The connection between population density and economic development

Yorlin  0:00  

Hello, welcome to Momentum Works Answering The Why series. This is Episode Two of Answering The Whys, where we’re going to where Alfonso and Jianggan will be talking about a trend in the ecosystem.

If you want to find out what we’ve been discussing in the past, go to our YouTube channel to watch the previous episodes, enjoy this episode.

 

Alfonso  0:22  

So there are many questions that we can actually ask about the region. So for example, one of the questions is, okay, we know that Ant has made a few investments in the region. But why those investments are actually less successful than what’s happening in China?

So basically, we are trying to answer that, that that that kind of question with this kind of report. So for example, if we go to the next slide, we’re going to see that it that next slide? Yeah. So for example, if we check, and if we check in, if we check this map that is actually showing the GDP per capita, we’re going to see that in Southeast Asia, basically, there are little squares that basically represent the GDP per capita tends to be very low and tends to be a bit more orange, what is the meaning of this?

It implies that the GDP per capita in general is less developed than other that other countries, right. And the thing that I think is very interesting is to see that China level of development in terms of GDP per capita, it is, it is in some cases higher, not higher than Singapore. But it’s not so different from what’s going on in Southeast Asia.

So the question for us is basically, a what was going on this, this, these regions and countries seems to be different in terms of GDP per capita, but why these kind of things are actually working in China and not in Southeast Asia?

And I think that that is a very, very reasonable question. So basically, we tried to dig in in order to understand what was going on. And if you go back to the previous slide, and gun, we can see that it basically did the first answer related to what why this is working actually in China and not in Southeast Asia, you’re going to see that that the level of demand in China are obviously huge. Okay.

And also, a subsequent question that, that is related to that is that there is a big effort to integrate and connect cities in the country through different means. So for example, what one is like the infrastructure China has, has made a huge effort in infrastructure to improve it and to connect the different cities.

So for example, in this map that we have here, that basically it is showing population density, you can see Southeast Asia, that seems, seems to be naked, seems to be very white. And basically, what is the meaning of that it implies that there are no important cities that it is that are accumulating wealth, basically population, right.

And if you actually focus now in China, you’re going to see that there are many dots distributed in a relatively even distribution through the region. And that is one of the keys. 

Because this kind of interconnection between cities enables the people in order to make business and also the interconnection between city, between cities also improve the competitiveness of people.

So if if there is a, if there is a shop, selling some sort of product, they will be able to compete with more shops, and instead of just selling very bad quality products, they need to actually increase the quality in order to be better.

And in order to be competitive, so does the idea of having a high interconnectivity that that will be improved, the deck will improve the quality of items that will improve their competitiveness, on the connectivity in the region in general. And that is one of the key things that China has, basically that Southeast Asia doesn’t have salad.

 

Jianggan  4:16  

So look, Can I add something here? Sure. So so this is the map as I love watching all the time, when it comes to building or evaluating a business idea or investment opportunity, because because essentially, even if we’re doing b2b stuff at the end of the day, so sort of the end products will be sold to consumers, knowing that, okay, where the consumers are and how they are distributed.

And also, I mean, think about consumers, they also the human capital, the workforce, where the workforce is, so allows you to, to understand me how to plan things. Um, and just like Alfonso said, I mean China clusters. We’ll see is like the metropolitan area. And and last Riverdale have lots of cities.

So so so that that changes that aspect of lots of things ramming the way you plan logistics on the way which logistic business model would work. And the way that you build a product, you handle your distribution, the way you sort of view the workforce, on the way that you sort of link your supply chain with consumers.

And compare this with Southeast Asia is so different than if you look at Southeast Asia. Most of the countries you have a big Metro mall, two big metropolitan areas, but outside that, I mean, you don’t have that in big cities.

So that changes the way you perceive business opportunities. For weird reason, lots of successful startup founders on my generation, they are spending time reading Chairman mas Adams works about an hour he won the Communist Revolution.

And a lot of it was for strategy. I mean, he mentioned a lot about I mean, how do you create a strategy sort of, and depth that you can tap into? So so so just to give you an example. So if you are the dominant player of delivery, China segment one witness dominant one now, Didi ride hailing platform, tries to go into delivery, it tries to attack the city, which is close to Shanghai convention, have made some key based on my time, and could very quickly mobilize resources from other big cities to support Nanjing, and I didn’t know they can very difficult for Didi to take any city from there. Right.

