Managing Director, Asia IR
“Go West, young man, go West, and grow up with the country.” So urged Horace Greeley in 1865. Today, many business leaders are telling their underlings, “Go East, young men and women, go East, and grow up with China.”
China, the “middle kingdom” in the east, offers 1.4 billion customers and a fast-rising middle class with an insatiable appetite for western brands. Many consumer companies in the west, such as Louis Vuitton, suffered years of growth stagnation until they hit the jack pot of Chinese consumers. Today, some publicly-traded American consumer goods companies derive as much as over 50% of their annual revenues from China. Properly positioned, those companies offer a unique appeal to a wide variety of institutional investors. They combine the best of both worlds: transparency of the developed market and hyper growth of the emerging market. Yet, attaining such a halo is no easy task. The road eastward is not always paved in gold.
One consumer company we follow closely has enjoyed a long history of selling products to American consumers. Now, it is facing a saturated home market and increasing competitive pressure from Amazon. Not surprisingly, it has turned its eyes eastward. In the past five years, it has tried to exploit the market potential in China but without much progress until earlier this year. Upon the news release of its attainment of a 40% equity investment from a Chinese conglomerate, its stock price shot up. American investors cheered for its prospect of growth revitalization. In theory, the Chinese investor would bring its nationwide distribution network in China, the American company could leverage its well-known brand name and high-quality products, and the combined entity should enjoy natural and immense synergy. However, within weeks, the stock price dived back to the level prior to the announcement. What went wrong?
It turns out that unlike American investors, local Chinese investors didn’t view the aforementioned strategic investment favorably. They knew that the Chinese entity which made the investment was a state-owned enterprise (SOE) burdened with a bloated corporate structure and inefficient operations. Worst of all, it had suffered over 10 years of declining revenues due to inferior product quality and misguided distribution strategies. They feared that once the SOE got the local manufacturing rights of the American company, the latter’s product quality would deteriorate rapidly and that its brand equity would be tarnished as a result. Above all, the Chinese investors believed the SOE had never figured out how to properly distribute its own products, so how could it possibly know how to sell the American company’s products in China?!
Although Americans may think they can find out everything they want to know just by accessing the Internet, China is an entirely different matter. First of all, Google is blocked in China, so Chinese web sites are never optimized for Google searches. As a result, relying on Google to conduct research will inevitably lead to an incomplete picture of the Chinese reality. Second of all, freedom of the press does not exist in China, so Chinese companies routinely pay media outlets to delete unfavorably press coverage. In the aforementioned case, it was quite obvious to ICR’s Asia team that the SOE had been actively purging negative coverage from the world-wide web. So one needs to be very resourceful in uncovering truthful information in China.
The Chinese market is like an ocean: its waves can carry you to a new height of success or bury you alive. Navigating through it requires a combination of category expertise, bilingual capabilities, extensive experience in pealing back market opacity, and a thorough understanding of where the information resides, how to find it and how it can be manipulated.
