6 Rules for Successful Investing in China
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everywhere I turn someone keeps telling me “look at China,” or “don’t forget China,” and “China is a good investment.” Throwing money at China has become the conventional wisdom of investors today – they make statements like this so they sound informed. The problem is that what most people tell you is usually wrong. China is a gamble.
Of course the Chinese economy is huge – it boasts 1,344,130,000 people. Yes, the middle class is finding its groove. But 1.3 billion Chinese is very different than 1 million Americans. American companies can tell you that. The ones that have shuttered their businesses, that is.
American companies that failed in China should have followed the 6 rules for successful Chinese investing. Here they are, in no particular order.
Rule #1: The Chinese Love to Hire Cheap Labor
Home Depot (NYSE: HD) can tell you this. Since entering China in 2006, Home Depot has struggled to sell its goods to the Chinese, who value cheap labor. Home Depot’s products are targeted to the do-it-yourself consumers, who are severely lacking in China. A Home Depot spokesperson says it well: “The market trend says this is more of a do-it-for-me culture.”
IKEA capitalized off of this attitude. How? It simply added a service line where workers install people’s furniture for them.
Rule #2: Many Chinese Live in Apartments
Hardware and lumber companies like Home Depot have also gotten hit by forgetting this key: lots of Chinese live in apartments. Often inhabitants do not want to expand their apartments, especially on their own dime. This fact makes it difficult to sell lumber and other building products in China, despite its large population.
Further, companies who sell outdoor products, like large, outdoor toys or bicycles would do best to enter strategically and cautiously. And when they do enter, start first in middle class areas with lots of homes.
Rule #3: Study Time Trumps Play Time
Toy maker Mattel learned the hard way. Mattel shut its central Barbie store in March of 2011. Apparently Chinese parents like their kids to read. A lot. Die-cast race cars and Barbie dolls just don’t provide the same education, they presume.
Remember the American slogan, “Work hard, play hard?” Perhaps the Chinese version of that is “Work hard, work hard.”
Rule #4: Joint Ventures Provide Instant Access
Citigroup (NYSE: C) provides a great model for joint ventures. Citi did not have an investment banking presence in China, so it partnered with Orient Securities Co. to create Citi Orient Securities Co., taking 33% of the $126 million capitalization. Citi’s share of the deal is the highest ownership allowed under Chinese law.
Citi expects the business to grow quickly, as it has already secured nearly 50 Class-A underwriting deals for IPOs. Touch Chinese market conditions, complex laws, and stringent investment requirements make it far easier for companies to buy their way into China than to start from scratch.
Rule #5: It’s Not Growing as Fast as You Think
China inked 13% year-over-year retail sales growth in August. However, the year before the growth was 17%. Growth rates in the teens are nice, but not as nice when you consider that China is becoming a crowded marketplace. Firms from across the world are rushing in like Easterners rushed to California during the gold rush. And in China, there are more gold diggers than there is gold to be had.
Also, Wal-Mart (NYSE: WMT) announced that it would open fewer stores in China in 2012, and that it would halve the square footage of those properties. According to Scott Price, Wal-Mart’s head of Asia: “We made a decision earlier to moderate our growth.”
Like Wal-Mart, Best Buy (NYSE: BBY) has struggled in China. The electronics retailer acquired 12 stores six years ago but has closed some as a result of slow sales. Best Buy learned that many Chinese do not have air conditioners and washing machines, let alone the stereo systems and expensive televisions that Best Buy sells. As a result, it closed nine China outlets in February 2011.
Rule #6: Cater to the Chinese
Sounds obvious, doesn’t it? Maybe that is why so many companies get it wrong. McDonald’s (NYSE: MCD) got it right by catering exactly to Chinese tastes. McDonald’s offers chicken sandwiches and bubble tea, which is tea with tapioca balls in the bottom of the drink, among other Chinese staples. McDonald’s garners huge sales in China by figuring out exactly what Chinese customers want, then giving it to them.
In conclusion, China is a major country with a population 1.3 billion strong. To succeed in the tough, crowded, Chinese marketplace, companies have to conduct their due diligence and perform their customer research. After all, the Chinese have their own customs, traditions, and tastes. Moreover, tremendous fortunes will go to the company that can discern those traits and market directly to them.
So the next time someone tells you to invest in China, just break a wide grin. The person is probably just repeating the very conventional wisdom that you know you must avoid.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy, Citigroup Inc , and McDonald's. Motley Fool newsletter services recommend McDonald's and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