But we come to Southeast Asia, do you see I mean, a few years ago, on Gojek was like 95%, of the food delivery market in Malaysia. But most of that market is crucial in Jakarta. So when grab decided to attack Jakarta, it was very, very hard for go to defense. So so so there are many, many other stories similar to that.

And so by even drawing parallels between this and how will political non correct mean, how France and Russia are receptive Nazis are Germany differently, and in Russia had a natural advantage because it’s, it’s wide in the red light resources better? So yeah, so just random cold? Yeah,

 

Alfonso  7:22  

That’s interesting. Yeah. Well, for example, if one reason is related to what the demand and how enable are different cities under current population, and I think that another important reason is it’s also related to, to the effort to regulate.

So, I think that Well, I think that is unfair, actually, to compare China that is one regulated country with third is Asia, that is an entire region that is composed of different countries, right. 

So, I think that this is also one of the other advantages of China is that there is an integrated effort by the country in order to connect all of this in, in in an in a nice way. So, basically, that there is an effort to regulate and to participate with the private sectors in order to improve the current state of affairs and while you can actually say a similar things about specific countries in Southeast Asia, in most of the cases that regulators are in a defensive mode instead of proactive mode. 

So, that is also another difference is that there is a consistent effort to regulate in order to improve the different components of the country. So, for example, if we go to the next slide, and we ask and we ask the question, what is the state of the what is the state of of, of development of Southeast Asia, basically, this discharge is telling us specifically, what is the way in which position are located in specific countries in Asia.

And as you can see, we will have the the chart in the left that is infrastructure. In the middle we have connectivity and human capital. So, infrastructure is measured by gross fixed capital formation and you can see that basically, many of the countries of Southeast Asia are located in the lower end side of the spectrum. 

And you can see actually in Singapore, the top so, this is something that is maybe not surprising for many and connectivity basically, this is related to to the trade off of different goods and services.

So, you will have also most of the countries located in the lower end spectrum, although in many cases one country has had have a lot of natural resources like the US from China, in many cases, this trade per capita is going to be a bit lower. So it is it is actually interesting.

For example, smaller countries without without without many natural resources, they usually will score very high interest, because that’s the only way a does the only way to make it right, because as they don’t have anything, they need to actually be able to trade. So this is why Singapore is also in the top.

And, and in human human capital, human capital is basically it is all that relates to the, to this current state of the population, it could be their health, it could be their education, it could be their salary. And I think it’s interesting to, in this case, we’re actually highlighting the education, the higher education, basically all of the post secondary education. 

And, and you can see that actually, in Southeast Asia, things are a bit better. And you have a country like Philippines, that isn’t something that is I think it’s interesting, they have around like 21% of the population has some sort of bachelor’s degree or higher education. 

And actually check the different statistics, you will say that they have, like 2000 institutions that are like universities, public and private institution, but in that, in the case of Philippines, they have actually, like 90%, or 88%, or something like that.

It’s actually private institutions that are actually providing this kind of education to, to prove to prove the levels of, of higher education. So while this could be very harsh, at things are actually improving on and I think that then the next slide will show you Yeah,

 

Jianggan  11:32  

Can I just, just quickly, absolutely. It’s interesting that you hired in the Philippines, we have a beautiful business in the Philippines before and been sort of going back and forth. 

For the last few years. The country’s very interesting, of course, I mean, they’re very, very good service culture, and they’re for customers, which is very good. But but but the level of education, as you highlighted, it is pretty impressive, if so many people with with higher education, and and some educational institutes are pretty good quality.

But but at the same time, I mean, we look at the the other infrastructure, like the roads and stuff, I mean, things are behind. So, so so so so this is sort of sort of makes people think, right, I mean, I would predict that we predicted that the startup ecosystem in the Philippines was going to take off.

And we made that prediction consistently over the last few years. And it seems a binary this year, there’s some signs I’m thinking of them. Of course, I mean, COVID is a is a big black swan, which would change lots of things.

But but but still, I mean, we’re optimistic about the Philippines for a long time, and but just think just things seem to be a bit slow as, as compared to the expectations. Um, and, and I think my, my sort of bottom Alfonso premise, if I’m wrong on is that is that I mean, you have good human capital, but on the other hand, um, you really need like, all these factors to come together for for, for wanting to move forward. Right.

