Asia Society Hong Kong Center and Tokai Asia Limited
Luncheon Panel Discussion on

Global Financial Markets: Investing in Technology

with Peter Churchouse, Morgan Stanley Dean Witter Asia
Ken Ehrhart, Telecosm Holdings International
Michael De Lathauwer, Goldman Sachs (Asia) L.L.C.
moderated by Brian Lippey, Tokai Asia Limited

Hong Kong, 16 June 2000

Brian Lippey: Tokai Asia Limited and the Asia Society would like to welcome you to the panel discussion today. This is the fifth in a series of discussions that we've had on global financial markets. We thought it would be timely and topical to focus our discussion today on the technology sector. Obviously, that's where a lot of the action and interest's been. I'm pleased that we have a distinguished panel of experts in the financial markets and the technology sector.

On my immediate left - Peter Churchouse, Managing Director in charge of Investment Strategy, Equity Markets, at Morgan Stanley Dean Witter.

In the center of the panel, Ken Ehrhart, who is Managing Director and founding partner of Telecosm Holdings International, and formerly the Director of Research for George Gilder -- Gilder Research based in the United States.

Finally, Mickey De Lathauwer, Goldman Sachs. Mickey runs the Equity Capital Markets Group focused on the technology sector.

We hope to have a lively and robust discussion today. Let me emphasize that the format is casual, interactive and we hope for some good conversation, dialogue and discussions.

I'm going to ask the panelists to take 10 minutes, maximum 12 minutes, to make some initial observations and then we'll open it up to the floor for questions and answers.

In terms of our own overview for the market, we see a sideways trading, churning market for the balance of this summer on NASDAQ. And we see an end to this current cycle of interest rate tightening by the Fed. We will likely see another correction going into the summer months prior to the US election in the fall, when we do expect to see a significant fourth quarter rally led by the technology sector. That will be driven by many of the elements that will be discussed by our panelists today.

So without any further ado, let me turn the mic over to Peter Churchouse and let's start the ball rolling.

Peter Churchouse: Thanks very much, Brian. Brian indicated that my role really should be to provide a bit of a background to the Asian region as a backdrop for the detailed discussion on technology and the more tech-specific investing.

Firstly, in the last 12 months to 18 months, the markets have been pretty much in what I would call a global sweet spot. Three factors have contributed to that. Firstly, we've had probably the strongest, longest expansion in US economic history. Secondly, I think the convergence of monetary and fiscal policies in Europe has led to a clear resurgence of growth there. Thirdly, I think the Asian recovery has been much stronger and much more rapid than people thought coming out of the recession. Really, Japan is the only laggard in this global healing process.

I think the key to much of the success in managing the global economy really has been attributable to central bank policies led particularly by Mr Greenspan and the Fed who pulled the world, I think, back from the abyss back in the latter part of 1998.

Generally speaking, around the world central banks have been much more independent than they've ever been in the past. They've been able to adopt lower inflationary policies independent of political interference and I think that trend is really an unspoken and I think a very important trend in modern history. Generally speaking this has created a very good and at least a benign environment for financial assets.

As far as technology is concerned, I think quite frankly tech has in fact helped the central banks to some extent. I see technology as a dis-inflationary force in the world generally speaking. It's improving productivity and lowering costs around the world. On the other hand, it can act as sort of an inflationary force in the sense that it's spurred so much stock market hype. It's that hype that Mr Greenspan's probably most concerned about. But in the real economy I think it is acting as a dis-inflationary force.

I think what it's also leading to - particularly in the development of communications - is very significant increased levels of outsourcing of services and processes. I think the implications for Asia are very clear here.

If you think about Asia, over the years, it's been a venue for the outsourcing of manufacturing of technology hardware. Increasingly I think we're going to be seeing Asia as the outsourcing post for intellectual capital. I think, for example, of Indian technology. The Indian software business right now is a perfect example of that.

As I mentioned, I think the speed of the Asian recovery is by now a pretty well-known story. It has been a pretty classic recovery, albeit very rapid. If we look forward over the next 12 months or so, what we're going to start to see are these growth numbers and earnings numbers starting to slow down in percentage terms. In absolute terms, they will remain very good, but in percentage terms I think the gloss has passed.

