What’s China Good for Investing in? It’s All About Innovation

October 5, 2010 Posted by Chris Devonshire-Ellis Reading Time: 7 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

Oct. 5 – OK, so I’ve been beating up on China a bit recently, however as I pointed out, there are political hierarchical issues to solve, an economy to recalibrate and enormous amounts of bad debt sloshing around. That’s not that great a scenario, and as for the theory China escaped the global recession – I may point out perhaps for China alone, it may still yet to prove rather more a case of postponement. But at the end of the day, and especially for my business, we’re committed to China, and obviously see great things on the horizon. It’s just that a slowdown is occurring, India is growing, and the dynamics are changing. Short term, this is the deal:

Will China’s economic growth slowdown? Yes.
Will it lose labor intensive industrial investment to other regional markets? Yes.
Has it gotten more expensive? Yes.
Is the economy out of alignment? Yes.

The bad news list could in fact go on and on, but that is not the subject of this article. Rather, let’s look at the positives and for clues as to where China is changing for the better and where those opportunities are. To paraphrase the rejuvenated Gordon Gekko “Change is Good.” And that’s what China is going through now. Moving up the value chain is never an easy thing to do, and China of course is a behemoth of the global economy. While as I said, China will go through a short term period of decline, there are bright spots aplenty. Just this past week, apparently missed by much of the media, three Chinese wind and solar power companies successfully listed on the New York and Hong Kong stock exchanges after raising nearly US$1.5 billion. This is the biggest push by Chinese alternative energy companies into the equity market indicating China’s determination to use stocks and bonds to bankroll a part of its massive investment program in the sector. Ming Yang Wind Power, a Guangzhou-based firm, has become the first Chinese wind energy company to obtain listing at the stock exchange in New York. It comes within days of two Chinese companies, Xinjiang Goldwind Science and Technology and Trony Solar Holdings, launching initial public offers at the Hong Kong stock exchange.

Goldwind in particular is interesting as the company managed to attract over-subscription by nearly 20 times after selling its shares in Hong Kong at a discount to the prevailing price at Shenzhen stock exchange, where it is also listed. China aims to become the world’s largest market for wind power, overtaking the United States in this field by the end of this year. Beijing has vowed to ensure that 15 percent of new electricity generation over the next decade comes from alternative energy sources. The total investment planned for new power projects from all sources over one decade is US$700 billion. If that isn’t a major statement of intent of China moving up the value chain, then I don’t know what is.

It’s not just alternative energy either. While the United States and Europe have wrapped up innovation in genetic technologies and bioengineering in all sorts of restrictive regulations, China has been moving ahead, and the new technologies will come from Chinese inventions, patents, and expertise. A politically awkward subject in the West due to concerns over “playing God,” mankind has in fact been involved with GM for centuries. On a basic level, even the family dog is an example of an animal bred and counter bred to create a species totally dependent upon man. That’s not how the animal naturally evolved, it is the result of human interference in the systematic genetic breeding of a species to alter its behavioral patterns. Ethical issues aside, China (and to some extent India) is powering ahead in this field. International scientists involved in such research are in fact involved in a mini “brain drain” – China now offers better facilities in the field than the West does. Add to that the new determination to unravel the active ingredients in much Traditional Chinese Medicine (TCM), and it’s easy to see that the GM and pharmaceutical industries globally will eventually shift to reliance on China derived knowledge and discoveries.

Space exploration is another field where the United States has for decades had the upper hand. Yet both Chinese and Indian scientists are both very much involved in space exploration, and the new technologies that come from investment in this field. The most accurate high altitude telescopes for identifying what’s going on around planet earth are Indian technology. Both countries, and especially China are investing billions into their space programs, and again new technologies will result that will become game and life changers for us mere earthlings.

In terms of infrastructure, China’s developments and engineering feats have now become legendary. Of particular note is the development of rail track over highly difficult terrain, and the lessons learned over the Tibet rail link are now being expanded across the Himalayas. That will also provide China with the potential later to provide massively upgraded rail links across Central Asia. The same may also be true of the provision of such technologies and engineering solutions to South America and Africa. Both suffer due to a lack of infrastructure, and to properly unlock the potential of Africa, a lot needs to be done. The continent has the largest number of inland countries globally, and interconnecting them and getting product onto the global markets through African Ports requires rail networks. Africa’s rail system in 50 years will be not just impressive, but will help lift an entire continent out of poverty and strife, and will be Chinese designed and built.

China has also been making considerable strides into electric vehicle production, with the likes of Warren Buffet and Daimler taking stakes in selected opportunities. The new locomotion device will be electric powered, and again those technologies are increasingly to be found in China, and again to a degree, in India. When the battery size and weight problem can be solved, it’ll be Chinese technologies behind much of the vehicles. And with patent ownerships, a lot of Chinese companies are going to make a lot of money for decades to come. Serious opportunities lie here for innovative foreign investors – working with some of China’s engineering companies may well open up markets and opportunities that would never otherwise be considered in the West, which nowadays often seems rather too set in its ways and a continuing over-dependence on oil.

There are also opportunities on the flip side. Chinese manufacturers with an export base are struggling, and this may continue for some time. It may be time to buy out a China supplier and get fully in control of those operations rather than allowing the supplier to take part of the margin. Factories with slow order books may be open to overseas acquisition. There are distressed assets too. Chinese businesses that have hit a wall and gone broke. Not so many years ago we were involved in structuring the Perdue Farms acquisition of a bankrupt Chinese chicken slaughterhouse in Anhui. That significantly improved their capacity and capabilities to get further into the Chinese domestic market, and as Chinese companies struggle, foreign investors may want to be on the alert for potential acquisitions.

I could go on about the opportunities China now represents, and welcome comments from readers. While China does have its issues – as any teenage with acne will have (a somewhat crass but accurate description of China’s development at present) – for those here for the long term, China represents the new dynamic in global innovation. Foreign investors in labor intensive, low end businesses have no place in that design. But for foreign investors looking at partnering with cutting edge businesses at the forefront of the new age of engineering and innovation, energy and invention, investing in China makes considerable sense.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992. The firm now has 10 offices in China. For advice over China strategy, trade, investment, legal and tax matters please contact the firm at info@dezshira.com. The firm’s brochure may be downloaded here. Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

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