2005 Outlook: Asia –

Ta-Lin Hsu, a classically trained Ph.D. scientist, spent a decade at IBM before becoming one of the prototypes for Asian American engineers who cross over into business. The founder and chairman of H&Q Asia Pacific, Hsu has been investing in Asia since he started the Taiwan office of Hambrecht & Quist in Taiwan. He helped to create the private equity industry in Taiwan, helped another generation of entrepreneurs-like Lip-Bu Tan, Dan Carroll and Peter Liu-make a start in Asia, and he remains one of the region’s most active investors.

Q What will happen in Asia in the New Year, starting with Japan?

A On the surface, nothing seems to have changed since the collapse of Japan’s economy in 1990, but a lot has. The iron rice bowl guarantee of lifetime employment has ended. Students don’t necessarily think of joining a major company on graduation. The NEC’s and Fujitsu’s now accept outsourcing, or spinning out subsidiaries. As a result Japan has more opportunities for foreign PE investors.

The emerging economies of SE Asia?

Those economies were depressed after 1997, and China sucked all the FDI out of the region until recently. Today, countries in the region, like Thailand and Vietnam, present opportunities for investors who worry about IP protection, even though costs may be a bit more than in China. One of our portfolios, Fabrinet of Thailand, will make $300 million in optical components for customers like JDS Uniphase in the upcoming year.

And India?

It has done very well in software development and business process outsourcing, but won’t monopolize either going forward. [In 05] we will see more companies, like Augmentum of Shanghai, which has hired hundreds of Chinese engineering graduates to do programming for large U.S. companies at $400 per month. India has been more successful to date because English is more widely spoken, especially with BPO, but that is ending and you’ll see India and China competing in both areas.

Which brings us to China.

China is a growth story, but it is maturing. VCs have to be more selective about what we do in China, as Chinese companies move higher in the value chain of manufacturing. China is shifting away from cheap commodity products to consumer goods, especially in electronics. To date China has made its products mostly for domestic demand but now it’s moving toward exports. That won’t hurt us; we don’t make much home electronics in America anymore, but it will have a big impact on Japan and Korea.

Is there anything VCs can do to prepare for Asia’s moving away from fixed exchange rates?

I’ve been asked that question every year for the last 50 years. You can’t do a thing. VC is invested in a 10-year cycle. No one can predict how the dollar will move up or down in that cycle. At H&Q Asia, we’ll invest in export-oriented companies if we anticipate stronger exports [as a result of devaluation], but there is no way to hedge your money.

What’s the big overall trend in Asian PE for 05?

Buyout firms are moving into China in a big way over the next few years. Even VCs who have spent years not wanting to travel further than 25 miles from their homes are going. It’s exciting, but we don’t want to make a lot of mistakes as we change.