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Business Week CIO Forum Gala Dinner
Speech by Mr K C Kwong
Secretary for Information Technology and Broadcasting

24 March 1999

Ladies and Gentlemen,

Good evening. I am delighted to have the opportunity to speak to you at the CIO Forum. The theme of the forum - "Leading Change : Business Alignment Through Information Technology" is well chosen because it highlights the key to business survival in the digital world of the 21st century.

Application of IT in the business world

If we look back at the development of information technology (IT) in the past couple of decades, we will note that the use of IT has changed in a fundamental way, from providing simply a means to speed up calculations and word processing to enabling a wide range of business management applications, such as financial and personnel management, production scheduling and so on. Also, development in IT, coupled with advances in telecommunications, has extended the operations of businesses beyond their own company boundaries so that businesses can work in an integrated manner with their business partners and their customers. This was done primarily through Electronic Data Interchange (EDI).

However, EDI applications have been typically geared towards specific sectors, using proprietary hardware and software platforms. This proprietary approach to transmitting information electronically had limited the broad adoption of EDI. Besides, the cost of installation and maintenance of private communications networks called value-added networks (VAN) for EDI purposes had also tended to put electronic business out of reach of many small and medium-sized businesses. So, despite the introduction of EDI, many of the small businesses still relied on the fax and telephone for their business transactions.

The Internet commerce

The fast development of the Internet in the past few years has substantially changed that. The main difference between Internet technology and conventional EDI is, of course, that the former adopts open standards which make electronic communications between businesses using different IT systems much easier and more affordable. Thus, regardless of their sizes, companies can now communicate and transact with each other electronically in a consistent manner without the need to install and maintain costly proprietary systems.

It would be worthwhile to pause here and look at the adoption rate of the Internet. In 1994, there were about 3 million Internet users worldwide, most of whom were in the US. Now there are some 112 million Internet users all over the world. In Asia alone, there are about 12 million users. The growth in the value of transactions over the Internet is equally impressive. It grew from virtually nothing in 1994 to US$43 billion in 1998. Some analysts have suggested that the figure would reach US$1 trillion by 2002.

So what does this mean for our businesses? The short answer is it means new opportunities. Let me briefly enumerate some of these opportunities.

First, sales and marketing. There are many constraints for businesses to physically expand their sales force in order to cope with market demands. However, with electronic commerce on the Internet, expansion of sales activities would require minimum additional cost and effort as the expansion could often be achieved by simply expanding the capacity of the server network. This is often much cheaper and more flexible than the employment of additional sales personnel.

Second, inventory management. The more inventory a company holds, the higher its operating costs, and the lower its profits. However, by linking purchasing information directly between customers and suppliers via the Internet, unproductive inventory held at the wholesale and retail levels could be reduced. Lower inventory levels mean not only lower costs, but also the opportunity to channel resources and capacity thus spared to other more productive uses.

Third, customer services. By putting information on product descriptions, support services or order status on line, we will be able to provide more efficient and focused services to our customers.

Fourth, the development of new markets. The Internet knows no geographical boundaries or time zones. Through electronic commerce conducted over the Internet, we can reach new markets which may be too costly to explore through conventional means. This is particularly useful to small and medium sized enterprises which cannot afford the cost of establishing a physical presence overseas to tap these markets.

Breaking the hurdles

While the Internet offers all these opportunities for businesses, there are still some hurdles which we need to overcome before we can fully exploit these opportunities.

For a business to feel comfortable about using the Internet in transactions with its suppliers and customers, it needs to be sure of the identity of the other party to the transaction, and that any agreements made electronically are binding. Companies which conduct EDI transactions over VANs will normally have the assurance that the information will arrive at its destination intact. Even if any problem should arise, the network service provider can be held accountable. However, the same is not true for the Internet. This is because it is a public network without any single entity which has the responsibility for ensuring the integrity of information transmitted and for providing the same level of assurances as in the case of conventional EDI.

The solution is for a safe and secure environment to be created for the conduct of electronic commerce. We accept that the Government is best placed to do this, especially when we want to ensure that electronic commerce takes hold and flourishes in Hong Kong. We have therefore decided that the Government should take the lead in establishing a local public key infrastructure and a root certification authority in Hong Kong. Through the use of digital signatures accompanied by properly issued digital certificates and encryption using public/private key pairs enabled under the public key infrastructure, we will be able to establish the identity of the parties to an electronic transaction, authenticate the electronic messages so transmitted, guarantee the integrity and confidentiality of the messages and ensure that they cannot be repudiated. I am glad to say that the Hongkong Post which has been tasked with the establishment of the public key infrastructure has worked expeditiously in this regard and its certification service should be up and running by the end of this year.

In parallel, we are preparing legislation to provide certainty in the conduct of electronic transactions. Briefly, the legislation will prescribe that electronic records will have the same legal status as their paper-based counterparts. It will also provide for the voluntary registration of certification authorities and the legal recognition of digital signatures accompanied by certificates issued by these registered authorities. We are aiming to introduce the Bill for this legal framework into the Legislative Council within the next quarter.

To encourage the community to engage in electronic commerce, the Government will also provide the lead by providing Government services on line over the Internet under our Electronic Service Delivery scheme, or ESD.

The purpose of ESD is twofold. On the one hand, we wish to improve the delivery of Government services by making it possible for members of the public to transact business with Government electronically round the clock, using various electronic means, including their PCs at home or in the office, interactive TV, interactive public pay phones and the like. On the other, we want to use ESD to drive the development of electronic commerce. Through ESD, we aim to establish an open and common platform which would serve not just our own needs, but also the needs of the private sector in carrying out electronic commerce. Supported by the necessary public key infrastructure and legislative framework which I have just outlined, we believe that the use of ESD will help to promote general awareness in and acceptance of electronic transactions in the community. This would in turn spur the development of more electronic commerce, in both variety and volume, in Hong Kong. Our target is to implement the first phase of ESD by the latter half of 2000.

Apart from the government, other organisations such as the Hong Kong Productivity Council (HKPC), the Hong Kong Trade Development Council and the Tradelink have also introduced a wide range of services aimed at helping local companies to take up electronic commerce. For example, the HKPC has recently established a DigiHall 21 - E Commerce Centre which offers integrated e-commerce solutions to local companies, from placing an electronic order, making an electronic payment, to establishing an electronic shop. The government will continue to work with them and major trade organisations in implementing a series of publicity and promotion programmes to encourage the business community to adopt electronic commerce.

Conclusion

Clearly, for electronic commerce to flourish, we need the concerted efforts of all concerned. Not least, the efforts of the businesses themselves. And, as the theme of this forum suggests, businesses need to re-align themselves if they wish to retain or enhance their position as the front-runner in the information world in which we live.

I am sure the CIO Forum will provide the platform for you to exchange views and ideas on how best such re-alignment could be achieved. And I wish you every success.

Thank you.