Hitech Investment in China: Risks

1
Hi-tech Investment in China Risks Reward

• Andrew Y. Yan
• Softbank Asia Infrastructure Fund
• President/Executive Managing Director
• andyyan_at_sbaif.com

2
Introduction to SAIF

• Established in January of 2001 by SOFTBANK
  Corporation with founding limited partner, Cisco
  Systems.
• 1.05 Billion in committed capital from Cisco
  focused primarily on telecom, media, and IT
  technology, with a focus on Broadband and
  Wireless Infrastructure in Asia Pacific region.
• 4 offices
• Hong Kong (Headquarters)
• Beijing, China
• Seoul, Korea
• Mountain View, U.S.

3
Investment Style

• Lead or Co-Lead with other large funds
• Typically 5M-50M in mid to late stages
  opportunities
• Strong interest in spin-off of large players with
  strategic positioning
• Strategic focus Mainland China, Korea, Taiwan,
  Hong Kong, India, Japan

4
Digital Evolution
Analog
Digital

Broadband
Narrowband
Information Services
Information Services
Information Technology
Information Technology
Information Services
Information Technology
SAIF
5
Chinas Competitive Edges in Digital Era

• China as a leading market
• Large domestic market low tele-density
• Stable economic growth comparing to other region
  in the world
• Deregulation and infrastructure spending
• Entering WTO
• Hosting 2008 Olympics
• High growth potential

6
Chinas Competitive Edges in Digital Era (cont)

• China as Manufacturing Center of Digital Products
• Migration from Cheap and low quality to Cheap
  but good quality products
• Pool of Engineers and Skilled Workers
• Private Enterprises reached critical mass in
  size and capitalization
• Hong Kong and Taiwan companies played important
  role in channeling and marketing Chinese-made
  products in the world market

7
Chinas Competitive Edges in Digital Era (cont)

• Chinas human capital strength
• Cheap but quality labor forces
• Pool of engineers and skilled workers
• Large domestic market with attractive
  opportunities
• Overseas Chinese returnees play more and more
  important role in IT industry
• Lack of management talents partly compensated by
  managers from HK overseas Chinese

8
The Contradiction about Investing in China

• 1.3 billion people but the addressable market
  size is probably only ¼ of it
• Over 80 population still live in rural area and
  barely can afford to buy anything
• Fast economic growth but the stock market lost
  1/3 of its value since its inception
• Large foreign direct investment, but barely heard
  anyone made money in China
• Government promotes foreign investment but
  actually doing it have to go through too many
  approvals

9
Issues Related to Hi-tech Investment in China

• Lack of legal infrastructure to support venture
  direct investment
• Existing regulatory established for FDI in JV
  Manufacture, not for venture investment
• Convertible bond, preferred shares and options
  are not allowed
• LP-GP structure, Tax issues
• Exit Liquidity Issues
• Legal person share lock up
• Foreign Exchange Control
• Restrictions and prohibitions on investment in
  many sectors
• Too many approval process
• Too many people can say no, too few can say
  yes