- Can old economy companies in China rise to modern day challenges?
- Is China’s textile industry coming under pressure from other emerging markets?
- Can changes in China’s domestic market help companies as growth slows?
The media is often dominated by China’s new economy companies. However, it’s important not to forget that a number of what we deem to be old economy companies are changing in response to China’s rapidly evolving landscape. Old economy stocks often have stable business models and are more accurate with growth and earnings estimates.
When a country has been through a period of rapid expansion, sudden economic growth can result in some competitive advantages being lost. To an extent, this has been the situation in the textile industry, in which China has historically had a strong competitive advantage. Rising cost of cotton and labour costs, coupled with an increasing number of competitors in South East Asia and Africa in particular, have resulted in some companies looking to innovate to stay ahead of the game.
While some textile and garment producers in China are keen to take advantage of the cheap labour costs elsewhere, there are those that believe this is a short-sighted approach. Although wage costs have increased, the workforce is becoming more skilled and efficient which is advantageous for companies seeking to develop their products. Higher wages also benefit employees as a consumer and can expand the domestic market.
There is also the school of thought that it is only a matter of time before countries with cheap labour catch up in terms of wage growth and develop the skill set required to become significant competitors to China. Therefore, the key is to innovate and remember that margins are an important consideration, not just costs.
One company we have identified through our research that is adapting its business model is Best Pacific, a leading one-stop solution provider of lingerie materials. Its comprehensive product lines make it an ideal partner for lingerie brands as it keeps inventory levels down, shortens production timescales and has strong innovation and product development capabilities. Best Pacific has a number of global brands as its customers, such as Calvin Klein, M&S and L Brands, which includes Victoria’s Secret and La Senza among others. Most recently, the company used its R&D capabilities to introduce lace to its product offering and to develop a cross-over between lingerie and sportswear lines. Although lace currently accounts for a small proportion of sales, the expectation is that it will become significant over the next 3-5 years. We believe that by adapting its business mix and improving its competitive advantage, higher margins are likely to result in time.
There are a number of companies across various sectors that are adapting to global challenges. Additionally, domestic demand is opening up new markets for companies that are prepared to adapt their business model to the explosive growth of China’s middle class. Our belief is that despite lower growth expectations in China in the near term, there are plenty of opportunities where we can add value through stock-specific insights.