Tales from the road: Velocity of change in India & China
Global Emerging Markets
30 August 2018
In both India and China, the
speed of change is evident at
almost every turn.
In both India and China, the speed of change is evident at almost every turn.
From an investment point of view, this is exciting to say the least. Among other things, my most recent visit provided further evidence of how firms are tapping into strong trends such as e-commerce growth, digitalisation and the emergence of the rural consumer. As a result, this has given me increased confidence in the long-term growth prospects of companies which are already held in the strategy, as well as presenting a range of potential new investment opportunities to be dissected by the team back home.
Watching friends effortlessly split the
bill after dinner in Shanghai highlighted
perfectly for me the pace of change
occurring in emerging markets. Using
smartphones, the restaurant received
payment and individual contributions were
covered with just a few swipes – all in a
matter of seconds. The small episode, for
me, summed up a willingness to embrace
innovation and growth that I witnessed
from the companies and people I met in
both China and India.
The first stop on my research itinerary was a factory run by
auto-parts company Minth Group (not held in the strategy)
in Ningbo, about three hours to the south of Shanghai.
Known for its manufacturing quality and expertise, the
Minth factory lobby showcased an impressive array of the
company’s products, back lit by blue lights, held up in
Perspex and arranged in the shape of a Cadillac. On the
shop floor, there were more ‘space-age’ elements, as
autonomous robots navigated around the production line,
guided by QR codes placed on the floor.
Automation has been an area of heavy investment for the
company as it looks to improve the efficiency of its
production capabilities and reduce costs. With over 16,000
employees, the majority of whom are directly involved in
production, wage inflation is a constant challenge for
Minth, and a large driver of its bottom line. Transitioning
some of the labour-intensity in its operations to robots
therefore seems a logical solution. What’s more, the
payback for a robot, that can cost as little as 200,000
renminbi (around US$29,300)*, is relatively inconsequential
over a year, and the output (such as polishing and painting)
is to a better standard than the human equivalent.
The payback for a robot is relatively inconsequential over a year, and the output is to a better standard than the human equivalent.
In 2017, the company bought more than 700 robots and it
expects to invest in a similar number this year*. Importantly,
Minth has considered the social implications of such a
move, in particular the effect on morale that could come
from a shift towards greater automation. In fact, the
company does not view the move as impacting the existing
workforce, rather maintaining a flat headcount as sales
grow. Minth regards automation as a vital means of
servicing a growing level of demand, while managing its
AUTOMATE TO ACCELERATE
The sheer scale of demand growth, and the operational
challenges of meeting it, was also a theme expressed by
ZTO Express (not held in the strategy), China’s leading
express-delivery firm, which I met at a conference in
Beijing. The company expects the industry to grow from
processing 41 billion parcels in 2017 to 70 billion in 2020*
– a result of the phenomenal rise in e-commerce and
smartphone-enabled ecosystems, all driven by China’s
increasingly affluent population. Against this backdrop of
growth, ZTO believes it has the potential to take an even
larger share of what already is a fragmented industry.
Last year, the firm processed more than six billion packages, and in May reported a 36% year-on-year rise in first-quarter
revenue. However, continued strong growth is dependent on successfully scaling its operational ability. This is where
technology adoption and increased automation will be vital. ZTO’s sorting hubs currently process around 150,000 parcels
per day, with each of its sorting personnel handling around 700 parcels per day. While impressive, these numbers pale in
comparison with the kind of productivity gains the company believes is possible with automation, with sorting lines able to
handle up to 20,000 parcels per hour*.
Unsurprisingly, the company’s exposure to such a
powerful growth theme is attracting significant attention.
The day before my meeting with ZTO, e-commerce giant
Alibaba (held in the strategy) announced it had led a
consortium of investors to buy around 10% of ZTO, for a
reported US$1.4 billion*. Alibaba has been expanding its
presence in its logistics network for some time
(it already has a controlling stake in a logistics affiliate,
Cainiao). This move will provide further strategic
partnering support to its own operations. The crucial
question from here is around ZTO’s ability to scale its
operations, the sustainability of the current cost structure
and whether its new Alibaba relationship will enable even
greater access to the growth potential of e-commerce.
We will continue to keep a close eye on this company.
Rapid shift from coal
The rapid pace of change is evident across several
industries, as highlighted by a business held in the
Emerging Markets strategy, China Gas, which I visited on
this research trip. The company has seen fast expansion
into rural areas, with a major catalyst being China’s
ambitious environmental programme. The country is
seeking to shift from coal to cleaner-burning natural gas
– a transition which is happening at a pace across a vast
swathe of rural China.
