No matter how much research one conducts in the office, there is no substitute for boots-on-the-ground exploration. Full immersion is the best way to build a body of knowledge about businesses, cultures, local economic factors, consumer behaviors and trends. This type of comprehensive engagement removes the layer of interpretation that comes from solely digesting reports secondhand, as an armchair analyst might. With this in mind, on October 31, 2018, I embarked on a six-month research trip to China. Joined by two analysts on my emerging markets team, Ching Chang and Terry Ouyang, our “deep dive” project was designed to achieve a richer understanding of China, its investment opportunities and its risks. Our findings will build on the significant body of research already compiled by members of Burgundy’s investment team, who have made regular short research trips to China over the past 20 years.
The world’s most populous country, China is home to 1.4 billion people and is the second-largest economy in the world.1 Massive change is taking place as its population undergoes urbanization. Thirty years ago, only one-quarter of people in China lived in cities.
By 2017, 58% of the population lived in urban centers. That number is expected to reach 70% by 2030 (Canada was at 70% in 1960!).2 The incredible migration from the countryside driven by China’s policy to open its economy and become a member of the World Trade Organization has resulted in staggering wealth creation. To put it into perspective, the Chinese have seen per capita incomes rise more than twentyfold over 30 years,3 whereas in Canada incomes barely doubled over the same period.4 It is difficult to comprehend the magnitude of economic and social change that people in China have witnessed. In this sea of change, as investors, it is incumbent upon us to build firsthand knowledge around the current and future opportunities.
While in China, the cities of Hong Kong, Beijing and Shanghai were among our temporary homes. From there, we visited a large number of companies and also met with industry experts, journalists, educators, diplomats and former government officials to gain a broad perspective. We traveled to “smaller” cities and also toured plants and stores of a number of companies. Here are a few takeaways:
The more we explored China, the more we recognized the regional cultural complexities that exist there. There is not one China, but many Chinas: north/south, coastal/inland, rural/urban, developed/undeveloped. In many of the cities we visited, there was world-class infrastructure with streamlined and highly efficient public transportation. For example, we spent time in the Pearl River Delta, a major manufacturing hub and emerging technology cluster. This is where the special economic zones were first set up 40 years ago as China began to open its economy to the outside world. It is now home to 70 million people. Consumers and workers there travel with ease via low-cost high-speed trains between the zone’s 11 cities. Real estate in these cities is quite expensive, reflecting both pressures from urbanization and a good deal of speculation as real estate remains the main store of savings in the country. GDP per capita is an impressive $23,000, three times the average for China. Income taxes are low relative to our standards in Canada.
Sophisticated technology permeates the economy. Online purchases can be made using facial recognition, and new buildings use fingerprint access instead of keys. Wherever we went in urban centers, people were on their smartphones. China’s internet population just passed 800 million, and 98% of them are mobile users.5 By comparison, the U.S. has 300 million internet users. Chinese residents have not experienced the slower progression that we have, with clunky desktop and laptop computers, dial-up internet and a reliance on search engines to find information. They instead have gone from “zero” to smartphones with applications that do the searching for them. The average user spends three hours per day on their mobile devices, well ahead of time spent watching TV.6 An entire value chain surrounds the digital leaders as they compete for consumers’ time, continually developing new ways for people to chat, obtain news, play games and simply be entertained. These technology companies can then monetize this time with advertisers and merchants. According to the International Monetary Fund, nearly one-third of Asia’s GDP growth over the last two decades was derived from digital innovations.
We found the offline (bricks-and-mortar) space for consumers to be much less developed than our online experience. The decades of experience in physical merchandising that we have had in Canada does not exist. The supply chain that serves the offline in China is inefficient, with multiple layers of distributors. Therefore, it is not surprising that online has become the leader as it has brought consumers more choices and better prices. Going forward, growth is showing signs of slowing, and businesses have to refocus if they are going to succeed. When we talked to management of consumer companies in China, they all discussed the same things: They are seeing a deceleration in growth and recognizing the need to build premium brands, innovate and differentiate to win consumer loyalty, remain relevant and protect market share. The years of winning simply by expanding capacity and distribution are gone. Chinese consumers are becoming more sophisticated and discerning with more options available to them, especially through online platforms.
Determining a company’s investment merit involves extensive research into its operations, financial strength, competitive edge, key customers, suppliers and, perhaps most importantly, management strategies and the markets in which it competes. Not all of this research requires an on-the-premises approach, but having one does provide a fuller understanding of the nuances that are not revealed in a more passive analysis. Speaking with the management of a company and walking the factory floor are invaluable.
It’s also crucial to develop a network of contacts, including businesspeople, consultants, advisors, academics, diplomats, civil servants and journalists. Cultivating these relationships provides diverse perspectives not only now, but also for research efforts in the coming years. It is about understanding the investment opportunities and risk there and also about the impact of China on investments elsewhere. Ching, Terry and I returned with an expanded understanding of the business environment in this diverse country and a firsthand perspective of what it is like to live there as a consumer.
Burgundy Asset Management Ltd. is registered in all provinces in Canada as a Portfolio Manager, as well as an Investment Fund Manager in Ontario, Quebec and Newfoundland & Labrador. We are also registered as an Investment Advisor with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. This article is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints, or financial needs. Under no circumstances does this article suggest that you should time the market in any way or make investment decisions based on the content. This article is not intended as an offer to invest in any investment strategy presented by Burgundy. The information is the opinion of Burgundy and/or its employees as of the date of original publishing (April 16, 2019) and is subject to change without notice.
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1 U.N. Department of Economic and Social Affairs Population Division.
2 The World Bank.
3 UNCTAD (United Nations Conference on Trade and Development).
4 Federal Reserve Bank of St. Louis. 2019.
5 China Internet Network Information Center, Ministry of Industry and Formation.
6 App Annie. “The State of Mobile 2019.”