I mean, if you if you think about and financial on there, there are so many factors in China, which would allow it to, into to grow to what it is today. And these factors might not exist, or are readily available in other countries.

 

Alfonso  13:15  

Right? Yeah, that’s true. Yeah, I think needs to go together, right? Like, what’s the, what will happen in any country, if they have a high percentage of very educated people, and basically under no proper jobs for them, right, they’re going to look for other countries, right. And I think that this was the case of Singapore in the 60 or 70, that they were actually looking for.

They were implementing, like new infrastructure. And basically, they were trying to look for new ways to get people, educated people in order to get their businesses. And I think that, for example, I was reading some news that were related to FinTech in Vietnam. 

So, like different companies, they, they were not complaining that basically, they were saying that there was a lack of professionals in order to make their FinTech business happen in Vietnam, because basically, the rate the percentage is actually very low. And it is understandable, but this is why this kind of this kind of dimensions needs to move together in order to make it work. 

So for example, if you see in terms of infrastructure, how do we depict infrastructure and you can see basically, that in a country like Vietnam, with a small icon, that is a big thing on English page, you can see that 29% of people in 1991 used to work in, in in in dangerous trees and services. But now like 62% of people is actually working in an industry and services. 

So what you can imagine what does this means in terms of the lifestyle and also in terms of, of your salary, right, because this was people that were used to work in agriculture. And now you have people that is working actually in in services or something like that.

So, a lot of things have been improving and also the trade per capita has been improving basically, this implies that things are companies and the country itself is much more connected and, and the human capital dedication.

And I think that is something that we highlighted before has also been improved on for example, in Singapore, I think that this is this is very remarkable is that for example, in Singapore, in 1991 6% of the population had had a higher education attainment, but now, that number is 42%. So, that is impressive. Um,

So, what is the meaning of this kind of modernization for Southeast Asia. So, if you check the next slide Jianggan you will see that modernization that is basically is is similar to talk about the industrialization or something like that or basically hybrid infrastructure. 

Basically, countries with higher infrastructure will basically have higher higher salary. So, this is also what we talked before and this also explains why a country like Vietnam, for example, has been able to increase their salary so high.

So, it was like 100 and $130 in the in 1991, and now is like around one 430 or something like that. So, that is that is pretty impressive. And all of this is because the the modernization in in Southeast Asia happened very recently, this is why things have been increasing and growing very fast during during this last 20 years.

And well in this chart, you can see that there is a direct association between infrastructure in the y axis and basically this disposable income per household in the x axis. So, this shows that the influence that invest in investing in infrastructure is actually paying off in terms of higher salaries for the different countries.

So, this is something that is that is that is very interesting. So, you can imagine that we the sudden, modern efficient that happened in Southeast Asia, this is also something that is moving together with a connectivity. So you will have more companies that are doing more businesses bring more bring new people bringing new technology, you can imagine also the consequences of this basically with technology now that the information that is being processes is being processed is much higher than before. Yeah.

So, and you can see basically, that what higher a higher level of progress in terms of economic development will basically bring also the emergence of the financial sector, right. So while there are many companies like FinTech companies or in some cases bank that they have the dream of serving the unbanked population, at the end, it is something that is very difficult to do.

And, and while we are talking about about FinTech that is something that seems to be very sophisticated, the most important things in Southeast Asia as we show before basically due to the under development of the region is basically to to, to be able to to to title correctly, the basic first and the basics is basically to provide some sort of bank account to people.

So that that is the basic. So, in this chart that we have here, and I think that this makes a lot of sense, you will see that in the y axis, we have the number of the percentage of bank accounts and in the x axis, you have a you have basically an answered related to if people have been able to make a digital payment in the last year or something like that.

So you can see that there is a direct correlation between obviously a bank account on under lending, right or no, in this case, digital payments. So, in order to, in order to push initiatives related to FinTech, you need to actually be able to, to solve the basics and the basics is with is related to the to the bank in itself today to creating to creating bank accounts and to to to provide the the immense population of Southeast Asia this kind of basics, the thing is that it’s not so easy.

