Hsu Ta-Lin

In October, H&Q Asia Pacific realised its ground-breaking investment in Beijing Mei Da Coffee, selling a controlling stake in the local operator of more than 60 Starbucks retail stores in Beijing and Tianjing back to Starbucks for an undisclosed amount. Here, H&Q Asia Pacific founder and chairman Hsu Ta-Lin shares his views on backing brand names in Asia's rapidly growing consumer markets.

How has H&Q Asia Pacific's focus changed over the past 20 years?
H&Q Asia Pacific started out in 1985 as a venture capital fund manager with a focus on Taiwanese technology. We invested heavily in what have proven to be successful companies making PCs and semi-conductors. We have invested in over 100 companies in this sector over the last twenty years. When we expanded into China and the rest of Asia in the 1990s, a multi-strategy approach was adopted. In China, we wanted to invest in the factories of the world, but we were also upbeat about the emerging consumer market.

How did the Starbucks deal come about?
We'd made a deliberate decision to invest in branded consumer names. We hired consultants to talk about ?branding?, and one of them was John Fisher, who identified a few brands including Starbucks. We met with Jinlong Wang, president of Starbucks Greater China, then general counsel and vice-president of Starbucks International, and after that, I was invited to Seattle for further talks. We pursued Starbucks for almost two years before they agreed to give us the licensing agreement for Beijing in 1999.

Not Shanghai?
No. We wanted Shanghai, and were disappointed when we weren't given that market, but it turned out to be a blessing in disguise. Shanghai is the most international city in China, and would have been the obvious choice, but it is also where competition is greatest. Beijing, however, is where the first ever cup of Starbucks coffee was served in China, and Beijing is where the Olympics will be held.

With a brand, there is always the sixmillion question: is it here to stay, or merely a fad? Even with Starbucks in the early days, we lost money. The J-curve effect of starting a new business was further complicated by the SARS problem in 2003. The boom really started in 2004.

You also made money backing MTV in Japan?
MTV was an opportunistic move when we bought a non-core music business off Pioneer, then invited MTV to return to Japan to form a joint venture in which we took a 70 percent stake. MTV had been to Japan twice before, but only this time, with our involvement as a local private equity partner.

Was it a deliberate plan to help bring established US companies to Asia?
We didn't set out to pursue only US brands, but it was a deliberate strategy to pursue established brands. In order to sell to the general consumer, you need an established brand, which means higher popularity, higher margins and greater success. Western brands, for now, carry a higher probability of success because they have been tested in more competitive markets.

Are Chinese brands attractive as well?
Chinese brands are still in their infancy of development. We will look to sponsor that growth more now than back in the 1990s, when we picked Starbucks. At that time, there were no local brands, except maybe for Taiwan's Master Kung instant noodles, but even that wasn't known in, say, Korea. But I predict you will increasingly get Chinese brands like Mengniu and Lenovo enjoying similar success. At this point, the jury is still out.

Are you still bullish on the Asian consumer?
Yes. Look at the demographics, and not just in China, but India and the ASEAN countries. Japan and Korea are more mature, hence a different investment approach is needed. In Japan, I'd say we adopt a ?migratory? strategy, to identify and help small to medium-sized manufacturing companies move their operations to manufacture and sell their products in China. Korea is undergoing a restructuring phase, and the migration has developed to a lesser degree than Japan, but it will start.

Aside from the consumer, what appeals to H&Q in China? What won't you do?
Financial services from credit cards to leasing and mortgage business providers will be the other preferred sector. There are some regulatory constraints on the foreign investor for now, and it will take time, but there have been positive developments in the banking sector. What we won't do is invest in ?special relationships?. By that I mean, we will not bet on the ?princelings? [children of well-connected officials], or accept offers of one-time favours.