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The Cost of Doing Business in China

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Once, it's a fluke. Twice, it's a coincidence. Three times, it's a trend.

Three stocks that make up the Dow Jones Industrial Average (DJINDICES: ^DJI  ) have all publicly been at odds with the Chinese government in the past few months. The most recent was Coca-Cola (NYSE: KO  ) with an odd GPS law, while Caterpillar (NYSE: CAT  ) purchased and then wrote off what now seems to have been a fictional company, and Alcoa (NYSE: AA  ) , which competes with government-owned aluminum producers, is now sort of a partner with the Chinese government.

Let's take a closer look.

The backstories
This past week, Chinese authorities announced they they were investigating Coca-Cola (NYSE: KO  ) employees for the improper use of GPS devices. The Chinese government keeps tight control on the use of this technology for reasons of "national security." Coke uses GPS devices in their delivery trucks in an effort to increase efficiencies, and company officials are cooperating with Chinese authorities.

Last year, Coke controlled 16.6% of the soft-drink market in China, down from 17% the year before. Increasing efficiencies is likely a way for Coke to continue to pad the bottom line, even though market share is declining. 

In late January, Caterpillar announced that it would be taking an $850 million write off because it found that a Chinese company it had purchased for just more than $650 million had fraudulently reported higher revenues in their books. Caterpillar said this fraud was a multiyear scheme that the Chinese company deliberately manufactured. The company produced and sold mining equipment, which is what caused Caterpillar to become interested in the organization in the first place, but apparently it wasn't making quite the amount it reported. 

And finally, we have Alcoa. It started with the steel industry, and now it seems that have moved to aluminum: U.S. steel manufacturers have been bounded over the past 10 to 20 years, as Chinese companies dump cheap product on the markets. The price of steel fell to a price in which the U.S. producers could no longer compete, dramatically hurting the steel industry here at home.

Now the Chinese are moving into the aluminum industry as the metal becomes a more important product for aircraft and car manufactures. Competition in the country is heating up, stockpiles of the metal are at 50% throughout the country, and aluminum prices are falling. Over the past year, the metal's price has fallen 7.7%, and Alcoa's stock price has followed along. Year to date, shares of Alcoa are down 0.58%, while the Dow is up 10.76%. That's after ending 2012 down 2.9% while the index was up 7.26%.

But the competition from China's aluminum producers may decrease in the future for Alcoa. In mid-February, a Chinese state-owned organization purchased a 13% stake in Australia's Alumina. That company's largest asset is a 40% stake in Alcoa World Aluminum and Chemicals, which is a joint venture with Alcoa, which holds the other 60% of the business.  

This new partnership could benefit Alcoa in the future, but as we have seen in the past, when it comes to the Chinese government, nothing is set in stone and there's very little rhyme or reason behind some decisions.

Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Controlling about 15% of global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospect and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant, simply click here now to get started.

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Related Tickers

9/29/2016 4:00 PM
AA $9.96 Up +0.08 +0.81%
Alcoa CAPS Rating: ***
CAT $87.47 Up +0.88 +1.02%
Caterpillar CAPS Rating: ***
KO $42.03 Down -0.12 -0.28%
Coca-Cola CAPS Rating: ****
^DJI $18143.45 Down -195.79 -1.07%