AI — Big Data — Cloud — Edge — IoT — 5G: Can Sri Lanka be an innovator; not a consumer?

Original article was published by Chanuka on Artificial Intelligence on Medium

AI — Big Data — Cloud — Edge — IoT — 5G: Can Sri Lanka be an innovator; not a consumer?

Sometime back, I had the rare opportunity of listening to Guo Ping, Deputy Chairman of Huawei, presenting the technologies that might rule the world in next 5–10 years to come. Interestingly, that was just weeks after Donald Trump criticised USD 105 billion Chinese tech firm and Xi Jinping, Chinese President has diplomatically retaliated, emphasising role of ‘Intelligent Innovations’ in contemporary society. Packed in the conference room of Shangri-La Shenzhen were representatives largely from developing nations. Distinction between speaker and audience was apparent. While Ping represented a researcher cum an innovator of technologies he spoke of, audience was a diversified set of consumers.

Piles of web literature on topics above, that can be collectively termed ‘Next Gen Technologies’ or ‘Disruptive Technologies’ too take innovator’s angle. They talk about developing Internet of Things (IoT) market to reach 25 billion connected devices with aggregate annual revenue of USD 1.1 trillion by 2025 — that is only five years to go. Asia Pacific is to lead this revolution by at least 10 billion devices. India itself will be a huge IoT market of USD 9 billion by then increasing current 60 million IoT connections to nearly 2 billion. Similarly, Artificial Intelligence (AI) has moved rapidly forward with some applications like face and speech recognition has advanced more than 10 fold during last two decades. For instance, now AI algorithms can identify faces and voice almost the same dexterity a normal human being can do. At infrastructure level, 5G builds base for both AI and IoT with user experienced data rates 10–100 Mbps, latency less than 10 ms, connection density 10,000–1 million devices within a square kilometre, with almost hundred per cent availability and reliability. By 2025, more than 1.2 billion users will be on 5G. As for applications, these can bring fully autonomous driverless vehicles within next 3–5 years, boost up remote robotic surgery market to USD 20 million by 2025 and fully take humans off from language translation process — the same way invention of calculators liberated humans from solving difficult arithmetical sums. Still all these information is for innovators. These figures make no sense to consumers. Their world is not the same.

What makes a consumer different from an innovator? Despite both groups benefit from the same basket of technologies, it happens in two entirely different ways. An innovator directly uses a technology in building a product; a consumer uses not the technology but the product. While two approaches complement each other, nature of returns is of different magnitudes.

Understanding Innovator-Consumer difference: Examples from Industrial Revolution

Industrial Revolution, in nineteenth century, transformed a predominantly agrarian and artisanal feudal society towards a commercial and industrial one. This transformation, driven by rail boom of 1840s, profoundly affected agriculture, economy, law, politics, society and environment. First to be industrialized was Great Britain. The outcome: Great Britain dominated world throughout first half of nineteenth century. City of London became essential in financial field in terms of transactions, for recognition of debts, to issue shares, to borrow, etc. This hegemony led Britain to form the largest colonial empire and become the largest foreign investor. By 1860, Britain alone accounted for one fifth of world’s GDP. In addition, there is a majority of commodities, despite competition from Chicago Stock Exchange, and reference currency for international trade remained Sterling Pound.

Interestingly, Britain was not the only country that saw development of railway systems. Take Sri Lanka (then Ceylon) for example. We had our first railway track relatively fast. Ambepussa was connected to Colombo in 1865 — that was only about three and half decades after England had its first public railway line between Liverpool and Manchester. Main Line was then extended in stages with service to Kandy in 1867, Nawalapitiya in 1874, Nanu Oya in 1885, Bandarawela in 1894, and Badulla in 1924. By dawn of new century the country has already been earning from investment. By 1990 there were 1,550 square kilometres of tea in Ceylon producing 70 million kg for export markets. This would never have been possible if not for the steam locomotive technology that cut down transport time. Otherwise typical time of transportation from Kandy to Colombo by bullock carts was minimum 4–5 days. This was an achievement. Still it hardly made us as rich as Britain. Not even close. Ditto for India and other British colonies that benefitted from then brand new technology of steam engines.

So why same technology treated two economies differently? Easy. One was an innovator, directly exploiting it for creating products, the other was only a mere consumer, who uses such products for its own economic gain, but still could never match gains by innovator economy.

Imagine the impact if British, instead of investing on coffee and tea invested in a manufacturing plant for steam locomotives. This would not have been practical, but for argument’s sake let’s assume they did. This business itself could have moved Ceylon to industrialised countries category by the end of WW II. Such is the power of early adopters of any technology. Sadly, we continued to play the role of consumer.