Looking around the region, we see basically four themes or four drivers in the markets. Firstly, the recovery in the equity markets in the region has been very much driven by local money. It is not being driven by waves of foreign money coming in from the US or Europe, but by local liquidity. There's been very little evidence, if you like, of big mutual fund flows, asset allocation trades into the region over the past 12 months. In fact, US mutual fund investors have been net sellers of Asian markets.

Secondly, I think a very interesting trend is that Southeast Asia is becoming marginalized. The big elephant market is the Greater China market. This market is now US$1.5 trillion with a turnover something in the order of US$8-9 billion a day. Compare that with the size of the Southeast Asian markets and you're just starting to see that these markets are becoming increasingly less relevant in a global investment thesis.

Thirdly, we're seeing genuine de-leveraging in Asia. In contrast to what we saw after the crisis in Japan in the late 80s/early 90s, we're seeing genuine de-leveraging in Korea, Thailand, Malaysia. There's still a long way to go, but I think these economies, central banks, and governments have achieved a great deal so far. Essentially this has been achieved by really the public sector absorbing a lot of private sector debt. We've seen a lot of asset sales of non-performing loans and we've seen a big uptake in M & A activity. It's up 150 per cent in the region last year over previous years.

The fourth theme is "TMT" - tech-media-telecoms. I think quite frankly that TMT caught on very late in Asia. It really caught on in the 2nd/3rd quarters of last year, but has been a driver of the markets since that time, particularly in Hong Kong, Taiwan, Korea and India. In actual fact, what's happened is that these indices have been driven to a large extent by a very small handful of companies. Just like we've seen in the US, we've been getting a very broad spread of valuations and the markets are becoming narrower and narrower. The old economy companies are still trading at valuation levels which are pretty consistent with long-term averages and trends, whereas the new economy companies have really widened the gap here.

If we look at Hong Kong since the beginning of last year, for example, we've had about an 8,000 index point rise in the market. Nearly 7,000 of those points were contributed by about three or four stocks. So you had old economy stocks going nowhere, doing nothing, under-performing, but a handful of new economy names have really driven these indices in a big way.

What has happened of course is that the valuation spreads have widened out much more so than we've ever seen in any market recovery in the past. For example, a couple of months ago when the market was around the 8,000 level, the technology or new economy stocks in Hong Kong were trading at an unprecedented 70 times earnings versus 13 or 14 times earnings for the old economy stocks. Now, everybody said, 'Hey, the market's expensive.' It's not expensive - those five stocks are expensive.

So I think what we're getting here at the moment is a big reality check. I think the euphoria of tech is giving way to a feeling that earnings still matter. I think we are going to see a reversion back to old models for valuing companies, maybe with some new twists and turns, but essentially you're going to be looking back at these relationships between earnings and growth, discounted cashflows, net asset values, free cashflow generation and so on. So I think we're going to get back into that sort of area. I think valuations such as those based on the number of "eyeballs" or "page-views" per internet site are going to go by the wayside over the course of the next 12 or 15 months.

In the near time, I think the Fed is still the key. Everybody's totally fixated on the Fed. Increasingly it's important for Korea and Taiwan. It never used to be important but it is right now.

I think the scenario that we're looking at is essentially that growth rates in the US in terms of GDP have peaked. Inflation will probably peak towards the back end of the year. It's not yet clear, but that seems to be where we're headed. Our general feeling is the Fed is going to tighten another 50 basis points before the end of the summer. Increasingly, we're seeing a building expectation that the Fed is closer to the top of its cycle of tightening than to the bottom. Perhaps at some point over the next six months or so, the Fed will move more to a neutral bias and even potentially to an easing bias.

I think one of the other potential sources of upside for this market is China. As we've seen, many of the key numbers are picking up very aggressively on the export side. Consumption's picked up to over 10 per cent from a low of 3 or 4 per cent. The key one here is money supply growth which has picked up to over 22 per cent, narrow money. That seems to indicate that the authorities are having some success in re-inflating the economy. I think it's a little early to get too excited, but a lot of the trends are in the right direction.

