The power of the 'Made in China' brand

Martin Currie China fund manager James Chong examines the growing sophistication of the Chinese market.

Look on the underside of any cheap plastic toy, and the chances are you will find the words “Made in China”. Today, these words are synonymous with low-quality goods.

But only a few decades ago, “Made in Japan” had exactly the same connotation. Later, it was “Made in Taiwan”. What the examples of Japan and Taiwan demonstrate is that countries can move rapidly from producing cheap tat to sophisticated, high-tech goods. So it should be no surprise China is now doing exactly that.

Breakthroughs

Many investors still think of Chinese companies as sweatshop factories producing cheap goods for export. But China is no longer just the “workshop of the world”, because Chinese firms have been moving up the value chain at a remarkable pace.
Take one of our favourite holdings over the past year: Dongyue.

This specialist chemicals company made a crucial advance last year. Ion-exchange membrane, which is used in a huge range of industries, was formerly the preserve of just two firms worldwide: Dupont and Asahi. But a technological breakthrough has allowed Dongyue to produce its own membrane – and more cheaply than its rivals. Since it broke the global duopoly, the company’s shares have gained around 400%.

Such breakthroughs should come as no surprise. China produces many more science and engineering graduates than the US each year. On top of this, no other nation allocates so large a proportion of its GDP to research and development.

Already, China’s growing technological sophistication is having a global impact. Martin Currie’s North American team increasingly finds US firms are concerned about Chinese competition high up the value chain. That is bad news for American companies – but good news for investors in China.

Increased consumerism

The phrase “growing sophistication” encapsulates much of the opportunity the Chinese market presents. Not only are China’s manufacturers raising their game, but the country’s consumers are raising their aspirations. And as Chinese consumers demand higher-end goods and demonstrate a growing appetite for luxury, domestic firms are best placed to cater for local tastes.

In this respect, companies like Hengdeli, which sells foreign and Chinese luxury watches, and Belle International, the country’s leading retailer of women’s shoes, are benefiting from the increasingly affluent consumers in China’s burgeoning middle class.

At the same time, consumer-facing companies have been harnessing the internet to sell their products more efficiently across this enormous country. Consequently, e-commerce is booming in China. We have favoured this area for some time; while we have sold some of the initial beneficiaries, such as Sina, which operates the ‘Chinese Twitter’, we expect many less-heralded internet firms to flourish as they apply new business models that will allow them to monetise their online traffic effectively.

Urbanisation

Middle-class aspirations and the increased market penetration the internet affords are two important elements in China’s move towards a consumer-driven economy. But the most important factor is the massive process of urbanisation that the country is undergoing.