Nasdaq-listed Internet Capital Group has taken stakes in over 70 B2B players in three years. It is now pushing into Asia and just announced three maiden acquisitions through regional vehicle ICG AsiaWorks Ltd, a joint-venture with Hong Kong conglomerate Hutchison Whampoa.
Victor Hwang, ICG AsiaWorks deputy chairman and CEO, in an exclusive with ZDNet Asia explains why he believes Asian B2B companies are still ripe for the picking.
ZDNetAsia: The dotcom IPO boom in US that began two years ago seems to have finally caught on in Asia. As one of the early players in funding such companies what is your take on Asian B2B plays and the recent lukewarm reception of IPOs of Chinese portals Sohu.com and Netease.com? Is the bubble bursting even before it's begun?
Hwang: Firstly, let me explain ICG AsiaWorks is not a traditional venture capital company but a holding company focused on acquiring and building Asian-based e-commerce companies. We also bring additional operational resources to actively assist our existing partner companies in the US expand here.
Unlike VCs, we look far beyond the IPO to build large, successful companies over the longterm.
We see the recent market corrections as a potential opportunity to take larger stakes in the companies we like. Those market conditions have not affected ICG's strategy. B2B e-commerce adoption is still in its early stages in Asia. In our view, a major shift to Internet-based commerce among businesses is inevitable and not too far off. We're looking at a US$400 to US$700 billion opportunity!
On Sohu.com and Netease.com, they are B2C portals. The market opportunity for B2B is different and much more significant. Forrester Research's Asia Pacific (ex-Japan) forecast is $715 billion for B2B online trade by 2004. That's about 13 times their estimate for B2C trade. Not only is the B2B market opportunity larger, it will create better businesses. B2B is about software, systems integration, ASP, outsourcing services, and digital exchange companies. These are companies which will develop deeper switching costs, greater top line growth, superior profitability and superior value relative to B2C.
ZDNetAsia: "First-mover advantage" is often the main reason dotcoms offer when they attempt to aggressively grow their business in the region. Do you think American companies planning such expansion may now hold back and funds needed for such growth will dry up, given current conditions?
Hwang: We believe world class B2B companies will be successful in Asia. ICG AsiaWorks itself is a first-mover in Asia and we're expanding rapidly. We are capitalizing on the Asian B2B opportunity by bringing our leading partner companies to the Asia Pacific and identifying appropriate acquisition targets in the region. We have a strong balance sheet to fund our expansion and acquisitions, and believe capital markets funding will be there for the companies who offer differentiated solutions, have proven track records, management strength and depth to execute.
We believe there is no better time to aggressively enter the market and the opportunity is now to seize B2B in Asia.
ZDNetAsia: Which countries are your target markets in Asia?
Hwang: ICG AsiaWorks' charter is to build five to ten companies that will each eventually command market caps in excess of US$500 million. Our strategy is to focus on leading infrastructure companies and market-makers. Those companies can be based anywhere in Asia - we are agnostic over location. But we are focused on large markets with fragmented players. So, we will look for supply chains that target the global markets, pan-Asian markets and large domestic markets, such as China and India. Our priority is countries that have widely adopted information technology infrastructure such as Australia, Singapore, India and Hong Kong for infrastructure-related investments and Hong Kong, China, Korea and India for B2B exchanges.
ZDNetAsia: If you were shopping in Asia today what kind of businesses would you be looking for to add to your portfolio?
Hwang: Clearly, we are B2B pundits. Our strategy is simple: identify, acquire and build the leading B2B e-commerce companies based in Asia. We recognize Asia lacks the basic building blocks to deploy B2B e-commerce and has focused on building infrastructure, related services and market-makers. ICG AsiaWorks also serves as the exclusive platform for ICG in the region, allowing for the rapid global expansion of more than 70 of our US partner companies. In addition, we also like the telco/wireless space. In Asia, we believe the growth of wireless adoption will play a significant role.
ZDNetAsia: The economies in the region are coming out of the recession and rapidly getting on the web-enabling bandwagon. Internet usage is on rise, wireless/handheld markets are on the rise, e-business awareness is spreading and broadband is coming. What advantages/disadvantages do you believe Asian startups or established companies have in attracting capital?