Can Sri Lanka leapfrog itself be an innovator of its own intelligent products?

In fact, there are countries that consciously changed their direction from a consumer to an innovator. Japan, for instance, after WW II transformed itself in its role by producing electronics products. China has remained a consumer for relatively a long period before shifting the roles. Since 1949 till 1980s, China’s electronics industry developed slowly due to limited demand and a closed market. Since 1980, spurred by economic reforms China has entered a stage of rapid development, driven by strong demand for consumer electronics. By 1990s, Chinese government adopted more favorable policies towards computer hardware market, making it the leading force in the development of electronics industry. By dawn of millennium China has become the second largest consumer and producer of computer equipment, second only to Japan. Today, while this fact is challenged, China remains international leader in ‘Intelligent innovations’.

Can a tiny economy of USD 90 billion like Sri Lanka ever be an innovator exploiting the set of leading technologies of the day, beating nations far bigger and advanced? Before jumping for a resounding negative response let’s contemplate a bit on the background.

The question is not entirely fresh. It has been asked before, though in a different manner and context. During closed economy regime of 1970’s we have repeatedly asked ourselves why not we manufacture our own iconic vehicle like India’s Ambassador. We have also been experimenting with local tech brands. They used perhaps the best technology then available. Sadly none was a remarkable success. They fell one after the other. The failures were so significant that by 1978 we have almost given up innovating products of our own. With open economy it was easier for us to place ourselves somewhere in the value chain — usually towards the end — if at all we produced any technological products. Then we moved into light industries like apparel, that we could comfortably handle. (India went a bit far than we did as their closed economy period went beyond 1970s. They manufactured many electronic items including personal computers and printers once, though without a substantial success in the market. After liberalization of 1992, Indian market was full of imported electronic products of a higher quality local manufacturers could hardly match. )

Reasons for failure, in these cases, were more or less apparent. Sri Lankan market was too small. Economies of scale were always unfavorable. Manufacturing for a small market didn’t make sense. Capturing offshore markets wasn’t easy when almost everyone was practicing protectionism. Being a consumer was the path of least resistance.

Has anything changed with the advent of ‘Disruptive Technologies’?

Has anything changed now? If so what? These should be the questions to start with. Were circumstances the same, no point even considering this option. Fortunately we live in a different period with most obstacles to international trade in 1970s have been obliterated. Protectionism, though still exists, does not really stand in our way. Not just Asian, but European and North American markets were brought closer with expanding Internet. Also we gain further by the very nature of ‘Disruptive Technologies’.

A Disruptive Technology, a term coined by Harvard Business School professor Clayton Christensen in his 1997 best-selling book, ‘The Innovator’s Dilemma’ can be any enhanced or completely new technology that ‘disrupts’ and replaces an existing technology, making it obsolete in the long run. ‘Disruption’ is an inherent feature. Rest are sustaining technologies which rely on incremental improvements to an already established technology. In terms of technology, a disruptive technology can be hardware, software, networks or a combination.

Our previous experience shows that disruptions resulting from new technological innovations create new markets that nobody could have anticipated before the innovation itself happened. Just like creation of the internet opened the way to ecommerce markets or invention of Personal Computer formed the possibility of connected PCs advent of cloud computing is paving the way for apps and the IoT. AI will be no exception to this rule, opening an entirely new market or markets which were not even imaginable previously.

Disruptive Technologies are what start-ups typically exploit. They, ‘innovators of technology adoption lifecycle’ have no other way than taking the risk of banking on disruptive technology potentials to target new markets and find ways to incorporate it into their business processes. Established firms normally take a more risk-averse position and adopt an innovation only after seeing how it performs with a broader audience. In the end they, failing to account for effects of new, disruptive technology may find themselves losing market share to competitors that have discovered ways to integrate technology into managing resources. So ‘disruptive technologies’ are always for young and tiny startups.

Sri Lanka’s Information Technology startups: new guys in the block

Sri Lanka, in recent years, has demonstrated itself to be a promising ground for tech startups. They now generate a sizable part of nearly USD 1 billion export revenue from telecommunication, computer and information services. They also account for a part of 125,000 employed in the industry — a quantum leap from 82,000 in 2014 — as revealed by IT sector manpower survey 2019. While it is still Information Technology Enabled Services (ITES) sector that includes Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO) dominates in the earnings, Sri Lanka’s nearly 300 software firms play a noteworthy role in meeting international demands.

