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Picking Asia's Model B
Investor interest in business-to-business portals remains intense. The trick is to back B2Bs that will thrive

Ed Lupton arrived in Hong Kong from Britain in 1989 with only a few pounds in his pockets — and a knack for business. By 1999, he had transformed himself into an entrepreneur in the financial printing and publishing business. With annual revenues of $20 million, his MediaCom Holdings owned a printing plant in Hong Kong, two trade journals in China and a stake in Action Asia magazine. Lupton, 33, is now ready for the next leap. On Christmas Eve last year, he presented a proposal to U.S.-based venture-capital firm Whitney & Co. to launch business-to-business (B2B) Internet exchanges in Asia. Lupton came home with $10 million for Pacific NetMarkets, which aims to create B2B exchanges for the region's food, drug and printing industries.

Holding Back. Asian businesses reel off a list of reasons that keep them from rushing too quickly into the B2B space is an extension of Lupton's China Food Industries magazine, which serves food suppliers and buyers in China. The online version will cover other Asian clients. aims to help hospitals source medical supplies more efficiently. It is patterned after Lupton's China Hospital publication, which brings together Western drug companies and mainland hospitals. Lupton's personal pet project,, will inter-mediate between Asia's top printing plants and major U.S. book and catalog publishers. "A top American printing-plant worker is paid more than $80,000 a year," says the entrepreneur. "His counterpart in Shenzhen earns less than $1,000. With modern technology, shipping and delivery services, it's possible for U.S. companies to cut costs by printing in China."

Lupton sees "an addressable market" for of $100 billion. That may not be as far-fetched as it sounds. Depending on which analyst you ask, the expectation is that Asian B2B initiatives will be handling total transactions valued from $445 billion to just under $1 trillion by 2004. With its diverse cultures, languages and sprawling geography, Asia may not easily lend itself to online retailing (witness the near-death of Chinese Books Cyberstore). But the B2B model is perfect for its thousands of manufacturers, subcontractors and suppliers. Online business-to-business transactions promise to eliminate market inefficiencies. Says Michael Christenson, global head of technology in the investment banking division at Salomon Smith Barney: "Squeezing out market inefficiencies is an incredible wealth-creating opportunity."

Venture capitalists may have soured on consumer-oriented dotcoms, but their interest in B2Bs remains strong. More than 150 of them showed up at last week's Asian B2B Forum hosted by Hong Kong website "We've basically seen the future, and it's in B2B in Asia," says Victor Hwang, a former managing director of U.S.-based B2B giant Internet Capital Group (ICG) who is now CEO of Hong Kong-listed ICG AsiaWorks. He manages a $180-million fund that invests in the region's B2B plays. After six months in Asia, Hwang and his team have invested in three local companies. They are in the process of bringing to the region ICG's 70 B2B businesses, most of them based in the U.S. "I don't think you can acquire 500 B2B players in Asia," says Hwang. "There just aren't enough of them here."

And few, if any, are profitable. "Most B2Bs are not making money because they haven't migrated to a transactional model," says Hanson Cheah, executive director of venture capitalist AsiaTech Internet Group. "Most B2Bs are nothing more than classified ads." True, Global Sources, a so-called "incumbent" company because it operates a slew of trade magazines as well as Asia's leading B2B trading portal, made $11 million on sales of $91.8 million last year. But most of its profits came from print advertising and web-related marketing for clients. A loss of $1.8 million is forecast this year because of the online venture. "Although we believe Global Sources has been successful in achieving a profitable online catalog-style advertising business, the jury is still out on whether it can replicate the same success with online transactions," says a Merrill Lynch brokerage report that gave an "accumulate" rating to the stock.

The money will really roll in when companies buy and sell online, with Global Sources getting a cut from each transaction. Company chairman and CEO Merle Hinrichs says that will happen once Global Sources Connect, a software platform that allows online transactions, is rolled out in October. But he acknowledges that Global Sources faces the same problem that bedevils other B2B exchanges: Most Asian suppliers are small and medium enterprises that lack the technological savvy to buy and sell goods online. Global Sources has to dispatch tech teams all over Asia to help them. "One of the biggest issues we have is trying to educate our client base," Hinrichs says. "It's not like you build a site and they come automatically."

At least Global Sources and Lupton's Pacific NetMarkets can fall back on print revenues. Hong Kong- and Beijing-based is on the tightrope without a net. Founder and chairman Jack Ma is famous for declaring: "I don't worry about revenues." He believes that profits will eventually come as long as the portal continues to generate large volumes of traffic. Founded only 18 months ago, Alibaba has 325,000 registered members in more than 200 countries and generates more than 1.6 million user sessions and 20 million pageviews a month. "Nothing is more boring than the incumbent hype," says Alibaba director Porter Erisman. "Just watch, dotcoms like us will move revenues from incumbents." To which Hinrichs retorts: "We have many advantages compared with the [newcomer] dotcoms. It's like comparing chalk with cheese."

There are other competitors. Old-line trading houses are also reinventing themselves. Hong Kong-based Li & Fung aims to create a super-portal that allows its clients in the West to custom-design the products they need from factories in China. Individual companies are putting up their own B2B e-commerce platforms; Taiwan Semiconductor Manufacturing and Chinese computer maker Legend Holdings are among the most aggressive. And a number of companies have banded together to set up industry-specific vertical markets. One example is, which was formed by steel traders in partnership with Japanese trading house Mitsui and others.

Who will win? Analysts give the edge to incumbents like Global Sources, which can leverage established business relationships — provided they move fast enough. But no one is counting the brash dotcoms out. "There is the opportunity for both to survive and do well," says Salomon's Christenson. In a recent study, Goldman Sachs concludes that trading houses are most at risk. "B2B could theoretically render these traditional middlemen obsolete," says the U.S. brokerage. But it also sees fresh areas opening up for incumbents and dotcoms alike. Says the Goldman Sach's report: "We see good opportunities in and development of new industries like maintenance, repair and operations, healthcare, food distribution and auto parts. These traditionally diffused industries in Asia could benefit from aggregation and supply-chain management."

Some investors have picked a B2B winner — and it is none of the above. Instead, they focus on the enablers, the software and hardware companies that everyone needs for online transactions. The ASPs (application service providers) are particularly hot. Victor Li, deputy chairman of the Cheung Kong group and elder brother of cyber tycoon Richard Li, recently pumped $380 million into iBusiness Corp., which will create ASP ventures to serve small and medium-size enterprises. In the short term, he may have the best idea of all.

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