get free same day delivery if you live in an SMDC condo. But you still live with your parents, so you search for available units at SMDC’s online marketplace, which also features a mortgage comparison tool powered by BDO. When you do buy your SM condo, it includes a tool to track your power and water consumption. All of this saving and spending can be tracked on your BDO online account, which by the way you can also access on your phone. The app is so smart that it can recommend which items you can save on – and lead you directly where in an SM store you can get the savings.

That’s when you realize that SM is neither in the retail, banking, or property business. It’s in the customer knowledge business.

SM is a big data company masquerading as a conglomerate. And if it can incorporate a software and digital layer on its physical infrastructure, it will be a race ahead of the pack.

The product isn’t a pair of shoes, or a shopping mall, or a credit card. It’s a stack of digital information that can connect separate businesses to generate an unprecedented amount of knowledge about its customers, and power a company that is more responsive to their needs and wants. And imagine if SM’s eco-system of suppliers can tap into this knowledge and customer access via open APIs and marketplaces.

Robin Warren knew that the dogma pre-dated the technology of his time (flexible endoscopes), and this created an opportunity to question the current state of affairs.

For SM, the dogma is the belief that it is merely in the retail business. Its flexible endoscope is the emerging boom in e-commerce, data science, and cloud computing, as well as our new understanding of network effects, winner-take-all dynamics, and platform businesses. This is the underlying philosophy that will guide SM’s digital future.

******

I of course realize that all of this are easier said than done and there will be a lot of work ahead for local retailers. The historical predisposition of Filipino companies is to aggressively protect its turf and resist big bets. When the company decided to completely overhaul SM Makati, cannibalize itself, and banish its retail operations to the upper floors in favor of Uniqlo, H&M, and Crate & Barrel, it showed that it can evolve with the times.

******

The stories on Semmelweis and Warren came from Kevin Ashton’s book, “How to Fly a Horse“. I enjoyed reading it.

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Uncategorized

Why is Cebu Pacific Such a Horrible Airline?

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We’ve all heard our fair share of Cebu Pacific horror stories. I’ve experienced my own too, from a faulty website to delayed flights. But they weren’t anything that I haven’t encountered at Delta, PAL, or even Singapore Airlines.

That was until the Great Cebu Pacific Christmapocalypse of 2014. While I’m still compiling a lengthy account of that experience (complete with photos + videos of stranded children, crying women, and censorship attempts by security), I couldn’t help but take a deeper look into the company and uncover some interesting facts why it’s such a shitty airline.

I’m no expert in the airline business, but I’d like to believe I know a thing or two about how companies work. In this case, I’m looking at Cebu Pacific with the following context in mind:

  • The airline industry is a tough business. In the US, the average airfare each way is $178 and the airlines would only make 37 cents per passenger trip on average.
  • Cebu Pac is a growing business. 2014 revenues are up 25% year-to-date.
  • The industry is becoming more competitive, with a resurgent PAL, a dominant low-cost competitor in Air Asia, and the desire of foreign airlines to enter the Philippine market.
  • Filipinos are demanding better service, yet are also more docile consumers on average.

This is just the tip of the iceberg. I only spent two hours going through publicly available information in its annual report, quarterly disclosures, and analyst presentations, and I already uncovered lots of reasons why it’s a horribly run airline. I just wrote this today, and this is by no means a definitive analysis.

Place Cebu Pacific under the close, investigative scrutiny of a Patricia Evangelista, Natashya Gutierrez, or Bianca Consunji, and I bet we’ll uncover way more.

Four things stick out:

1. The Board of Directors is stacked with family members and insiders.

No surprise here. This is the Philippines, after all.

For comparison, let’s look at Air Asia’s board of directors, followed by their ages:

  • Datuk Kamarudin bin Meranun (52), Non-Independent Executive Chairman
  • Tan Sri Dr. Tony Fernandes (50), Non-Independent Executive Director and Group Chief Executive Officer
  • Aireen Omar (40), Executive Director and Chief Executive Officer
  • Abdul Aziz bin Abu Bakar (61), Non-Independent Non-Executive Director
  • Fam Lee Ee (53), Independent Non-Executive Director
  • Robert A Milton (53), Independent Non-Executive Director
  • Amit Bhatia, Independent Non-Executive Director
  • Uthaya Kumar A/L K Vivekananda (60), Independent Non-Executive Director

Here’s Cebu Pacific’s Board of Directors:

  • Ricardo J. Romulo (80 yrs old), Chairman
  • John L. Gokongwei, Jr (87)., Director
  • James L. Go (74), Director
  • Lance Y. Gokongwei (47), Director
  • Robina Gokongwei-Pe (52), Director
  • Frederick D. Go (45), Director
  • Jose Buenaventura (79), Director
  • Antonio L. Go (73), Independent Director
  • Wee Khoon Oh (55), Independent Director

Why is this important? Because the board is the highest governing body of a corporation. If customer service is so bad, then either the Board a.) refuses to do something about it (prioritizing fleet expansion instead, for instance), or b.) is incapable of doing so.

