China’s dominance is about more than demographics

Fidelity China Special Situationss Dale Nicholls explains how the Asian nations growing dominance is being built on a bedrock of domestic consumption.

While China is widely known for having the world’s largest population, there is a lot more to the country, especially for investors. Crucially, China is adopting global technology trends such as e-commerce and mobile/online payments much faster than western economies.

Furthermore, Chinese firms are becoming increasingly innovative and competitive in the context of these global trends: for example, Alibaba Group is a key player in e-commerce and payments, not just in China but also in other emerging markets, while Bytedance (which owns the TikTok app) is increasing its positioning both in emerging markets and across developed markets.

Demographically, with a population of close to 1.4 billion, China’s focus on innovation – primarily automation and robotics – is a result of its labour force needing to innovate, given its rising ageing population and the peak of its working age population.

There’s likely to be growing demand from Chinese companies to replace employees with robotics, which in turn has underpinned the wave of automation that has emerged. Furthermore, China is set to lead the world in automation developments, capitalising on the ample data it can leverage. China’s 5G network is key to the growth of this trend.

5G + Cloud = Smartcows

‘Smartcows’ epitomise the possibilities. Farmers have traditionally relied on their judgement and experience to determine a typical cow’s three-week oestrous cycle, which includes a small two-day window during which the cow can be successfully fertilised and impregnated (a precondition for producing milk). Missing this window can be costly: an estimated $250 (£190) of foregone milk production per cow.

Enter the smartcow, or cloud-connected bovine. A new wearable tracking device developed by Huawei can enable farmers to identify a cow’s conception window with 95% accuracy, according to the company – up from 68% using traditional methods. It is estimated that this translates into increased revenue of more than $60,000 from every 1,000 cows, a significant financial boon to large-scale dairy operations.

To date, hundreds of thousands of these devices have already been sold across the country, but the benefits don’t end with at China’s 15 million dairy cows. Similar technologies are gaining traction in Asia-Pacific and Latin America, and they can be applied in the farming of horses, sheep, pigs and other animals.

From farms to fashion: hip designs are now being created by Chinese fashion brands. JNBY is a fashion label, designed in China, made in China, and marketed in China to the domestic consumer. The designs are known to be unique and are of high-quality fabric – characteristics you would expect from high-end international brands. And although it is classified as ‘affordable luxury’, a JNBY dress still costs around £150.

You can see why Chinese management teams are focusing on their own domestic consumer base. China accounts for one-third of global luxury consumption, which equates to around $115 billion at home and abroad. Additionally, with consumers trading up due to higher incomes, growing urbanisation and a better quality of living, they are also becoming more sophisticated and demanding more brand choices.

We are also seeing companies having more capability to leverage their resources and capacity in China to develop products – in particular to design attractive products that appeal to local consumers. JNBY recently said encouraging innovative products is the most important thing for the company. As for now, most Chinese consumer players – be they in fashion, home appliances or consumer staples – are focused on growth and the intense competition within China.

But don’t be surprised if the winners ultimately look overseas too, especially where they can leverage huge domestic volumes to drive down costs. In that case, we’re set to start seeing these Chinese premium brands becoming global leaders.

Growing strength of domestic brands: top 10

Notes: Table shows top 10 most popular brands in China in 2017 and 2018. Green = Chinese brand. Source: Prophet Survey & Bloomberg

Dale Nicholls is manager of Fidelity China Special Situations.

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