What are the things that really keep us awake at night? What are the big downside risks here? Firstly, perhaps if the Fed gets too zealous in its interest rate tightening, it may drive the US economy into recession. Secondly, and more importantly, the huge current account deficits that we're seeing in the US - 30 billion a month on the trade side, 4.5 per cent of GDP. The ability to fund these deficits from current account surpluses in Asia, from M & A transactions, and from portfolio flows into the US is going to stop at some point. Current account deficits like this don't always end nicely. They end up pretty ugly. Finally, an issue, perhaps a policy mistake somewhere in the region, perhaps involving China, Taiwan, maybe Korea, may negatively affect the markets. These are unforeseeable events, but are things that I think we do have to keep in mind.

Brian, I'll stop it there.

Lippey: Thanks, Peter. That was exactly 11 minutes. Perfect. That really sets the stage and gives us the context. I'd like to turn now to the actual technologies that are driving the build-out and Ken is going to go through this fairly briefly with time at the back end for questions using some slides. Ken?

Ken Ehrhart: Thank you, Brian. I really come from the technology area, from doing research for the Gilder Technology Group, looking at technology from a rather different perspective than a lot of people are used to.

The beginning of our approach and the basis for our approach is to start with an economic principle -- that the basis for wealth creation in any economic area is really the harnessing and exploitation of a key resource that's plunging in price. During the industrial age that resource was power, whether measured in horsepower or kilowatt hours. The plunging price of that resource led to the development of industries, from steam engines to railroads to automobiles and so on, that were generating a lot of the wealth creation both in stocks and within the economy generally.

Then we entered an area we call the "microcosm" or the era of semiconductors and computers. The key component in that era was the plunging price of transistors on chips, essentially relating to the increase of performance of those chips and the increasing value of those chips.

What we call the "telecosm" is really the convergence of advances in computers, networking and telecommunications, the era of the connected microcosm, if you will. That's the era that we're entering now, of which we're just at the beginning. The key resource in this period is transmission capacity or bandwidth, the plunging price of bits per second.

This first slide says everything that I just said. The slides are meant to illustrate general trends. You probably won't be able to see them or make out the axes from where you're sitting, but the point is to see the trends, the general direction of things because they illustrate the points I'm going to make.

These charts both show the PC shipments - on the left in the US and on the right in Japan - passing TV shipments in 1996. For a long time computers were dominant over TVs and other electronics in terms of their value in revenues, but here you see them passing them in units sold.

Really, what's driving that is Moore's law and the plunging price of the transistor. That's led to cheaper PCs and more powerful PCs. And we know that there's been an explosion of PC use in the last couple of years. Really, what's driving that is actually the Internet and the adoption of the Internet. We've gone from a point where less than 50 percent of computer time in 1998 was online to a majority of time using computers now spent online. We've also come to a point where essentially every computer that is used that has a modem is actually connected to the Internet. People are buying computers to get online, people are online who have computers. This has been a central theme over the last couple of years.

The Internet use in the US has expanded tremendously so that now 56 per cent of adults are online. But the real indicator for the future is that over 90 per cent of US teenagers are now accessing the Internet, whether at home or at school or through friends or other means.

But this isn't a US phenomenon only. The chart on the left shows non-US Internet users passing US Internet users in 1998 and growing from there, while US growth is forecasted to slow down. The chart on the right indicates that the Asia-Pacific region holds now about 23 percent of Internet users world-wide.

If you examine country specific trends, here is Japanese Internet growth and users on the left, and Chinese on the right. They look fairly comparable but the time period on the right is about half as great as on the left. So there's been tremendous growth within the Chinese market over a very short period of time.

What all this means really, what Internet growth means, is an increase of not just users online but of traffic across the Internet, traffic in bits, requiring a fundamental change in transmission capability. Of course, it also means what people generally see when they look at the Internet -- opportunity for commerce, opportunity for investment and so on.

But to bring it down to the fundamentals of the bits that are transversing the network, what is required and what has enabled this is not silicon, as in the microcosm, but silica or glass in the telecosm. These slides show on the left, US deployment of fibre optic cable, actually measured in fibre miles from 1985 to 1998, a tremendous increase in deployment.

But this deployment is also occurring on a global basis. The pie on the right shows North America, including the US and in Canada, comprising about 45 percent of the world deployment in 1999; Europe at 25 percent; and Asia also at 25 percent, with 10 percent in Japan and 15 percent in the rest of Asia.