Let’s look at the Board one by one.

Ricardo Romulo is the senior partner of law firm Romulo Mabanta. No airline experience.

Gokongwei patriarch John is unlikely to be closely involved in the airline’s operations given his age.

James Go is John’s brother. No airline experience.

John’s son Lance, is CEO of Cebu Pacific. No extensive airline experience before Cebu Pacific. More troubling, Lance also serves as CEO of Robinson’s Land. Oh wait, he is also CEO of Universal Robina.

I’m sure Lance is brilliant. But I am doubly sure airlines, real estate, and food & beverage are incredibly tough businesses on their own. How can he be CEO of all three? The inescapable conclusion is that Lance is Cebu Pacific CEO in name only.

Robina is Lance’s sister. No airline experience.

Frederick Go runs Robinson’s Land as COO. No airline experience. Which begs the question: if we measure Frederick’s and Lance’s performance, do they spend more time in the airline business or in the real estate business?

Jose Buenaventura is a lawyer (and a partner at Romulo Mabanta). No airline experience.

Antonio L. Go is a banker. No airline experience.

The only board director with significant airline experience is Wee Khoon Oh, who used to be with SIA Engineering Co. SIAEC also happens to be the aircraft maintenance contractor of Cebu Pacific. Even so, Wee Khoon’s experience is in aircraft engineering, not customer service or flight operations.

In short, this is a board stacked with lawyers, family members, and insiders. It’s a board designed to preserve control and mitigate risk, rather than to strive for operational excellence and competitiveness.

It’s also a board filled with old people. The average age of the Cebu Pacific Board is 65 (and that is helped by Lance and Frederick. 5 out of 9 Directors – a majority! – are above 73 years old).

The average age of the Air Asia board is 53.

There is a very real possibility that the Cebu Pacific Directors themselves are not aware of the on-the-ground reality because they are unlikely to browse through Facebook, Twitter,  or this blog.

I am sure they are outstanding professionals in their fields. But their skill set does not belong in today’s airline business.

I can end this blog post on this point. But let’s go on.

2. Senior management is no longer the right team for the job.

The role of the Board of Director’s is to be the overall governing body of a corporation by setting strategy, selecting senior management, and deciding on things like acquisitions, capital raising, and management remuneration. Operations is the responsibility of the senior management team, which reports to the board.

If the main issues are a.) delayed and cancelled flights; and b.) poor customer experience (in terms of ground staff operations, check-ins, gate crews, refunds and rebookings), then we should be looking for managers who are in charge of operations and customer service.

We’ve established Lance is CEO in name only. Who’s really in charge at Cebu Pacific?

That would be Garry Kingshott, Chief Executive Adviser. We all know the “Adviser” title is a smokescreen in Philippine business given that public utilities cannot have foreigner CEOs. But with Lance’s multiple roles, it’s reasonable to believe that Garry is calling the shots.

Judging by his LinkedIn profile, Garry is a sales & marketing guy. Cebu Pacific’s focus on growing ancillary revenue (revenue from baggage fees, rebooking fees, etc – which by the way is worth P6 billion) is likely his strategy, given his past experience at Jet Lit India.  He seems to be more preoccupied with international expansion rather than getting down and dirty with local flight operations.

Who runs ground operations? Let’s look at the Cebu Pacific Annual Report.

Capt. Jim Sydiongco? Nah, he’s responsible for flight operations, pilot training, and safety. With a growing fleet and a pilot shortage, his main focus (rightly so) is for the planes to stay in the air. (Remember the Davao crash landing last year?). Rosita Menchaca? Nope. She runs in-flight services.

The most likely candidate is Michael Shau, Vice President of Ground Operations. But this year, he was moved to run the TigerAir division. And even if he is in charge of customer experience, Michael was also running cargo & fuel, catering, facilities, and procurement! He looks stretched.

In fact, looking at Cebu Pacific’s organizational chart, it’s impossible to see who’s in charge of ground operations and customer experience. There’s Benito Cosep, who runs integrated operations control (including flight dispatch and fleet control), and Rosario Santos who runs quality assurance, but they seem too far down the organizational chart to have significant power to influence outcomes.

