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主题: VC系列: Why China? Why Now?
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作者 VC系列: Why China? Why Now?   
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文章标题: VC系列: Why China? Why Now? (2951 reads)      时间: 2004-11-02 周二, 09:44      

作者:游客海归商务 发贴, 来自【海归网】 http://www.haiguinet.com

Why China? Why Now?
01/11/2004. Source: Ernst & Young. Gil Forer and John de Yonge



Anyone who has regularly attended venture capital conferences in the U.S. or Europe over the past year will have noticed the remarkable increase in the industry buzz about China, says Gil Forer and John de Yonge of Ernst & Young. Where a year ago one heard about China only from a small avant garde of venture capitalists, now panel discussions on how to make sense of the opportunities in China are de rigeur conference fare. Pair this with increasing venture capital commitments to China by the likes of 3i, Nokia Ventures, Intel Capital, Motorola Ventures, Warburg Pincus and The Carlyle Group, and the rush from West to East is on.

Indeed, China has established itself as the low cost manufacturing center for numerous industries, such as electronics, automobile parts and textiles. This capability is being brought to capital-intensive technology sectors favored by venture capitalists like semiconductors and communications where the challenge is to constrain development costs in order to be able to generate venture capital returns through a trade sale or IPO.

Chinese manufacturing capability is complemented by a deep pool of engineering talent that can be employed at a fraction of the cost of American or European equivalents. According to the National Science Foundation, China has graduated more engineers per year than the U.S., Japan and Germany combined since 1997. In 2000 alone, China graduated 195,000 bachelor level engineers compared to 61,000 for the United States. The availability of this low cost engineering expertise makes China an attractive site for technology development projects that would be extremely expensive if located in the West. Chinese expats returning home from educational and entrepreneurial stints abroad are also adding to the talent based available to venture capitalists. "The downturn in Silicon Valley and other technology centers between 2000 and 2003 convinced many Chinese managers and engineers to return to their homeland and apply their learning in startups in China," says Dr. Haemmig.

While China's 1.3 billion people have long been seen as an attractive consumer market, its promise went largely unrealized because of lack of consumer purchasing power. That's quickly changing. With its gross domestic product surging at 9% per year, China has become the second largest economy after the United States when measured by purchasing power parity. A middle class is emerging and, as pointed out by Lip-Bu Tan, chairman of the venture capital firm Walden International, in the preceding interview, China is already the number one or number two market for a range of consumer electronics and communications services.

Capital is following this opportunity. Last year China received some $50 billion in foreign direct investment. According to the Asian Venture Capital Journal, $1.57 billion in private equity was invested in China last year, up from $350 million the year before. Zero2IPO, a Beijing-based research firm, tracked $992 million in Chinese venture capital investment last year, an increase of 137%. In terms of venture capital, China beats investment in any U.S. state except California and Massachusetts and surpasses any individual European country except the United Kingdom.

Innovation is coming from both the top and the bottom in China. The Chinese government has a declared policy of encouraging innovation and has implemented a program to develop Chinese technology standards in a number of strategic industries. Shanghai opened the city's state-owned laboratories to foreign institutions and multinationals to help capture R&D investments. Chinese companies, addressing the huge internal market, are developing products and services to their own standards, particularly in communications. Western companies are also setting up innovation centers in China to take advantage of local engineering talent -Nokia, Nortel and Infineon are a few recent examples.

Why Now?
Prior to 2002, the Asian private equity and venture capital community had a broader Asia focus, says Bob Partridge, leader of Ernst & Young's Venture Capital Advisory Group in China. In 2002, a lot of firms restructured and didn't do many deals. "As we came out of the SARS crisis in 2003, China became the principal focus of the private equity community with a flurry of new deals being done there," says Partridge.

One important driver of the new investment activity was the Chinese government, which revised its rules governing foreign-invested VC funds early in 2003, making it both easier to establish a fund in China and realize an exit. "As the Chinese government began to wake up to the importance of venture capital and private equity as an alternative source of investment, it increased the transparency of the rules, making it easier to do deals on the mainland," says Partridge.

"Investment opportunities in China have always been there," comments Dr. Haemmig, "but the cloudiness on regulatory and currency issues kept away foreign investors."

Opportunities for exits concurrently became much brighter. "Up until a few years ago the biggest problem with investing in China was the exit," says Partridge. "It was hard to get shares or capital out of China. Now a lot of existing investments in China are being flipped, providing inspiration for new deals. There is also momentum building because of Hong Kong listings and dual China/U.S. listings."

One of the most prominent examples of the new wave of Chinese IPOs is the Shanghai-based Semiconductor Manufacturing International Corp (SMIC), which floated a $1.8 billion offering on both Hong Kong and Nasdaq exchanges in March. Private equity and venture capital investors in SMIC, which raised nearly $2 billion in pre-IPO equity financing, include H&Q Asia Pacific, Gold-man Sachs & Co., Toshiba Corporation, Walden International, Vertex Venture Capital Israel, New Enterprise Associates, and Oak Investment Partners.

Another driver of investment activity is the Chinese government's announcement that state-owned assets valued at about 700 billion renminbi will be privatized, according to Dr. Haemmig. Partridge agrees: "We're starting to see private equity firms look at large state-owned enterprises, particularly profitable ones, where the firms could see attractive public market exit opportunities after introducing the right corporate governance practices and commercial structure to the business, along with the enhanced management teams."