Hwang: The advantage is the hyper growth rate of Internet users in Asia. The challenge is to achieve critical mass due to the different levels of economic development among Asian countries, culture, varying levels of IT penetration, and other country-specific factors. We believe strong management is a pre-requisite for building world-class early-stage companies, especially for B2B companies in Asia. Because B2B is in its early stages, management must have senior-level industry relationships and the credibility to gain industry "buy-in". Early movers with strong management and a dependable execution track record can attract capital.
ZDNetAsia: Are there cultural or language advantages you see that certain businesses can leverage on?
Hwang: For B2B, we should try and avoid building niche markets, unless the opportunities can scale tremendously. Scale is crucial for the best Internet businesses. The economics of the business is characterized by high fixed cost -- the initial expenditure necessary to develop the brand name or technology -- and low operating costs. The most profitable Internet companies, therefore, will be those that can spread the fixed costs over the largest user base, and in the process, realize the lowest "unit costs". However, certain businesses will be more attractive in certain countries.
One of the most attractive market-maker opportunities is to marry large markets with fragmented suppliers such as the light consumer products manufacturers in China selling to the global markets. In this situation, local management experience and language skills will be crucial for the success of the company.
ZDNetAsia: Tell us about your current portfolio and acquisitions announced last week.
Hwang: We have entered into preliminary agreements in principle to form a pan-Asia joint venture with Breakaway Solutions Inc to be called Breakaway Solutions Asia. We will also acquire a significant stake in Singapore-based AceFusion.com Pte Ltd and have also acquired MegaVillage.com Holdings Ltd in July.
Breakaway Solutions Asia will be a leading full-service provider of e-business solutions for growing enterprises and offers integrated strategic consulting, systems integration services and application hosting services.
AceFusion.com is a leading logistics solutions provider in the Asia Pacific region. It has a suite of Internet-enabled logistics systems, and a flagship e-logistics portal in Asia called FusionHub. It offers an industrial strength supply chain management solution which integrates warehousing, air and sea freight and land transport. AceFusion is a strategic partner with Fuji Xerox, MHE-Dematic (S) Pte Ltd, IBM/Lotus, iLog, Oracle and Sun Microsystems.
MegaVillage.com operates multiple B2B marketplaces which address various categories of light consumer goods, including watches, handbags, women's shoes and eyewear. The MegaVillage marketplaces introduce substantial efficiency improvements in the supply chain for these product categories. These markets will also connect low cost, high volume manufacturing capacity in South China with global demand for these products.
We're excited about our initial acquisitions and expect the next few years to be active, busy ones!
Note: ICG AsiaWorks revealed a loss of HK$1 billion (US$128.21 million) or HK$0.344 per share for the six months ended June 30, 2000. The loss was mainly due to a provision of HK$1.02 billion (US$130.77 million) for its toy and property businesses -- elements it inherited from Harbour Ring International, the company Internet Capital Group took a majority stake in to achieve its May backdoor listing in Hong Kong. Newly appointed chief financial officer Rowena Chu reportedly said no further provision will be required, and the company would have no problem in funding start-ups because it could take advantage of a HK$1.4 billion cash pile. In the US, ICG reported a second quarter loss of US$186.9 million, or 70 cents per share 9 August. The Wayne, Pennsylvania-based company spent US$417 million in cash on acquisitions and follow-up investments in the quarter.
Bio on Victor Hwang: Hwang is a managing director and strategic business developer for Internet Capital Group and is currently CEO and deputy chairman of ICG AsiaWorks. He also holds board seats on CentriMed.com, FreeBorders.com, and Simplexis.com. He was previously an investment banker with Goldman, Sachs & Co and was involved in more than 25 financing and merger transactions for a broad range of Internet, software, semiconductor, communications, and hardware companies. His clients included Yahoo!, GeoCities, and eBay. Prior to ICG, he was with Softbank Holdings, where he was a general partner focused on late-stage private equity investments in Internet companies. Hwang is an Arjay Miller Scholar from the Stanford Graduate Business School, where he received his MBA, and has a bachelor's degree from Stanford University.