Chinese getting tired of ‘Made in China’
Commentary: Multinationals press brand advantage
new
May 6, 2012, 8:40 p.m. EDT
By Craig Stephen
HONG KONG (MarketWatch) — It’s hardly news that ‘made in China’ products
get bad press. But now, upwardly mobile mainland Chinese are starting
to turn their nose up at home-grown brands of even low-end staples.
This could spell trouble for mainland consumer stocks that have been one
of the most crowded trades in the China consumption growth story.
Conversely, multinationals that have been patiently investing in their
mainland Chinese business could find their fortunes are on the up.
In a new research report, Barclays Capital says that after continued
double-digit wage hikes, many more mainland Chinese aren’t just getting
wealthier, but also more discerning on how they spend. Increasingly,
they are looking at premium products and often, foreign ones. This, they
say, applies to both staples and discretionary consumers stocks.
Barclays warns that mainland companies who have neglected to invest in
building strong brands, R&D and product development will be exposed
to this shift in consumer tastes. Many local companies achieved
dominance through cheap manufacturing and low pricing, as well as
dominant local distribution. As the era of cheap products comes to an
end, companies that are unable to upgrade are vulnerable.
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Berkshire Hathaway CEO Warren Buffett gives his views on the unsteady global economy and on what his company will do with its massive cash reserves. Photo: Getty Images
The market appears to have already passed judgment that some mainland
companies are not up to the task. At least 10 consumer stocks in
Barclays mainland China consumer universe have lost between 35% and 85%
of their market cap in the past two years, following earnings downgrades
— this suggests something more serious than a cyclical slowdown. These
include sportswear names such as Anta
HK:2020
0.00%
ANPDF
+10.67%
, Li Ning
HK:2331
+2.10%
LNNGF
+4.29%
, and China Dongxiang
HK:3818
0.00%
CDGXF
+4.55%
, as well as high-end fashion names such as Ports Design
HK:589
-0.40%
PDESF
-1.30%
Mainland Chinese corporates have been maligned before for their poor
performance at brand-building, although it was often in the context of
how this prevents them venturing overseas. Where mainland brands have
made it onto leading-brand lists, it is typically due to a historical
dominance in their home market, such as banking major ICBC
HK:1398
-0.34%
IDCBF
0.00%
CN:601398
+1.69%
with its 16,000-plus branches.
The difference now is that this weakness in branding could come back to bite local companies in their own backyard.
And it is conceivable that foreign firms could make bigger inroads in
retail, which has been substantially deregulated since China entered the
World Trade Organization a decade ago, in comparison to more restricted
industries like banking, telecom or insurance.
Meanwhile, foreign companies are ready to push home their advantage.
Barclay’s report also included some interesting updates on the progress
of foreign multinationals penetrating deeper into China’s hinterlands as
they make some sizable investments.
Both Nike
NKE
+0.59%
and Adidas
DE:ADS
-1.01%
ADDDF
-1.48%
have expanded into the relatively smaller “tier 3” cities and beyond,
and are taking market share from local sportswear brands.
Coca Cola’s beverage volume growth matched that of noodle and drinks giant Tingyi
HK:322
-1.44%
TCYMF
-5.02%
for the first time last year after it grew 13%. Coca Cola
KO
+0.11%
plans to invest $4 billion in its China business over the next three years to 2015, encouraged by this growth.
P&G
PG
-0.14%
believes it already reaches 1 billion consumers in China, out of the
total population of 1.4 billion, and its mainland China sales now top $2
billion a year. It plans to invest $1 billion over the next two to
three years growing its China business. Following recent acquisitions of
stakes in mainland confectioner Hsu Fu Chi and food producer Yinlu,
Nestlé
CH:NESN
+0.58%
NSRGF
+0.21%
now makes about $5 billion in revenue from China on a pro-forma basis.
And it is not just Western companies making notable inroads in China. Japanese consumer-product company Unicharm
JP:8113
+0.78%
UNCHF
-0.38%
now has 44.7 billion yen ($560 million) in sales, up from just ¥10 billion in 2006.
This all suggests multinationals are in a strong position, or at least confident.
Multinationals are not yet being talked about as China plays, however,
although the aggressive acquisitions by the likes of Nestlé show how
organic growth can be quickly accelerated. Moreover, it’s worth
considering that last year China overtook the U.S. as the world’s
biggest grocery market.
Still, it is not all one-way traffic on acquisitions. Some mainland
companies are ready to step up to the challenge, going by the deal
announced last week by Shanghai-based Bright Foods to buy a 60% stake in
U.K. cereal maker Weetabix for £1.2 billion ($1.89 billion). Bright
Foods highlighted it was buying famous international brands, advanced
technology and taking strong competitive positions in each of its
markets through this deal.
As competition heats up in its domestic market, we should watch out for
more mainland companies seeking such opportunistic overseas acquisitions
that bring technical expertise and brands, as well as extended
distribution.
The upshot is that if mainland consumers are becoming more choosey,
investors also need to be when assessing these retail plays. They might
be staples, but they can no longer be assumed to be stable. For those
seeking a lower-risk China exposure, some of these multinationals could
be worth considering.
Another option is to try to match the upwardly mobile aspirations of
mainland Chinese consumers and avoid more everyday mainland brands.
Brokerage CLSA claims in a new report that wealthy Chinese consistently
spend up to a quarter of their entire household budgets on top-end,
niche niceties. It is tipping luxury brands to outperform general Asian
consumer stocks.
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