But the key to understanding this new era of the telecosm isn't strictly fibre, but what you do with the fibre. Traditionally, prior to 1996, you were able to send 1 bit stream or one transmission down each fibre. In 1996 a new technology was commercialized by CNN that allowed multiple wavelengths, multiple frequencies of light to be transmitted simultaneously down the fibre, each carrying its own bit stream or transmission stream.

On the left here you see TDMA or time division multiplexing systems coming up to 1995 with very, very limited growth and capacity. From 1996, you see an explosion of capacity for transmission through fibre. The reality is demonstrated on the right where the flat lines on the bottom of the chart are fibre deployment and lip fibre in the sprint network, which have essentially been flat. Whereas the red line on the top is the actual capacity of the sprint network which has exploded, coincident with 1996 and the introduction of WDM.

And to put this in perspective and to see why we're so excited about it, on the left is Moore's law from 1971 to 1997. You see both transistors per D-RAM chip and MIPS, or millions of instructions per second on Intel processors, and you see a tremendous exponential growth of this capacity, the numbers of transistors on a chip doubling every 18 months as was forecast by Moore's law.

On the right you see what has been termed Gilder's law, after my former employer, and this chart shows transmission capacity down a single thread of fibre. The red line that's flat actually represents applying Moore's law, doubling rate to fibre. Guilder's law says that fibre capacity is actually increasing approximately three times as fast as Moore's law pace. The blue chart represents commercially announced systems for WDM and the tremendous growth in this capacity.

Really, to understand what this means, you have to apply the same rule we apply in the microcosm and essentially ask yourself what if bits were free? In the microcosm, we asked what if transistors were free? How could you waste transistors to get an advantage? That's what Intel did and that's what Microsoft and others did.

In the telecosm, if bits are free the primary thing you need to examine is access technology and the fibre backbone down to the end user. The left chart shows the tremendous growth of broadband access through both cable modem and DSL in the US. The exciting thing here in Asia is that you actually have a greater percentage of broadband access than in the US. You do as well in Europe.

The reason for that is that the US began with very effective and widespread dial-up access and has been slower to migrate, whereas in Europe you had a lot of ISDN deployment. Here in Asia you've been able to leapfrog what's been done in the rest of the world and enter this new realm in a different style.

This is also an example of the Asia situation and how it's unique. On the left-hand chart, you see declining telecom revenue amounts (though not by rate or time) in the Americas, Europe, and Asia. With respect to telecom investments, however, in Asia we actually are seeing far greater investment in telecoms than in the rest of the world, despite the lower revenues. This is creating an exciting opportunity in Asia for establishing future telecoms groundwork.

On the right hand chart, you can see that mobile penetration in Asia is actually greater than PC penetration. This is very relevant to the future of the telecosm because the future of the telecosm is very much associated with wireless. When we consider the plunging price of bandwidth, we consider it over fibre optics and through wireless means.

Here you see on the left digital mobile phone shipments blowing past computer shipments in 1998. Last year world-wide, we had 113 million PCs shipped versus over 260 million cell phones. The illustration in terms of revenues and where this is all headed is on the right where domestic fixed line revenues throughout the world actually level off and decline. The bars that are coming up from the bottom are actually a combination of Internet and data revenues in mobile phones, revenues that far exceed those fixed line sources. The future, thus, is really one of mobile hand-held devices, whereas the microcosm was a PC-centric world which changed rapidly with the Internet and connected PCs.

The mobile road is one that is rapidly changing, moving from independent PDAs, or personal digital assistance, to connected cell phones with data capability. I'll leave it at that and we can discuss more later. Thank you.

Lippey: Thank you, Ken. Mickey, you're actually in there bringing new technology deals public. We're interested in your insights.

Michael De Lauthawer: I would like to talk about three topics. First of all, what does technology and telecom, TMT as it's generally known, mean for Asian capital markets and the new issue activity? Secondly, what does TMT new issue activity mean for Goldman Sachs, which I think is a proxy really for banking in the region. Thirdly, and maybe the most interesting aspect for all of you, what is it that we are looking for in companies before we take them public, whether it's on NASDAQ or on the local exchanges around the region.

First of all, technology and telecommunications, generally referred to as TMT, what does it mean for capital markets in Asia? I'm sure that Peter is much more familiar with the statistics than I am, but it basically represents something like a third to 40 per cent of the market. That's just the capitalization of the large technology and telecommunication companies.

