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Cashing In on the Rise of the Chinese Consumer

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Change is afoot in the Middle Kingdom, and investors patient enough to ride out the turbulence will be handsomely rewarded. Over the past 30 years, China has undertaken the most remarkable economic journey in history, pulling hundreds of millions of peasants into the global marketplace. To get there, the country capitalized on its seemingly endless supply of cheap labor, becoming the world's factory. However, this period is coming to an end.

End of an era
In the past year, members of China's army of cheap labor have started to revolt. The change was triggered by the tragic developments at Foxconn, a major electronics manufacturer which counts Apple, Dell, and Hewlett-Packard among its clients, in which several workers committed suicide, presumably because of the harsh working conditions. Then workers at a plant owned by Honda and Toyota brought the Japanese carmakers' production to a standstill.

In response to these developments, Foxconn announced a 122% wage increase, as well as other steps to improve workplace morale. Honda agreed to a 24% pay raise in order to get its assembly lines working again. The workers are rising, and they are getting results, which will likely inspire fellow workers around the country. This set off a chain reaction that resulted in wages across the country rising by nearly 23% by the end of 2010. Early this year, government officials in Beijing announced they would be looking at further wage increases and granting workers greater wage-negotiating powers.

The rollbacks aren't over
Higher wages are great for factory workers, but what about companies like Honda and Wal-Mart that rely on cheap labor in order to supply customers with low-cost goods? I wouldn't worry too much about them. Discount retailers like Wal-Mart have proven quite capable of tracking down the cheapest labor available.

China's status as the world's low-cost producer was never a sustainable advantage, and it was only a matter of time before the factories moved on to new markets in Vietnam, Indonesia, or the African continent.

Good kind of pain
In fact, rising wages for Chinese workers are good news for multinational companies. I mean, what could be more attractive than a market of 1.3 billion people with rising living standards? So whatever temporary discomfort worker revolts may bring, companies looking to sell into the Chinese market will be in a much better situation down the road.

This is where investors can capitalize on these developments. Finding both foreign and domestic companies (from a Chinese perspective) that are focused on the Chinese consumer will provide healthy returns in the years and decades to come. A few U.S. companies that have targeted this market segment include:

Nike (NYSE: NKE  ) is one American company with its eyes clearly focused on China's future. Nike opened its first office in China in 1991, but didn't really see sales take off until 2005. Last year, however, sales in the Greater China region reached $1.7 billion, or 9% of total sales.  The company's heavy investment in brand-building has ensured that it will benefit handsomely as the number of people in China with disposable income increases.

Coca-Cola (NYSE: KO  ) has also put in the time and effort to build its presence in China, jumping through the local joint-venture hoops that Beijing demands of foreign firms looking to gain access to Chinese consumers. Today Coke commands more than half of the Chinese soft drink market and continues to work to make its beverages synonymous with refreshment for consumers from Harbin to Guangzhou, from Shanghai to Urumqi, and everywhere in between.

When Proctor & Gamble (NYSE: PG  ) entered China back in 1990, disposable diapers were practically unheard of. This meant the company's marketing team had to convince Chinese consumers that diapers were a necessary part of child-rearing. Two decades and many advertising dollars later, P&G is covering more babies' bottoms than anyone in the country, and as urban populations grow, more and more Chinese parents will be adopting this Western cultural import.

As incomes rise, so does the demand for status symbols, which is why leather fashion goods manufacturer Coach (NYSE: COH  ) has been emphasizing the Chinese market in recent years. The company opened its first flagship store in China last year, which helped the company double its retail sales in the country. This year, Coach is expecting another 85% jump in Chinese retail sales, and it plans to list its shares on the Hong Kong Stock Exchange in order to raise awareness of the Coach brand among Asian investors and consumers.

A little local flavor
While these familiar names are indeed well-positioned to address the rising consumer demand in China, more adventurous investors might like to sample some local fare.

Two domestic Chinese companies that will see the benefits of rising disposable income are (Nasdaq: CTRP  ) and Home Inns (Nasdaq: HMIN  ) . As wages rise, Chinese consumers will have more money to spend on recreational travel, and these two are the country's 800-pound gorillas in the travel game.

The Motley Fool Global Gains team will be heading to China in a few weeks to find more companies ready to cash in on the rise of the Chinese consumer. If you'd like to receive their dispatches from the road and learn about which companies they think are poised to capitalize on the next stage in China's growth, just enter your email address in the box below.

Nate Weisshaar does not own any shares of the companies mentioned above. The Motley Fool owns shares of Coca-Cola, International, and Coach. Motley Fool newsletter services have recommended buying shares of Nike, Coach, Coca-Cola, Procter & Gamble, and International.

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. 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.

Read/Post Comments (3) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 02, 2011, at 2:30 PM, ETFsRule wrote:

    I love the investment strategy of going after Chinese consumers... here are some more possibilities:












  • Report this Comment On June 03, 2011, at 8:10 PM, TMFMmbop wrote:

    We are meeting with a number of those names during our research trip. Make sure you sign up to get our dispatches.

    Tim Hanson

  • Report this Comment On June 06, 2011, at 9:58 AM, SussexFIA wrote:

    Surely China has potential. Since the Chinese stock market burst in 2007, the violent correction ensured went into a large converging triangle, which is very much near its final stages. In theory, with so many years in the doldrums and so much currency appreciation expectations, it is as attractive as ever. Just hope things will turn out the right way.

    As to China collapse theory, well China did almost collapsed twice in its thirty-year reform, but it can pick up the pieces and resum on its rise.

    However, serious questions have to be asked of those come to list in the US stock market, many of them do seem to have an issue.

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