Lip-Bu Tan Walden International CSPA 2005 Annual Conference September 24, 2005

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The Rise of China

Fastest growing economy in the world with an economic growth rate averaging 8% - 9% in the last 25 years Largest population in the world with 1.3 billion people Emerging middle class makes it one of the largest consumer markets in the world Government encouraging investment through offering of loans & incentive programs Strong cross border links to Silicon Valley Thriving entrepreneurship and the emergence of the private sector Educating world class engineers 2008 Beijing Olympics, 2010 Shanghai World Fair 2

The Rise of China

Mobile Handsets

China USA India

Televisions

China USA India

Personal Computers

China USA India Sources: Time Magazine, CSFB, IMF, World Bank 3

China Internet is Mobile-Centric

Country China

US Japan Germany UK Italy S. Korea

Mobile Users (MM) 363

177 88 69 54 54 37

Internet Users (MM) 100

211 78 51 37 32 32 Source: Euomonitor, CNNC, World Bank, Morgan Stanley Research July 2005

Mobile Phone to Internet User Ratio 3.6 : 1

0.8 : 1 1.1 : 1 1.4 : 1 1.5 : 1 1.7 : 1 1.2 : 1  China has 360M mobile users, 3.6x more than its Internet users and amounting to the level of the next 3 nations combined  MVAS contributed $700-800M in revenue to Chinese Internet firms in 2004 4

China: Semiconductor Industry Growth

 World’s fastest growing semiconductor market  Growth in market share, value chain, profit pool, R&D, patents and IP  World’s 2nd largest consumer of semiconductors in 2010  Primary growth industry supported by the government  Building the semi value chain is part of the 10th 5-Year Plan  Increasing IC consumption/supply gap  $5.7B in 1999   $25B in 2004 $45B in 2008  Establishment of local value chain  Foundries  Over a dozen fabs    20% of global production capacity by 2006 Semiconductor Packaging, Assembly & Testing (SPA&T) facilities  Over 90 SPA&T facilities  10% of the world’s SPA&T revenue Fabless design houses  500+ design houses  about $1B in revenue in 2004 5

China: Industry Trends

 Communications  Convergence of mobile and wireline creating attractive new opportunities   New mobile applications (video, enterprise applications, and gaming) exploiting 2.5G; 3G launch pending government’s approval; IP becoming unifying medium for mobile and wireless networks: IMS, VoIP  Software / Services  Increasing broadband penetration will drive internet service and application    Software as a service business model is increasingly being accepted Wireless devices are the next major client for software appointments Open source is a significant trend 6

China: VC Investment Climate

 253 projects received VC funding for $1.3 billion in 2004 (28% growth from 2003)  Foreign VCs still dominate the market supplying 70% of funding  24 VC-backed IPO in 2004, raised $4.3 billion  Materialized divestment in 2004 through IPO, M&A & trade sales: $802M  Investment focus mainly on broader IT, led by semi (IC design) ($400M)  Geographic split: Greater Shanghai (40%), Beijing (28%) and Pearl River Delta (12%) 7

China Offers…

 Cost effectiveness of labor, capital and operations expenses  Participation in the local supply chain  Proximity to the vast domestic market  Talent pool   World’s largest source of university-trained engineers since 1997 Over 250,000 returnees with Western education 8

China: Success Stories

 Innovations driven by new business models / technology       Alibaba ($1B investment from Yahoo) Baidu ($2.5B market cap) Focus Media ($950M market cap)  Capitalize the eyeball effect in 5-star properties Shanda ($1.8B market cap)  Massive concurrent online gamers SINA ($1.4B market cap)  Content is the king  News, SMS, gaming, community, e-commerce, VOIP & interactive media… SMIC ($3.5B market cap)  Leverage innovations, leadership, government support & local industry growth 9

Potential Undercurrent

 Soft landing of the heated economy  Energy price and scarcity  A growing heterogeneous market  Uneven distribution of wealth among population   Uneven distribution channels across geographic coverage Conflicting regional laws and regulations  Opening of capital market post WTO  Currency exchange rate    Bank reforms Future role of foreign financial institutions Exit of foreign investment  Relationship with Taiwan and the Western nations  Anti-corruption campaign  Last but not the least, IP protection 10

Challenges

 Large market, but not everyone makes money  Lack of a quality pool of middle management  Ambiguity and changes of policy  Information transparency & accessibility  Corporate governance  Sustainability of growth & profitability in the long term  Rapid growth of competition 11

Walden International: Investment Focus

Early Stage, Cross-Border IT investments

Beijing 

Shanghai

Hong Kong    Taipei

Singapore

Kuala Lumpur

San Francisco

 Palo Alto  12

Selected China Related Investments / Exits Semiconductor Comms Software/ Services

SMIT

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Lip-Bu Tan [email protected]

415-765-7100

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