Technology itself - if you take away the telecommunications companies - represents about 10 to 15 per cent and is growing at a much faster rate than the overall market. In certain markets, for instance, in Taiwan, Korea and greater China, it represents closer to 50 per cent. So the bottom line is it's very important and if anything it's getting more important.

The other thing that I would mention is that technology and telecommunications stocks around the region are very often market leaders. They have the biggest market capitalizations. For instance, Taiwan Semiconductor in Taiwan, China Telecom here in Hong Kong, Samsung Electronics in Korea - these are the market leaders. They're the biggest companies with strong liquidity. These are very often the stocks that people will use to get into the market and sometimes to get out of the market. So you see them trading very accurately and very often leading the market.

Technology has obviously been a very important reason behind another phenomenon and that is the emergence of new stock exchanges around the region - GEM here in Hong Kong, KOSEC in Korea. Our view is that this is a very important and positive phenomenon. Asian capital markets are expanding very rapidly. It provides an avenue for certain companies, companies that have very high growth rates, but that are still at the very early stages of their development. In these cases, they need access to capital, but not through venture capital because they're beyond that stage, and they're not yet ready to go to the bigger exchanges or to the Nasdaq market.

We are strongly convinced that the emergence of these local exchanges is a very healthy development for the economies around the region. Despite the fact that at the moment, given the liquidity situation, these local exchanges are having a difficult time, there is no doubt in my mind, and in anybody's in my firm, that those exchanges will do very, very well over time.

The second thing that I want to talk about is what this whole revolution in technology and telecommunications means for our industry, investment banking, around the region. The bottom line is that it's very exciting. I just want to give you some examples.

When we look at technology and telecommunications, we split it up into different areas. In technology, for instance, we talk about the semiconductor stocks, the Internet stocks, the PC and hardware stocks, and emerging now, there are the data networking and the computer services stocks.

Similarly in telecommunications, there are the big telecom corporations but more and more there are also the broadband access providers. So it's impossible to lump all these companies into one category, you have to split them up.

In the last six months or so, we have been fortunate to lead manage about 15 deals or so in Asia excluding Japan. Out of those 15 deals, four are Internet companies, four are semiconductor companies, two are PC and hardware companies, one is a bricks and mortar business which is making an investment in the Internet business, and three are telecom businesses.

So out of 15, 14 companies are basically related to what we're talking about here today, TMT, or, if I put it in a different way, if it wasn't for TMT I wouldn't be here, I wouldn't be in business. So technology is a very important part of our business. Technology is very important for our clients, the people that are investing in companies around the region - probably many of you here today.

The other thing that I've observed is that obviously, because of this incredible surge in activity, all of us have had to make very significant investments in resources. That's both on our side, on the banking side, as well as on the investing client side. On both sides, there is a general scrambling to get a lot of people focusing on these new technologies, setting up research departments, looking for young people that can understand these companies and are able to make decisions about investments in these technologies or in these sectors.

Using ourselves as a proxy, we have gone from a technology research department of a few people a couple of years ago to a technology research department of about 10 people, again split up into different sectors, but it is just phenomenal growth. Again, I'm sure that that is the same at Morgan Stanley and other places. Similarly, on the banking side itself, we have spent a lot of money building our own resources in technology and telecommunications.

Lastly and maybe most importantly for those of you interested in these new technology companies, what is it that we are looking for when we take these companies public? Some of these comments may be more specific to Internet companies with very early business models, but I think you could use them for technology by and large.

Whether we list the company on Nasdaq or whether we do a transaction in the local market here in Hong Kong, basically as a banker, you're looking for some key ingredients. There are really six key ingredients that I'd like to share with you.

First, when we take a company public we are quite convinced about the market opportunity that the company has and we like to think of it as a unique market opportunity that can be transformed into a powerful equity story. Again, this is very much for early stage businesses, specific to the Internet business.

We are secondly looking for scaleable business models. At the end of the day, we are asking you, the investing public, to make a leap of faith in paying a high multiple of revenue for these incredibly fast-growing companies. If they don't have scaleable business models, where there are no boundaries to growth, you're not going to be happy with the performance of these companies over time. So we're very much focused on whether these companies have business models that you can multiply over the years.