Sri Lanka’s start-up ecosystem is expanding, having created almost half of all new companies in the computer science area, says National IT Export Strategy of Sri Lanka 2018–2022. Sri Lanka has a growing number of start-ups in IT industry, it continues, and various programs support their development allowing young entrepreneurs and developers to find affordable workspaces, access international and local investment and overcome barriers to future growth. Industry today offers professional services in different areas and a full range of IT products, from IT development and maintenance to innovative solutions and IP creation. Sri Lankan IT companies have been providing services to global clients for customized and outsourced software development.

This backdrop perhaps makes things look less gloomy. We don’t talk about introducing an entirely new industry. The industry is already there doing same things, may be at a less advanced level. It is just a question of expanding work. The stage is already set. So, while it might not be easy that couldn’t be as difficult as opening a steam locomotive plant hundred years ago too.

Way forward: What Sri Lanka can do in promoting innovators

Not all what economics text books say makes practical sense. Leave markets free, they say, right industries will eventually emerge. If any development models were born following this maxim, certainly they were not in Asia. Almost all Asian country case studies exemplify correct government intervention at right time had more to do with making them industrialized, than so called ‘free market’. Some countries have taken risks too large for them to make their mark on global economic map. Had they waited, letting free market to work on its pace, they would have been the same poverty stricken societies they were in 1960s.

One common strategy has been preferential treatment. ‘Chaebols’ (pronounced ‘jay-bols’) or South Korean conglomerates including renowned brands like Samsung, Hyundai and Lucky Goldstar (now LG) were historically offered preferential treatment till they became international giants. Samsung was once the largest of Chaebols. It wasn’t always producing mobile phones. Founded in 1938 by Lee Byung Chull, the son of a wealthy landowner, the group diversified into areas including food processing, textiles, insurance, securities and retail. Samsung entered electronics industry in late 1960s and construction and shipbuilding industries in mid-1970s. In 1977, Samsung had Korean engineers dismantling color television sets from United States, Europe and Japan to learn how they could be copied. Within three years they were producing color television sets. In 1979 Samsung started making VCR’s and in 1980 microwave ovens. Since 1990s, Samsung has increasingly globalized its activities. Electronics, particularly mobile phones and semiconductors, have become its most important source of income. This success would not have been possible for strong state backing in terms of providing low interest loans, R&D facilities with personnel and assurance of recovery provisions in case of a temporary business failure due to external shocks.

An essential prerequisite Sri Lankan tech firms too would expect in getting into ‘intelligent innovations’ sphere is such preferential treatment by government. This may sound a step-motherly treatment for other industries — most of them are promising, but that cannot be helped. It is just a case of priorities. We need strong policy decisions aimed at boosting ICT industry.

Then it would be essential building the right workforce. Skilled human capital is difficult to find and that costs. This again should go hand in hand with the industry developments. Instead of generally qualified professionals the need is for professionals trained in specific skills matching industry needs. There are two approaches to follow.

Firstly, developing the capacity locally. Annual aggregate intake to state universities in ICT related steams, including computer engineering and newly introduced technology streams is only 2,152. With Bachelor of Information Technology external degrees added, state universities produce about 4,500 IT graduates per year. Non state universities and state institutions offering fee levying degree courses produce about 5,000 graduates. Will all the output is still less than 10,000. For a quick expansion of the industry this number should at least be doubled immediately. Fortunately multiple approaches are available varying from increasing external graduates by offering them easy loan schemes (already available in limited scale) to supporting private sector to increasing their intakes.

Secondly, if local capacity is not adequate we may have to attract foreign, mainly Indian IT professionals. Certainly not a popular option, but a last resort. Even countries with populations against foreign workers far seriously than Sri Lankans, now attract them as the step has somewhat inevitable in an innovator economy. We can surely anticipate political resistance. May be that makes more reason for us to focus strongly on option one.

Other essential requirement is expanding R&D capacity. R&D plays perhaps the most important role in capturing market with innovations. All international firms so far successful in innovation game are masters in R&D. For instance, out of 188,000 Huawei employees, nearly half are engaged in R&D in their 30 innovation centres. This is the type of significance any innovator must give for R&D. Ideally that should come from the industry itself, but at least on this case state backing can do a big difference.

All above requires close co-ordination between the universities, state or non-state, and industry. Not that we lack it today, but certainly needs to be strengthen to a level that almost all pass outs immediately absorbed by the industry with no further orientation or training. For this both institutions and industry must clearly understand each other’s needs.

Finally, all this can only be achieved with strong political will. This is the most difficult part. A transformational move, perhaps one of the most important even since independence, it would never materialize without full state backing. We don’t talk here about a mere process that generate few thousands more jobs. Neither we talk about something that may earn few USD millions to economy. An innovator economy has the true potential of adding annual revenue in USD billions.

Chanuka Wattegama is an academic and a public policy researcher. Opinions here are his personal and not of any institutions he is affiliated with.