As one of the country’s leading gas distributors, the
company has been more aggressive than its peers in
pursuing the rural natural gas opportunity. I travelled to a
rural part of Tianjin, about two hours outside Beijing, to
see first-hand how people’s lives are changing rapidly as
a result. Not that long ago these households would be
using coal for heating and cooking, but now they are
being supplied with natural gas. I was hosted by a local
resident in their home, who showed me their natural gas
pipeline connection and new gas-operated cooker (which
can also be sold to them by China Gas). The company
plans to connect around 16.5 million homes (both in urban
and rural areas) to its gas network over the next three
years*. It is a huge growth opportunity. Of course, the
growth outlook is intertwined with potential operational
challenges that we will be monitoring with the company.
It is not easy to connect this amount of homes over a
three-year period, but we have a good understanding of
the business model and will continue our dialogue with
China Gas on its progress.
Demand from all areas
The rural consumer was also a prominent topic at a
conference I attended in Mumbai. Consumption rates
outside India’s cities were strong last year, with many
companies at the conference predicting that growth
would remain robust this year and into the next. A large
proportion of rural incomes comes from either the
regional or national government, and subsidies have
been pouring into rural regions in the build up to
elections to the State Assembly and a general election
As a result, companies exposed to rural demand have
fared well in recent years. This came across in my
meeting with Indian motorcycle and scooter
manufacturer Hero MotoCorp (not held in the strategy).
Hero cited year-to-date industry growth rates of 14%,
with 40% of its sales volume attributed to the rural
economy*. The impact of government spending on
levels of rural demand is stark. Hero’s rural business
underperformed the urban segment from 2012–2015
when the government was more focused on controlling
its fiscal deficit.
Year-to-date industry growth rates of 14%, with 40% of its sales volume attributed to the rural economy*.
Using the digital fulcrum to lift home ownership
Government funding was also behind another of the
major growth themes discussed at the conference.
Affordable housing has been a major policy objective
for the Modi administration over the last three years,
including aggressive growth targets for lower-income
housing supply. Several reforms, such as incentives to
low-income groups and an interest-subsidy scheme have
resulted in a sharp rise in new housing projects in the
affordable-homes segment. Most recently, India’s
Finance Minister Arun Jaitley announced a dedicated
‘affordable-housing fund’ that aims to boost
construction specifically in rural areas.
These wide-sweeping initiatives are delivering some
powerful opportunities for a range of businesses,
including construction, banks and mortgage-financing
companies. One company I spoke to on the trip, HDFC
Bank (held in the strategy), has a broad exposure across
a number of areas that will benefit from the Indian
growth opportunity, providing products and services to
urban and rural India, both via a physical and digital
The company highlighted investment in technology as a
significant differentiator for its operations. Similar to my
meetings with ZTO and Minth in China, it is clear HDFC
is also committed to harnessing the potential of
technology: revamping its processes digitally for faster
turn-around times, using improved data analytics to
assist credit underwriting, as well as making the
customer experience much smoother. And there’s no
shortage of ambition here. It wants to expand its digital
capabilities to grow the hugely under-penetrated Indian
mortgage market via fully automated approvals from its
web platforms. New digital initiatives have included a
‘Smart account-opening app’ (which processes credit
ratings and pre-fills forms); a virtual relationship
manager; and the launch of Eva, an AI-powered
‘chatbot’, a conversational banking tool available via a
mobile app. In our view, if HDFC gets this digital
strategy right, it will establish a considerable
competitive moat for years to come.
The data explosion
The digital race was a theme among many of the
companies I spoke to during the conference, but none
more so than Reliance Industries (not held in the
strategy). The company ostensibly engages in
hydrocarbon exploration & production and petroleum
refining, but has also developed significant operations
in telecommunications, providing the largest 4G
network in India.
Data consumption in India is a perfect example of the
rapid pace of growth. Reliance Industries claims that
India in just a few months, has risen from 155th in the
world in terms of data consumption to first. Subscribers,
on average, use around 10 gigabytes (GB) per month,
which equates to a total of 5 billion GB consumed on its
network per quarter. The driver of the rapid growth has
been threefold: the introduction of 4G, a large market;
and, crucially, incredibly low prices for data, with 28GB
of data costing just US$2.50.
The impact of cheap data has been very significant.
Indeed, Indians are already streaming broadcasts such
as live cricket, rather than installing fixed lines in their
homes. Key to this disruption is the increased take-up of
smartphones among consumers. Around 9–10 million
smartphones with 4G capability are sold per month, and
the company estimates 210 million users have already
shifted across to 4G. However, there are still around
550 million feature phones in the market – so significant
room for growth remains*.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should
not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
* Source: Martin Currie, company presentation.