The third point, which is similar to the first point, is that we're looking for companies that have one of two things: (1) a very dominant position in their local market, a very powerful position, usually the number one position, and hopefully in an important market like China or India; or (2) a strategy that they can use to multiply their success to use as a platform across the region. So those would be two different ways of doing it, but both are very important.

The fourth point is a track record of solid execution. All of these start-up companies have business plans which they've been working on or which they've been executing. By the time we take them to the public markets, we're very keen on seeing that they have hit their internal milestones time and time again. When they do go public, the investing public will have the expectation that these companies can execute all these promises, an expectation we share. Moreover, these companies have to show that they can do more than grow revenues, they also have to show that their margins are expanding and that they can get to a cash-flow breakeven position in the not too distant future.

The fifth point, which very often you take for granted by the time you end up buying a company in the public market and something that often takes a long time for our side to work through with companies, is the financial transparency or financial integrity of a company. Very often, before we take a company to the market we'll end up transforming those accounts to meet US standards, for instance. You just want to have -- even if it's not a US listing -- a very clear-cut financial operating model and you want to have very high confidence in the CFO and the financial controllers of that company before you take them to market. Those are really key personnel people in a company.

Sixth, the financial and strategic backers of the company are important to us. These people can add a lot of value, in our opinion, especially in these start-up situations. When these backers have worked with new companies, they have proven to be excellent strategic investors in addition to providing advice and experience as a company goes through these different stages before they become a public company.

The last point that I would make is very important for all these new companies which we're taking to market. The point that we have to keep making to these companies before we take them public is that an IPO is not the last stop in this whole preparation. If anything the IPO is the first stop because now you are a public company. That's what we keep telling these companies. That means that you have to answer to the public, to people that invest in you, and you better make sure that you fulfill all of your promises.

I'd be happy to answer any questions.

Lippey: Thanks very much, Mickey. That's very helpful. Let's open it up to the floor. I think you're all familiar with the protocol. Please identify yourself and your company and we'll be passing around microphones.

QUESTION: How many of these companies that have gone public will still be around two to three years from now?

De Lauthawer: Well, there have been some high profile cases where some Internet companies that have gone public, who happen to have some high profile investments by very smart investors behind them, have actually gone belly-up.

Naturally, when you see a rush of investments into a new sector, there are going to be winners and there are going to be losers. You have to do your homework when you invest in these new start-up companies and you have to really dig quite deep - and we pride ourselves on digging very deep in trying to understand what these companies are all about. It's going to continue to be a very risky investment market - there is no doubt about it - and you should try to limit your risk by doing your homework.

The last thing that I would say is - however much we or you do your homework, there is something else out there for which you can't blame anybody. You can have the best business plan, you can have a strong execution record, you can have a very competent management team, but there will still be events in the market that can cause these companies to go through difficult times. It is a challenging game.

Churchouse: Just to add to that, we're getting a bit of conventional wisdom coming into the tech area now, particularly with our experience in the US. Some of our team are coming up with a sort of a - I don't say it's a mantra but it's an observation - particularly in Internet related businesses.

If you're No. 1 in a space that's fantastic. If you're No. 2 in that space that's very good. If you're No. 3, well that's probably just about okay. If you're No. 4 you might survive. If you're No. 5 or 6 you're dead. It's going to be that sort of situation. So I expect you're going to see a lot of consolidation of smaller companies that may have not even gone public. You've got to have volume, you've got to have size, you've got to be No. 1, 2 or 3 in a particular space.

Now, there are lots and lots of little spaces out there but if you're No. 10 in a particular space, then it's probably going to be very tough to survive.

Ehrhart: I'll make a comment as well. In terms of failure rates, I think you'll see these failures stratified because I believe there's much more risk associated with the content side, because what we're really dealing with at the present is a narrow band Internet, in a narrow band world and it's not necessarily clear that the leaders in the current space will maintain their leadership as this world shifts and changes.

Similarly, in the telecommunications space, a lot of the fundamental rules of the game are changing. New upstarts with the latest and greatest technology will have a significant advantage over companies with legacy equipment systems and legacy revenues.