Contrast this to Air Asia’s senior management featured in their annual report. They have a tough looking guy named Patrick Fennel heading the operations control centre. There’s a head of guest services – Francis Loh, who’s the single accountable person for customer service. Then there’s Terri Chin, group head of quality and assurance. All three seem like they have considerable power.

In Air Asia, there is one person in charge of finance in senior management: Andrew Littledale, the CFO.

In Cebu Pacific’s senior management, there are three: Jaime Cabangis (CFO), Jeanette Yu (VP Treasury), and Robin Cui (Comptroller).

Strategic priorities are allocated with resources, people, and power. Guess where Cebu Pacific’s priorities lie?

The lack of accountability culture at Cebu Pacific is in full force at the front lines. Ground staff were completely afraid to offer explanations for fear that might say the wrong thing.

“CEB personnel did not explain the long lines, saying they were not authorized by their management to give statements to the press,” says an Inquirer report. I saw this myself. When I asked one supervisor at  counter C27 to explain to the 150+ cancelled passengers what our next steps are, he resisted, saying that it wasn’t his job to process cancellations. After 2 minutes arguing, he agreed to send one of his lackeys to speak on his behalf.

3. Investments in human capital have severely lagged passenger growth.

A frequent complaint heard last December 24 and 25 was that Cebu Pacific was severely undermanned. There were not enough people at the check-in counter. My boarding gate didn’t have an agent for two whole hours. And when I finally was given a hotel room, the guy who coordinated the transfer and hotel booking told me there were only three of them that night who handled thousands of irate rebooked customers.

Contrary to what they want you to believe in the press, this wasn’t just a one-time incident over a busy holiday. It’s a structural problem.

The proof, again, is in the annual report. But you need to dig deep into the notes section.

Cebu Pacific’s Revenue Passenger Kilometer (RPK) grew 12.1% in 2013. RPK is the number of paying passengers on an airline multiplied by the distance traveled. If an airline were a factory, RPK is the measure of an airline’s production output.

Yet, despite the growth, note 21 in the annual report indicates that staff cost only grew 2% in 2013 (P339.7 million in 2013 vs P332.9 million in 2012). Output grew 6x faster than the growth in staffing. No wonder the ground crew felt swamped.

Now, under note 20, the accounts “Flying Operations” and “Aircraft and Traffic Servicing” both contain sub-accounts called “Others”. In the note, “Others” is said to pertain to “staff expenses incurred by the Group such as basic pay, employee training cost, and allowance“. It doesn’t exactly say if staffing cost is the ONLY item under that account. There could be others.

But let’s give them the benefit of the doubt and assume that that it’s all staffing costs. Note 20 + note 21 then implies that total people costs amounted to P921.9 million.  This is equivalent to 2.2% of Cebu Pacific’s 2013 revenues of P 41 billion.

But if you look at Air Asia, which did RM 5.11 billion in revenue in 2013, staff costs were RM 610.9 million, or 12% of revenues! Now, even the higher wage levels in Malaysia vs the Philippines wouldn’t be able to entirely account why Air Asia spends 6x more on people than Cebu Pacific.

The whole “we didn’t anticipate the Christmas surge” reason doesn’t fly. This is an airline that obviously tracks RPK, and thus would have month-on-month information on passenger volume.

4. Finally, there are the rumors that Cebu Pacific is being window-dressed for a sale. Nope, not the “piso-fare” kind of sale, but a divestiture of the company to a strategic buyer. After all, the Gokongweis might be starting to realize that it is hard pressed to compete in an open skies environment across Southeast Asia, and would thus be willing to consolidate rather than compete. The group showed its willingness to do something similar in the Sun Cellular sale to PLDT.

Basically, a push for a sale encourages Cebu Pacific to prop up its bottom-line to maximize its market capitalization (and a larger return to the group if a sale occurs). And because profits tanked in 2013 (net income declined 86% from P3.6 billion in 2012 to P512 million in 2013), there is a strong reason for the company to scrimp on expenses in 2014.

In summary, it’s really hard to say what’s going on. All of the above is based on publicly available data. If you know something, get in touch.

My theory: Cebu Pacific is run by a Board that is designed to retain control of the Company rather than to embrace outsiders with the expertise and experience to run a growing low cost airline in a challenging competitive environment. This may have been an adequate Board 10 years ago, but not today. Its senior management is poorly structured, and there is no accountability for key passenger requirements, namely for excellent customer service. It’s underinvesting in human capital. While it’s also pursuing international expansion, management is also considering a sale of the company, and is thus incentivized to prop up the bottom line at the expense of making the investments that lead to operational excellence.

Stay tuned for my next post on how Cebu Pacific stole Christmas Eve.

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