A US tech guru gets positive about Asia

CSFB''s Palo Alto-based tech guru, Richard Char sees great things happening in Asia.

FinanceAsia: What trends do you see in Asian tech?

Char: Asia has always been important for tech. For as long as I have been doing tech, Asia has been an important element.

In our telecoms space, Asia is important because Asia - specifically Korea and Japan - have been ahead of the US. In Japan, the developments in GPRS and 3G are two years ahead of the US. Korea is the most 'broadband' country in the world right now. So if you want to know what the US broadband space might look like in the future, you look at what's being done in Korea today.

Taiwan has always been important for semiconductors and is increasingly so because the fab-less model is becoming more and more pervasive. If you are an American semiconductor company, you're crazy in this downturn not to consider a fab-lite model. There are very few companies that still want to do heavy spending in manufacturing. Even very large US semiconductor companies like Texas Instruments or Connexant are implementing a fab-lite model. They're saying TSMC, UMC, and Chartered can build it, and we'll design it.

China is important too. Historically, it was a low cost opportunity and assembled things that didn't have a lot of design value added, but where labour was an important component - such as circuit board assembly. Now, China is becoming a significant market in its own right. The third phase will be very technical high-end manufacturing, represented by companies such as Huawei, UTStarcom and SMIC.

There's an assumption in the West that production can be outsourced to Asia, but it will always retain the high margin innovation and design side of the tech business. Could Asia ever move up the value chain and disrupt that thinking?

Asia will compete more in some of the design areas with the US and Europe. We see it already. If you look at Taiwan, it's gone from being a DRAM producer, to fabs that have the best-in-the-world production technology to giving birth to design houses - the fab-less companies one used to think only existed in the US - such as VIA.

Samsung Electronics has remade itself from the manufacturer of inexpensive white goods to producing products that get premiums. So there's already a lot of design and development work in Asia that now competes head to head with the US.

But that doesn't mean the US or Europe capitulates with respect to innovation and design.

But if the cost of an engineer in China is one fiftieth that of Palo Alto that has to change the equation?

True, but the kind of engineering work you'll see is the type where the destination is known, and you're trying to figure out how to get from here to there.

We were talking to a large China software company yesterday, and the CEO was saying that if you know what functionality your competitors in the US have introduced in the latest version of a software, then you can write the code. But if it is the US telecoms companies that are asking the software vendors to create this feature, so it stands to reason that the idea will originate in the US.

You are describing a situation where Asia is a follower and not an innovator. Is there a situation where leapfrogging exists?

Well, yes. Korean broadband is a good example. In the US and Europe, only a small fraction of homes have broadband. In Korea, it is the standard and most people have it. Now people that sell software and services, and the stuff that goes on top of broadband, they have so much more to work with in Korea. You have consumers who can already get streaming video.

If you offered a business in the US streaming video, you'd be addressing a market that was a small fraction of the population. In contrast, in Korea, most households would be in your target market.

Will a lot of the big tech IPOs over the next few years originate from Asia, and particularly from China?

Some of them will. There are some very promising companies, such as SMIC, that have excellent technology and address attractive markets. That will be a spectacular IPO and there will be global interest in that transaction.

In Asia there has been a lot of talk about venture capital. Is it performing its true function in Asia?

Venture capitalists provide multiple services to their client. There is more capital here now to finance new ideas than there used to be, and that is very good. It varies from country to country.

In the US right now incubators are out of favour. It's a fashion that's passed. And yet you can make a strong argument that in Asia, the incubator is still a model that makes a lot of sense, in a lot of different countries. A lot of companies require managerial assistance, and sometimes it is easier for a venture capitalist to do this if he or she can amortise their efforts over a series of companies.

Tech is out of fashion now. When do you think it will come back into fashion?

Does out of fashion mean people are not interested in it? No. Tech is new, fun and exciting and for that reason people are always interested in it.

When does the market come back? That may be a different question. It is challenging. We have just been through the perfect storm. We had an overbuild of telecoms infrastructure. We had a run up of IT services because of the Y2K. And we had this phenomenal period of growth in the internet that compressed what should have taken 20 years into 4-5 years; which was necessary for companies to find out the right business models and applications. But the party is over, and having lived through 1999 and 2000 and it now seems like the nuclear winter. However, even today, the level of financing activity, looked at relative to the last 15-20 years, is probably one of the best year in the history of venture capital. But it doesn't feel like that because we came off incredible highs.

Visibility is poor. Key drivers such as PC demand and the telecom industry show no signs of an imminent recovery. Now people have started mentioning 'double dip' and that's why all of us are cautious.