For example, The next slide is going to show a bit of that and it’s not so easy because Because it is not something that people just is going to acquire easily right you need, you need to have some sort of,

You need to have a formal job, you need to have a, you need to have specific papers to demonstrate that you need to have a specific salary, minimum salary in order to show that. And in many cases, those things are still missing, especially if you have 50% of the people living in rural areas. So, what did you do in those cases, and is complicated is not something that you’re just going to improve by creating more banks by putting more ATMs in every corner, that is not going to solve the issue because still, the human capital is under deadlocked, right.

You still have people that doesn’t have enough salary in order to to make a living in order to get an A create a bank account, or you have people that is not educated enough in order to move to the next step, right. So for example, in this chart here, basically where we’re showing as in the x axis, the bank branches, per capita. And in the y axis, basically, what we’re showing is the reserves of deposit money, basically, how much money how much bank account money do we have? Does country have right?

Uh, basically, this is interesting is that a country for example, like Thailand, even if they have done doing a great effort to improve the number of banks per capita, and actually, they have high, they have more banks than Singapore, they haven’t been able to prove the results of deposit money in banks, and why is it because there is something else missing?

And what will be that thing? It is something related to, to the human capital, it is something related to the lack of connectivity are the reason that the country that is still underdeveloped. And we can say something very similar to other countries, for example, Indonesia, also has How are higher bank branches than Malaysia, for example, but they’re still not able to push the results of deposit money higher than that Malaysia?

Why is this the same reason, the human capital, and the connectivity of that country is not high enough in order to make it. So you can see, this is also related to what we talked before is that things needs to be balanced. In the case of China, things are more balanced, and you have a strong wheel, from the regulators in order to make this happen, right in order to integrate in a unified way.

And also, the government is actively regulating, and I think that this is important is that, okay? If there is a new product, I will create rules in order to in order to know how to process that. But in some cases, in some countries, there are simply no rules. So without rules, you are not going to be able to organize yourself. The culture, it’s not going to be able to organize itself, in order to, to create some sort of progress and basically dice the entire issue.

 

Jianggan  23:05  

I just want to add a bone about the previous slide, which, which talks about account ownership versus digital payments. And I think in the in the past two to three years, I have seen lots of pitches of FinTech companies.

And, and many of them are saying that, oh, we want to provide services to the unbanked population of Southeast Asia, because we didn’t have bank accounts. And, and the site sort of and financial or alipay, as example in China.

But, but, but i think i think i think most people who say that did not understand I mean, how alipay started in the first place. I mean, do you know that in China, to open an Arctic pay account, what do we need? You need to have a bank account? Right? And,

 

Jianggan  23:51  

and what does that mean? It means that we first, first of all, first, of course, I mean, you need a place where you can take money from and there’s this one regulation in China, which popped out a lot which, which is if you take the first I mean, I can’t remember the exact limit, but for certain amount of money they take out of your bank account into the car, there’s zero chance, you don’t have to pay a fee.

So that means that for wallet, and to top out or to do to be used by consumers, there’s no cost, there’s no cost to the consumers, right? To alipay. Aside from of course, the management infrastructure, etc, etc.

Um, but on the other hand, if you think about that, I’m not sure if any of you has ever actually open a bank account in China, you need to physically go to the branch verify it. And I think I think now they verify your face as well. So we have a phone number which also needs to be verified and cetera cetera.

So So basically, the bank has done a KYC go, Alipay and alipay doesn’t have to spend any effort to to do to verify whether this person is real person. And and that’s a challenge for those two countries. Where You don’t have where people have not been sort of KYC approved by the bank.

So if you do the wallet or payment system, you onboard users, you need to know who these users are otherwise you can’t even trust them with much money. So so that’s which, which, which was which, and financial or alipay didn’t have as a challenge in China, but many athletic happens in Southeast Asia.

 

Alfonso  25:20  

Yeah, that is, that is interesting. And it’s so Connect. And it makes sense. Right. So, yeah, I think that it makes so much sense.

 

Jianggan  25:31  

So yeah, we have we’ve talked about I mean, solving some fundamental issues about a market. And we have sort of discussed a bit about the infrastructure of regulators should be and and how advantage has been doing in Southeast Asia. so far. So do you have anything to add?

 

Alfonso  25:49  

Just just to highlight maybe the questions the answer is, is what what was, what can Southeast Asia learn from from and financial? Right? So I think that one of the main thing is to work very close to the regulators. And regulators needs to be actually very proactive in order to make this happen in AP, they actually have a real interest in improving the country, companies needs to be very proactive also, in pushing this with with them.

