China. More than a billion people and an economy on the go. Number of main telephone lines in use: 263 million (estimated, as of 2003). Number of cell phones: 269 million (estimated, 2003). Clearly, there's room to grow. Is it any wonder that American investors are intrigued by the possibilities that China presents?
I've recently read some interesting things about the nation and the business within it. For example, Yum! Brands (NYSE:YUM), operator of Taco Bell, KFC, and Pizza Hut, was an early mover into China, launching a KFC unit there in 1987. Today, according to QSR magazine, its China division sports more than 1,100 KFC units and 136 Pizza Huts -- significantly more than McDonald's (NYSE:MCD) and its 600-some locations. Much of the credit for Yum's success is due to its early entry. If you're investing in a firm operating in China, see which firms in the industry have established themselves there early on.
On a less rosy note, in Inc. magazine, Ted Fishman offered a long article detailing 14 things entrepreneurs should know about how China will affect American businesses. First, though, he offered some eye-opening facts: China "has become the world's largest maker of consumer electronics, pumping out more TVs, DVD players, and cell phones than any other country... [and is] moving quickly and expertly into biotech and computer manufacturing. It is building cars (there are more than 120 automakers in China), making parts for Boeing 757s, and exploring space with its own domestically built rockets."
Here are some of his 14 points:
- China's economy is much larger than the official numbers show.
- China's growth is making raw materials more expensive.
- No company has embraced China's potential more vigorously than Wal-Mart (NYSE:WMT). Fishman notes: "A whopping portion of between 10% and 13% of everything China has sent to the U.S. winds up on Wal-Mart's shelves."
- There are hidden costs associated with doing business in China.
- Piracy is a problem.
One of his scariest points is this: "China can be a bully. China can spend, it can hire and dictate wages, it can throw old-line competitors out of work. In just a three-year period from 2000 to late 2003, for example, China's exports to the U.S. of wooden bedroom furniture climbed from $360 million to nearly $1.2 billion. During that time, the work force at America's wooden-furniture factories dropped by 35,000, or one of every three workers in the trade. China now makes 40% of all furniture sold in the U.S., and that number is sure to climb."
Not scared yet? Consider this: "In 2001, the Chinese makers produced 1% of the socks on U.S. feet. In just two years, sock imports from China to the U.S. jumped two-hundred-fold and now make up 7% of the U.S. market. James J. Jochum, assistant secretary for export administration at the U.S. Department of Commerce, has noted that the Chinese manufacturers cut their prices by more than half in 2003 and helped drive one in four U.S. sock makers out of business."
We investors might want to stop and ask ourselves how well-positioned the companies we've invested in are to compete with China. At the very least, we should remind ourselves that the world economy can and does change quickly, and that we shouldn't let ourselves become too complacent about our holdings. It's critical to keep up with their progress, lest we end up with unpleasant surprises.
To learn more from Mr. Fishman, read his book, China, Inc.: How the Rise of the Next Superpower Challenges America and the World.
To learn more about investing in China, read these Fool articles:
- China's Hungry for More
- The Future of the China Syndrome
- Chinese Diesel Torture
- China's Steel Binge and Purge
- China Choices
- A Chinese IPO Plunges
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