So our focus is really much more on the key technologies themselves, the infrastructures. It's easier to define these through an understanding of technology, what technologies will be significant when considering an accelerating bandwidth. And if you're dealing with fairly cutting edge technologies, it's often the case that they're extremely difficult to master and they take a long time to get right. So once you find a team and the right structure to get it right, it's often very difficult for someone else to aspire to that even if they have the same concept or understand what that company is doing.

So you'll see a lot of companies maintaining their pioneering role and changing that pioneering role into a very stable role in the future. But it gets more difficult as you get farther from the basic infrastructure.

QUESTION: How do you see the ascent of technology in the Asia-Pacific region helping to change backward business structures, helping to provide more transparency? Do you see that the rules of the game have changed or is this to some extent the same old thing? Do you see significant changes, positive signs and what is the prognosis? That's the first part of the question.

The second part - what are the comparative advantages in Asia? What are the competitive advantages you see Asia being able to bring to technology? I'd be very interested in the comments from Goldman Sachs and Morgan Stanley. Thank you.

Churchouse: Let me have a quick crack at the second question. I kind of look at Asia in a funny kind of way. It's originally been an exporter of labor and an exporter of capital. We've built these current account surpluses, high savings rates and so on, which have been applied to building manufacturing products and so on which have then been exported. So it's been a crucible of exports.

I think going forward there is also this potential but I think it's only just beginning -- the idea that Asia can also be an exporter of intellectual capital is seen in the outsourcing of software businesses both in India & the Philippines. I think the next potential leg of that is in China, which has huge portfolios of highly educated people. So the export of intellectual capital from Asia is a distinct possibility.

In terms of the near-term though, when I look at a market like Hong Kong, I believe that Asian businesses are providing access. The objective I think of a lot of these companies in Asia right now is to become the partner of choice for the big tech and Internet giants out of the US and potentially out of Europe. They want to become the partner of choice and they've got what I call the three Cs.

These companies have got cash -- they're very, very liquid. All the big major corporates in Hong Kong have got more than enough cash. Secondly, they've got contacts. What's the big elephant market that everybody wants to get access to? It's China. And most of these corporates, particularly in Hong Kong and even in Taiwan, have been doing business in China for 10/15 years, and have got a lot of contacts in this market. The third C is credibility and this is where I think there's a little bit of dispute - credibility in the sense that these guys have proven they can run the old economy businesses very well. They've done everything from plastic toys to flowers, to textiles, to property, to hotels, to transport, to ports, telecommunications, PCs, etc., they've done it all. Now what's the next one? It's technology, particularly in this Internet area.

So the fact that they've done all this in the past suggests that perhaps they might be able to do it in the future. But the big difference is, the point you first alluded to, are these companies really transparent enough? Are they taking enough care in that area?

Secondly, are they prepared to buy in the expertise to run these new economy businesses and I see a bit of a question mark there. Some companies are prepared to do it, some are less likely to do so. But I think the ones that do, they have the chance to become the partner of choice and that's where you get that first-mover advantage.

Lippey: Good response.

De Lauthawer: Very interesting questions. I'll resolutely say to your first question - have things changed - my answer would be yes, things have changed. But I also agree with Peter that there are certain aspects that can still be done better.

I think that the bar has been lifted. I think that the Asian crisis has probably been a watershed of total change in direction and focus for Asian companies. These companies realize that they can't get access to international capital and therefore need to change. I'm sure that we can all come up with companies that haven't changed, but I think that those companies will become marginalized because they will find it harder and harder to find funding for their business plans to go forward.

I observe, again going back to the business that we've done this year to date, a lot of these companies have chosen to go to the Nasdaq even though the local markets were open and available to them during the first and a large part of the second quarter. They saw and looked at who were the best of the breed in their industry, they saw that there were global companies listed on Nasdaq, and they wanted to be there.

Coming back to the accounting issues, international standards are being adapted readily by a lot of the people. And the ones that don't will disappear in this great consolidation game that is going to start in Asia over the next few years.

Venture capital firms, who didn't exist in Asia a few years ago, will become very important and I think that they also are setting certain standards which I think will help companies get through to that next level.

I'll give you an example -- which is a little bit of Goldman Sachs advertising, Peter, which I hope you don't mind - but I think it's a very good example.