Models for Investing in China
Almost all foreign VC funds active in China are based offshore, Dr. Haemmig tells us, to take advantage of the tax benefits and more convenient exits these structures offer. In this indirect form of investment, explains Dr. Haemmig, VC firms register in offshore havens such as the Caymans, Bermuda or the British Virgin Islands, then establish units in China to carry out day-to-day business including M&A, usually by registering in Hong Kong for a small fee and maintaining a representative office on the mainland. The offshore companies structure can help foreign venture capital firms to use an effective capital structure that is still not possible under current legal framework in mainland China. Stock options and preferred shares widely used by venture capitalists in developed systems are also available in offshore companies.

Foreign venture capitalists do also use onshore investment vehicles to carry out their businesses, says Dr. Haemmig. These may directly invest in domestic companies, Sino-foreign joint ventures, foreign wholly-owned companies, and other opportunities, but must be in compliance with current existing laws in China. Most of the onshore investment funds are based in Hong Kong, but some have representative offices in Beijing, Shanghai, Guangzhou, and Shenzhen.

Investing in China: Success Factors
What does it take to be able to successfully participate in China's market opportunities as an investor? A good local network, for one, or a partner who can bring a range of local contacts to the table. "You have to have the ability to operate in the market," says Partridge, "and that almost always means working with a local Chinese partner."

Dr. Haemmig agrees. "Good network 'guanxi' for local deal sourcing and business know-how in China is key," he says, adding, "It is also important to understand how to combine the European and American experiences with China's situation." Dr. Haemmig suggests that for a non-Asian investor seeking to enter the Chinese market, a partnership with a Taiwanese, Hong Kong or foreign VC firm with a China office may be an ideal entry strategy since the under-standing of culture and language are key ingredients for success. "Such a partnership will speed up the learning curve and limit risk at the same time," says Dr. Haemmig. Partridge adds, "the most successful VCs in China today are those with local Chinese executives on their team who have spent time in the U.S. doing deals, and then returned to the Mainland."

Another important success factor for foreign investors operating in China is exercising the same investment discipline in screening and due diligence that would be applied to deals at home, says Partridge. But this takes stamina. "China is geographically so vast that it could be a ten hour one-way commute to see a potential investee company," notes Partridge. It also takes patience. "The due diligence process takes significantly longer in China than it would in, say, the United States," says Partridge, "and ultimately 80% of the deals that get past a letter of intent do not close." All this means that the most successful firms are the ones best at prioritizing investment opportunities. "One target might take three months to close, another nine months, and still another twelve months," says Partridge. "Some firms are really good at setting realistic timelines for deals and devoting only the appropriate level of resources to them. Others are not as good."

Once investments are made, the challenge is to find the right management team. "The biggest bottleneck in the entire VC industry in China are senior managers to run the VC-backed companies," says Dr. Haemmig. "Foreign VCs prefer to hire Chinese managers who received their education and industry experience overseas in technology companies, especially in the United States. They understand the culture and language from both sides but also have the scope of experience and understanding of business processes, communications and marketing required to build the next generation billion dollar companies."

Outlook
Many of the leading private equity and venture players have already established a beachhead in China. These include the likes of Warburg Pincus, Morgan Stanley Private Equity, The Carlyle Group, Intel Capital, Barings Private Equity, JP Morgan Partners, Hambrecht & Quist Asia Pacific, Walden International, JAFCO, IDG Ventures, Draper Fisher Jurvetson and Doll Capital Management. More will certainly follow, encouraged by receptive Chinese government policies and increasingly positive exit prospects.

Foreign corporate investments in R&D and production facilities will likely continue, driven by the offshoring trend, which shows no sign of abating, and by the growing market opportunities created by the increasingly affluent Chinese consumer.

Does this mean that China will become the new Silicon Valley? "China will not be an immediate threat for Silicon Valley and other innovation centers in the years to come, because it is just an additional market with great potential," says Dr. Haemmig. "On the other hand, given the huge local market, technology required for domestic use will likely be developed within China in coming years if the venture capital model is successfully implemented. Some of that local technology will also be deployed to foreign markets, but that is more likely to be the exception than the rule in this decade."

Because China has not yet definitively proven its venture capital success, Dr. Haemmig believes that their will not be substantial reallocations of capital to China in the near term when considering the global venture investment pool. "There may be some opportunistic reallocation in venture capital, especially by American limited partners, to shift some focus from Europe to China and India, because the Europeans have proven the buyout business with superior returns but are not at par yet with their venture capital investment performance. Some reputable American VC firms in Silicon Valley and at the U.S. East Coast with longstanding investment history in Asia will definitely allocate larger sums to China, however," said Dr. Haemmig. Momentum is building for China to develop into an investment hotbed as a number of demographic, regulatory, economic and industry trends come into alignment. But the cur-rent focus on China should be seen in the context of a venture capital market that is still developing and the evolution that implies. "As with every emerging market, there is an expected boom in the early phase, followed by a shake out with consolidation, eventually leading to the professionalisation of the VC industry," concludes Dr. Haemmig.

Gil Forer is the Global Leader of Ernst & Young's Venture Capital Advisory Group. John de Yonge is an Assistant Director in the Ernst & Young Venture Capital Advisory Group and is responsible for developing venture capital thought leadership and insight.


作者:游客海归商务 发贴, 来自【海归网】 http://www.haiguinet.com









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