And also, they need to be aware that, especially for investors and companies that are trying to go into into Southeast Asia, they need to be aware that of the development of the current development stage of the country, right. So as we saw before, there are many things that are actually new.

If a country is underdeveloped, it implies that there are much more things that are going to be new, and that haven’t haven’t been created in terms of actually regulation. So companies needs to be aware of that the investor needs to be aware of that there should be some sort of alignment in terms of everything. Right.

So there are there are many different aspects, right? It’s not just the regulation basically stopped the IPO, there were many things happening before there was a progressive, a progressive series of things that happened in order to reach that state.

And yeah, and financial was one one key player, I’m pretty sure that he was a key player in order to the development of the of the FinTech industry, in China, right? Because they were able to push this and to break some kind of off limits to make it happen, right, I’ve nothing The same thing is happening in different countries. But in other cases, there are simply no regulations, yet. They need to be created in order to to move forward.

 

Jianggan  27:48  

Um, I think, I think I think lots of lots of industry stakeholders, including regulators, including industry, payers, including the investors, including people who work in the industry are closely watch what’s happening with any financial or with WhatsApp in India.

So they try to understand for regulars point of view, I’m sure, I mean, what did any financial do wrong? And and if I’m regulating sure, for sure, I think in spiritual the same rules in China, or should I just be a little bit sort of more liberal or should I be like more stringent and from provider’s point of view.

They did look at Okay, does that mean does that mean that I will be exposed to present level risk in the future and, and does that mean that that my business model needs to be tweaked? Um, I think for for people working in this economy, they will probably be thinking that okay, where should I be, which company should I be working for, so that so that my stock options will become something that the company may eventually go to go for IPO.

So, so, so, so, lots of people have to have had all these questions. But but but I think essentially, essentially, the most important thing is to understand exactly what happened or to do to understand that, that I mean, I think most people try to understand try to try to emulate and financial sector without without understanding how everything came, and was the sequence of events. 

I will not go into the details. But but but but but I can tell you that many of the things they did were not because of some strategic oversight like 10 years ago that they wanted to create the biggest Financial Group, they fully invested historically. But because some because many things came out of need, I mean, once a beaut in one business successfully Alibaba case, ecommerce, and they realized that okay, people need payment, and they stop being human right?

And once they start doing him and they realize that okay, I’m my sellers need, because I’m doing escrow, right. I mean, I’m keeping the money, but the sellers need money to do to do to buy more goods was working capital, whatever. So they need lending. So what do I do with that? I mean, lots of things can I mean, of course, I mean, we, we started, we started with linear cigarettes, because I realized that okay, how do you how do you how to do risk control in the credit scoring came about so so lots of things came because necessity i and i think he said the same about about the Amazon with this web services system and may become a product that he can sell to other parties.

So, so understand that journey, what worked, what didn’t work? And what was the infrastructure? And what’s the market demand which enabled this or sort of, sort of hinder this. So that’s important map that into software vision, map that into your market? What makes sense to you? What doesn’t make sense to you? And I think exponential initially, with their teams in Southeast Asia, are some of them made a mistake of creating products that were too complicated for local market, because that’s not in China, but they didn’t know that. Okay, for for for different markets, we didn’t have the same level infrastructure.

And he did incremental approach, like, do this make sense? And, and with his progress, they add layers? Yeah. By the way, that’s the same reason why we had failed, because the product was too complicated. Right? So So understanding exactly what happened, and also engaging with all levels of, of the society to understand how it is, and and what worked, what didn’t work.

And also and also, just have a pulse about me how people perceive me, because at the end of the day, that’s going to affect on decision making of the government of the regulators. Yeah, you need to into half have that sense about different stakeholders in the market here, then engage them. And then theoretically, it is not difficult, but you just need to make it happen.

 

Yorlin  31:51  

So, so so guys, that was a very short introduction of the of the episode and lots of interesting insights from both john Gunn and Alfonso, I hope that it was useful, and I hope that you find out a bit more about the Momentum Works enabler report, we have more coming.

So stay tuned for the next episode. So in the meantime, if you look on my right hand side, these are the these are the ways that you can connect with us and find out more about what we do. Find out more about the neighbor report. And you can also just contact anybody from Momentum Works To find out more and if you want to find out more about what’s going on or understand what’s going on in our mind, go to our blog. So until next time, I’ll see you guys