Taiwan Semiconductor is a world-class company. This company, in 1996/97, decided that in their business, a foundry business, they wanted to work with the best companies around the world; that they wanted a capital structure which was reflective of that strategy. So they chose to list on a big exchange and they chose to basically implement a very focused strategy that would move Taiwan Semiconductor from being just a Taiwanese company, to a global company.

Now, what has been the effect of that? The effect of that is that they have always had access to the international capital markets in good times and in bad. I think we could characterize the last two months as really pretty poor in terms of world markets, but Taiwan Semiconductor was able to raise a billion dollars which they needed for a very good reason during a period of unprecedented volatility, at a very good price. I think that is really the standard to which all these companies should shoot.

Now, in terms of your second question - and I'll try to make this one short - I think that the question was roughly what can Asia bring to the US? I think there's been a big shift and it is just in its very initial stages, but a few examples.

Taiwan Semiconductor is now the biggest foundry company in the world. It's based in Asia. Two of the three largest mobile phone companies in the world are Asian companies. NTT DoCoMo and China Telecom are just below Vodaphone Airtouch in terms of market capitalization. There is no doubt in my mind that China Telecom will be the largest mobile telephone company in the world in a few years.

I think that's what Asia will bring to the world -- because of its size, of certain markets, it will set certain standards. 10 or 15 years down the line, people will look at Asia, maybe even on par with the US.

Ehrhart: From the technology standpoint, it really depends on two things: one is the focus of your investment; another is very importantly the patience of your investment.

In Asia, what you have in most cases are advanced designs in intellectual property coming out of the US being manufactured into chips in Taiwan and going into Japanese produced consumer devices that might then flow into Japan, US, Europe or China or other end-user markets. Some of the very latest and greatest technologies which are being developed in the US will then transfer to Asia through joint ventures and other processes.

But if you take it from basic technology up to the infrastructure level and then from the infrastructure level up to the end-user level, you get a different picture. That's where patience comes in because to have the best intellectual property and to capitalize on selling that intellectual property into the market place, Nasdaq has the liquidity and the speed that you need to get a return on your investment.

But if you look to the ultimate future of a broadband world, when you look to the point where everything is broadband and connected, Asia will be a transformed place. The connectivity in terms of commerce and communications will have a greater impact in a lot of parts of Asia than it does in the US where infrastructure is quite good.

But it's a patient process and here in Hong Kong I-Cable is deploying broadband cable modems. But it's taken over six years to go door to door and to get the rights to lay coaxial cable through all of the apartment towers, through all the office buildings until they had 90 per cent of the market covered.

Now they're rolling out broadband. Satellites will play an important role in last-mile and remote areas in Asia. Alpha Space Com has been planting a satellite for over two years. It will take another year and a half to two years to construct and then you'll begin to see the impact of that technology.

But these all require patience and a long view to the future. If you get far enough from the fundamental technologies, it becomes even murkier because it's hard to see on the end-user level who will be necessarily providing the best content to the best approach.

Lippey: We have time for, I think, one more quick question.

QUESTION: Could you expand a little bit more about the acceptance and the ascendancy of the WAP standard in Asia and the fact that it's seemingly more accepted in Asia than in the States where we have various standards for mark-up languages in hand-held devices.

Ehrhart: I'll try and address that quickly. WAP, wireless application protocol, has a lot of real serious problems, in my perspective. One is it's based on narrow bandwidth, it's based on limited screen visibility and it's based on limited input into the devices. It was designed from a narrow band world to focus on a narrow band world. And like many of the technologies that incumbent providers have come up with, like interactive TV, or other devices to capture greater revenue from the end user, they ignore the fact that the real driving force is the open standards Internet and a billion websites that people want to access. That's where the value is -- in that enormous amount of content and capability.

In the case of most WAP proposals, from its fundamental basis they are based on different protocols than an Internet protocol. You need gateways, you need translations, you need adaptation of that content, so you're limited immediately down to 50 or 100 or even if you expand to 5,000 sites of content. It's really infinitely small compared to the total Internet and the value of the Internet.

So the solutions that are going to prosper are the ones that take advantage of all that is in the Internet and provide it seamlessly. I think one of the reasons I-Mode has had a greater success than WAP in Europe or other areas is that you can actually read html text through the device. You're opening up the full value of the Internet rather than a small subset that tries to pretend it's like the Internet.