Day two and three of our journey have brought us to several fascinating companies that have provided us incredibly varied insights. Our meeting with Barclays afforded us a broad overview of China’s financial and economic perspectives as well as insights into deal-making in one of the world’s hottest markets. Our meeting with Alibaba took us to Hangzhou (a three-hour drive out of Shanghai past the West Lake, known as China’s most beautiful lake) and introduced us to a company that aims to be bigger and better than Amazon and Ebay. Lastly, our visit to China Ting, the owner of several wholly owned retail brands including Finity as well as a manufacturer for private label brands such as Jones New York, Macy’s and even Chanel, showed us the remarkable manufacturing capability of Chinese firms. We have also been seeing bits and pieces of this beautiful city in our spare time. We have embarked on culinary journeys through cheap and small food stalls (left) as well as highly rated restaurants on the Bund. The group’s consensus was that the best food we have had to date was at a restaurant called Lost Heaven on the Bund, a waterfront area in Shanghai right) which showcased food from China’s southern province of Yunnan.
In terms of our meetings, our conversation with Barclay’s revealed that deals are down in the past year due to accounting scandals, bad valuations and a slow global IPO market. Nevertheless, Barclay’s Asia Investment Banking division expects fees to grow 10% per year, proving the underlying strength of their business in the region. The conversation’s highlights included a discussion on China’s nascent but growing debt markets (most Chinese deals are done via syndicated loans if with any debt) and the increasingly higher diligence standard. We also spoke about debt as a new and growing investment class. Most Chinese keep their savings and investments in the banks. Otherwise, they invest in real estate (driving some of the price inflation in real estate) and the equity markets. Chinese businesses follow a similar logic as exemplified by China Telecom’s $60bn cash holding (almost double that of Apple’s!). Other trends discussed included changes in contract law. Fifty percent of contracts are now being properly drawn up in the way most of us are used to in the West (previously, contracts in China were no more than three pages long and somewhat vague, using layman’s terms), a sign of increasing business sophistication. Further, consistent with the “China, for China” viewpoint, companies are now more often listing onshore (meaning in the PRC as opposed to Hong Kong), as well as relocating offices from Hong Kong in order to gain more favor with the PRC’s government. This is a positive in terms of the development and increasing importance of the onshore Chinese market. It is also a potential concern to foreigners looking to do business in China. Will business in China evolve more and more into doing business the “Chinese” way?
On day three, driving three hours out of Shanghai, we entered Alibaba’s campus in Hangzhou. If its impressive and stunning architecture as well as its “startup” and Silicon Valley vibe were not impressive enough, the power of this ecommerce company blew us away. The access it has to Chinese consumers for its B2C business (Taobao and Tmall) and suppliers for its B2B marketplace (Alibaba) is truly impressive. Its ability to collect data on both sides of the marketplace positions it extremely well for the domestic Chinese market. Alibaba has its sights set on even bigger markets however, expanding into Alipay (its own payments service), Alifinance (loans to small and medium-sized suppliers) as well into new (and huge) markets such as Brazil and Russia. In general, China’s outbound investment is a topic that will increasingly more often be a topic of global discourse as Chinese firms shift from relying on cheap labor as their competitive advantage and focus more on distinguishing themselves as leaders in the global business arena.
After eating lunch on the go, we drove an hour further to meet with the Head of Investor Relations for China Ting, Sharon Wood. Ms. Wood took us through an informative presentation on the company as well as China’s retailing ecosystem and prospects. Impressive in her knowledge as well as her positive outlook on China’s new leadership, Ms. Wood also brought us on an hour-long tour of Ting’s factories. There, we saw all the steps in the fabric sourcing, dying, printing, cutting, sowing and pressing process. We also saw showrooms of the different wholly owned brands under the China Ting Umbrella, as well as Calvin Klein’s new Performance line which China Ting has been manufacturing. We were impressed with the open discussion Ms. Wood had with us on her company’s supportive treatment of migrant factory workers, as well as her acknowledgement of the sometimes harsh realities of factory work. For example, because China Ting has been working with US-based brands for over 15 years, Ting has always sought to meet US compliance standards; Ting provides medical coverage to migrant workers even though this is not mandated domestically. In terms of the less positive realities, she mentioned that many workers want to be worked overtime (despite media backlash) because, after all, they are far away from home and want to earn as much as possible. Many also choose not to wear protective gear such as gloves and masks while at work even though these are provided to them in the highly toxic environment. Further, high turnover (80%!) every year puts pressure on Ting’s bottom line. The silver lining is that most turnover is apparently voluntary and due to migrant workers returning home or finding better paying jobs. In terms of her discussion on China’s new leadership, her optimism was driven by faith in the government’s pledges to stamp out corruption, reduce pollution and environmental damage and implement economic reform (such as stabilizing real estate prices by capping the number and value of properties individuals can purchase). Her faith also rested on the government’s goal to be “a stronger nation for global prosperity and peace”. The idea that China will not be a democracy was another message reinforced from previous discussions. While theories and evidence as to why China wouldn’t / shouldn’t / can’t be a democracy run the gamut, potential for too much partisanship in a country of 1.4bn people and cultural reasons seem to dominate the conversation. One surprising element that we as a group have more broadly observed is the lack of “big government” presence on the streets and, in most instances, the day-to-day operations of businesses. Certainly regulations exist and corruption exist. Nevertheless, businesses are thriving, the country has made massive shifts in a short period of time, and the Party seems to be envisioning ideals that any country, whether a democracy or otherwise, would aspire to. Again, the refrain seems to be that China is redefining the many keywords with which it is associated, creating its own vision of what capitalism, communism and competitive advantage might be.
Marianna Zaslavsky ’13