Bulletin
Investor Alert
Craig Stephen

Craig Stephen's This Week in China Archives | Email alerts

May 6, 2012, 8:40 p.m. EDT

Chinese getting tired of ‘Made in China’

Commentary: Multinationals press brand advantage

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Anta Sports Products Ltd. (2020)
  • X
    Anta Sports Products Ltd. (ANPDF)
  • X
    Li Ning Co. Ltd. (2331)

or Cancel Already have a watchlist? Log In

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.

Click to Play

Buffett on Europe, China, Berkshire stock price

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 /zigman2/quotes/203867255/delayed HK:2020 -1.85% /zigman2/quotes/204683695/delayed ANPDF -6.49% , Li Ning /zigman2/quotes/200624860/delayed HK:2331 -0.14%   /zigman2/quotes/201332063/delayed LNNGF -1.30% , and China Dongxiang /zigman2/quotes/204765314/delayed HK:3818 -3.06%   /zigman2/quotes/205617001/delayed CDGXF -9.38% , as well as high-end fashion names such as Ports Design /zigman2/quotes/216996816/delayed HK:589 -1.25%  

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 /zigman2/quotes/201401473/delayed HK:1398 -0.75%   /zigman2/quotes/204265987/delayed IDCBF -3.77%   /zigman2/quotes/202525815/delayed CN:601398 -0.20%  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 /zigman2/quotes/203439053/composite NKE -0.42%  and Adidas /zigman2/quotes/202556172/delayed DE:ADS +0.50%   /zigman2/quotes/206082742/delayed ADDDF +2.76%  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 /zigman2/quotes/208969648/delayed HK:322 -2.41%   /zigman2/quotes/204861187/delayed TCYMF +1.12%  for the first time last year after it grew 13%. Coca Cola /zigman2/quotes/209159848/composite KO +0.04%  plans to invest $4 billion in its China business over the next three years to 2015, encouraged by this growth.

P&G /zigman2/quotes/202894679/composite PG +0.51%  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 /zigman2/quotes/208115528/delayed CH:NESN +1.42%   /zigman2/quotes/208312639/delayed NSRGF +2.16%  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 /zigman2/quotes/207993831/delayed JP:8113 +0.41%   /zigman2/quotes/201699806/delayed UNCHF +0.67%  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.

