No Rest for Asia's Hot Growth Heroes

The small and midsize outfits on BusinessWeek's annual list of Asia's Hot Growth Companies face fierce competition

Asia's record-breaking Internet stars may be grabbing all the headlines, but the big winners in this year's Asia's Hot Growth Companies, our annual scorecard of the top 100 small and midsize businesses in the region, aren't the region's high-flying dot-coms. They're in decidedly less sexy lines of business, everything from noodle shops to chemical fiber manufacturing.

But these Asia stars do enjoy some big advantages, like relatively high barriers to entry and growing demand from Asia's newly affluent consumers. The No. 1 company, for instance, is Ajisen (China) Holdings, a Shanghai operator of Japanese-style ramen restaurants that operates its own noodle factories. The No. 2 company, Singapore's Raffles Education, is expanding quickly in Chinese cities, where growing numbers of middle-class families are willing to pay top dollar for their children to get advanced degrees. And in a year when news about unsafe food from China has dominated the headlines worldwide, No. 11 Celestial NutriFoods has been able to cash in on growing demand among Chinese consumers for food that is not only safe but also healthy.

Even some of the top performers have reason to worry, though, because of fierce competition from other Asian players. For instance, E-Ton Solar, one of Taiwan's top producers of panels used for solar energy, is No. 7 on the Hot Growth list this year. That's a reflection of rising demand for solar-powered electricity as worries about global climate change increase.

Raw Materials Shortage

Trouble is, there's now a group of hungry Taiwanese and Chinese rivals, led by China's New York Stock Exchange-listed Suntech Power Holdings (STP), crowding into E-Ton's territory. "There are too many companies," complains Tsai Chin-yao, president of E-Ton. Barriers to entry are low, since there are plenty of talented engineers with experience in the semiconductor and liquid-crystal-display industries, which Tsai says are not that different from the solar-panel field, so finding capable staff is no problem. This year alone, the number of solar companies in Taiwan has tripled, to more than 20. "It's incredible," says Tsai. "Even some companies, I cannot remember the names. It's really very hot."

All the increased competition from Taiwan, as well as from the mainland, is leading to a shortage of raw materials. That's a big reason E-Ton's stock price has dropped more than 16% so far this year. So E-Ton, which sells to customers in Europe, is expanding its reach far beyond its headquarters in the southern Taiwanese city of Tainan. In June, it announced that it would spend $155 million to acquire Adema Technologies, a Mountain View (Calif.) producer of ingots used in the solar-panel production process. Since so many rivals from Taiwan and China are now offering low-cost panel production, "this is why we focus on high quality, high efficiency," says Tsai. "We don't want to compete with them on price."

E-Ton also is boosting its spending on research and development, currently 5% of sales, to come out with more advanced panels that convert sunlight into electricity more efficiently. With the competition getting tougher, the company will need to move fast to ensure it doesn't fall down the Hot Growth rankings next year.

Hammered by a Stronger Rupee

That's what happened to Hexaware Technologies, a Mumbai specialist in outsourcing services such as human resources and transportation for corporate clients. Like many other Indian IT companies, Hexaware has gone through a rough year. India's tech leaders have gotten hammered by the appreciation of the Indian currency. The rupee has gone up 12.6% against the greenback over the past 12 months, making Indian companies catering to U.S. customers less competitive with their foreign rivals.

The stock prices of blue chip Indian IT firms such as Infosys (INFY), Tata Consultancy Services, and Wipro (WIT) have plunged this year at the same time the benchmark index of Indian stocks, the Sensex, has hit record highs (, 11/08/07).

Hexaware last year ranked No. 22 in BusinessWeek's ranking of Asia's Hot Growth Companies. In 2007, Hexaware slipped 30 spots, to No. 52. Executive Chairman Atul Nishar points out the company has enjoyed compounded average annual earnings growth of 37% since 2002. However, the most recent quarter saw profits plunge 22%, to $6.8 million, largely because of the appreciation of the rupee. That's why Nishar says Hexaware is looking into opening a development center in China next year, in addition to one the company already has in Mexico. "Clients in the U.S. want to de-risk" their exposure to the rupee, he says. Having employees in China would provide Hexaware "with an additional low-cost center."

Hexaware's experience is a good reminder of how quickly fortunes can change for companies on BusinessWeek's Hot Growth list. Companies from Hong Kong, Taiwan, and mainland China dominate this year, with 45 of the top 100 companies coming from Greater China (, 11/19/07). That's not surprising, given the spectacular growth of the Chinese economy and the bull markets in the Shanghai and Hong Kong stock markets. But amid concerns of a stock market bubble, as well as worries about the subprime crisis in the U.S. and uncertainty about the willingness of Chinese regulators to open the Hong Kong market to Chinese investors, both markets have been heading south. Hong Kong's Hang Seng Index is down 14% from its October peak, and the Shanghai Composite Index is off 12%.

From Highflier to Fallen Star

John Deng knows all too well what it's like suddenly to be out of favor among investors. The University of California at Berkeley PhD is the co-founder and CEO of Vimicro International, which not too long ago was a star in the universe of Chinese high-tech companies. The Beijing company is one of China's premier chip design houses and is known for its semiconductors used in cameras installed in PCs. Chinese President Hu Jintao, who is trying to encourage more innovative startups in the country, awarded Deng the National First Class Award for Science & Technology in 2005, the same year Vimicro raised $87 million in a Nasdaq initial public offering. Five months after its November listing, Vimicro's stock price had doubled amid investor excitement about growing Chinese demand for semiconductors.

But those heady days are over, at least for now. In the past 12 months, Vimicro's stock has dropped 60%, as concerns mount about increased competition and falling prices. On Nov. 15, Vimicro announced its third-quarter revenue dropped 24%, to $25.1 million, compared to the same quarter in 2006. Earnings were even worse: Profits for the third quarter were just $300,000, compared to $2.5 million in 2006's third quarter.

So Vimicro is shifting strategies, dropping some of its lower-end chips such as sensors for basic PC cameras. "We were shipping a lot of products that we think are no longer important to our future," says Deng. "We want to move up the food chain to create more high-margin products," such as chips used in high-definition video cameras.

As for Vimicro's languishing stock price, Deng blames fickle investors who are more interested in sexier sectors like the Internet. Beijing search engine (BIDU), which despite having given back some recent gains, is still up 194% this year, and Hangzhou e-commerce company Alibaba raised $1.5 billion on Nov. 6 in a Hong Kong IPO. But those Internet companies need technology outfits to launch innovative products, he contends. "Where is the technology going to come from? It has to come from technology companies like Vimicro," says Deng.

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