/zigman2/quotes/203867255/delayed
HK : Hong Kong
HK$ 76.95
-1.45 -1.85%
Volume: 3.50M
Sept. 25, 2020 4:08p
P/E Ratio
41.41
Dividend Yield
0.74%
Market Cap
HK$207.53 billion
Rev. per Employee
HK$1.14M
loading...
/zigman2/quotes/204683695/delayed
US : U.S.: OTC
$ 9.51
-0.66 -6.49%
Volume: 1,750
Sept. 25, 2020 2:46p
P/E Ratio
39.94
Dividend Yield
N/A
Market Cap
$26.78 billion
Rev. per Employee
$145,685
loading...
/zigman2/quotes/200624860/delayed
HK : Hong Kong
HK$ 34.85
-0.05 -0.14%
Volume: 7.02M
Sept. 25, 2020 4:08p
P/E Ratio
56.80
Dividend Yield
0.50%
Market Cap
HK$86.22 billion
Rev. per Employee
HK$5.71M
loading...
/zigman2/quotes/201332063/delayed
US : U.S.: OTC
$ 4.48
-0.06 -1.30%
Volume: 0.00
Sept. 24, 2020 3:29p
P/E Ratio
56.93
Dividend Yield
N/A
Market Cap
$11.14 billion
Rev. per Employee
$727,986
loading...
/zigman2/quotes/204765314/delayed
HK : Hong Kong
HK$ 0.95
-0.03 -3.06%
Volume: 11.73M
Sept. 25, 2020 4:08p
P/E Ratio
13.55
Dividend Yield
5.06%
Market Cap
HK$5.57 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/205617001/delayed
US : U.S.: OTC
$ 0.13
-0.01 -9.38%
Volume: 0.00
Sept. 8, 2020 9:35a
P/E Ratio
13.91
Dividend Yield
N/A
Market Cap
$733.79 million
Rev. per Employee
N/A
loading...
/zigman2/quotes/216996816/delayed
HK : Hong Kong
HK$ 1.58
-0.02 -1.25%
Volume: 110,000
Sept. 25, 2020 4:08p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
HK$987.50 million
Rev. per Employee
N/A
loading...
/zigman2/quotes/201401473/delayed
HK : Hong Kong
HK$ 3.99
-0.03 -0.75%
Volume: 319.29M
Sept. 25, 2020 4:08p
P/E Ratio
4.37
Dividend Yield
7.20%
Market Cap
HK$1844.66 billion
Rev. per Employee
HK$3.03M
loading...
/zigman2/quotes/204265987/delayed
US : U.S.: OTC
$ 0.51
-0.02 -3.77%
Volume: 42,525
Sept. 25, 2020 12:07p
P/E Ratio
4.02
Dividend Yield
N/A
Market Cap
$238.02 billion
Rev. per Employee
$387,287
loading...
/zigman2/quotes/202525815/delayed
CN : China: Shanghai
¥ 4.89
-0.01 -0.20%
Volume: 108.00M
Sept. 25, 2020 3:00p
P/E Ratio
5.54
Dividend Yield
5.37%
Market Cap
¥1623.12 billion
Rev. per Employee
¥2.53M
loading...
/zigman2/quotes/203439053/composite
US : U.S.: NYSE
$ 124.23
-0.52 -0.42%
Volume: 9.18M
Sept. 25, 2020 4:00p
P/E Ratio
74.22
Dividend Yield
0.79%
Market Cap
$193.78 billion
Rev. per Employee
$529,466
loading...
/zigman2/quotes/202556172/delayed
DE : Germany: Frankfurt
279.50
+1.40 +0.50%
Volume: 1,476
Sept. 25, 2020 8:59p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
N/A
Rev. per Employee
€384,366
loading...
/zigman2/quotes/206082742/delayed
US : U.S.: OTC
$ 327.80
+8.80 +2.76%
Volume: 108.00
Sept. 25, 2020 3:02p
P/E Ratio
106.26
Dividend Yield
N/A
Market Cap
$63.11 billion
Rev. per Employee
$453,455
loading...
/zigman2/quotes/208969648/delayed
HK : Hong Kong
HK$ 13.76
-0.34 -2.41%
Volume: 6.33M
Sept. 25, 2020 4:08p
P/E Ratio
16.61
Dividend Yield
4.78%
Market Cap
HK$77.39 billion
Rev. per Employee
HK$1.27M
loading...
/zigman2/quotes/204861187/delayed
US : U.S.: OTC
$ 1.80
+0.02 +1.12%
Volume: 0.00
Sept. 24, 2020 5:20p
P/E Ratio
16.93
Dividend Yield
N/A
Market Cap
$10.17 billion
Rev. per Employee
$162,402
loading...
/zigman2/quotes/209159848/composite
US : U.S.: NYSE
$ 48.72
+0.02 +0.04%
Volume: 12.60M
Sept. 25, 2020 4:00p
P/E Ratio
22.91
Dividend Yield
3.37%
Market Cap
$209.27 billion
Rev. per Employee
$506,342
loading...
/zigman2/quotes/202894679/composite
US : U.S.: NYSE
$ 137.62
+0.70 +0.51%
Volume: 4.97M
Sept. 25, 2020 4:04p
P/E Ratio
27.74
Dividend Yield
2.30%
Market Cap
$342.62 billion
Rev. per Employee
$727,304
loading...
/zigman2/quotes/208115528/delayed
CH : Switzerland: SWX
CHF 109.76
+1.54 +1.42%
Volume: 5.48M
Sept. 25, 2020 5:30p
P/E Ratio
23.52
Dividend Yield
2.46%
Market Cap
CHF305.69 billion
Rev. per Employee
CHF296,880
loading...
/zigman2/quotes/208312639/delayed
US : U.S.: OTC
$ 119.00
+2.52 +2.16%
Volume: 7,538
Sept. 25, 2020 3:48p
P/E Ratio
24.94
Dividend Yield
2.33%
Market Cap
$329.05 billion
Rev. per Employee
$303,353
loading...
/zigman2/quotes/207993831/delayed
JP : Japan: Tokyo
¥ 4,704.00
+19.00 +0.41%
Volume: 986,800
Sept. 25, 2020 3:00p
P/E Ratio
70.13
Dividend Yield
0.68%
Market Cap
¥2807.89 billion
Rev. per Employee
¥43.68M
loading...
/zigman2/quotes/201699806/delayed
US : U.S.: OTC
$ 44.13
+0.30 +0.67%
Volume: 1,456
Sept. 25, 2020 1:22p
P/E Ratio
71.15
Dividend Yield
N/A
Market Cap
$26.58 billion
Rev. per Employee
$395,513
loading...

This Story has 0 Comments
Be the first to comment
More News In
Commentary

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.