China's toughest competition is at home

China’s businesses have made striking gains in technology and manufacturing. Their closest rivals are often just down the road. After September’s Foord Orient Express investment immersion, Foord South Africa Chief Investment Officer NICK BALKIN considers what that rivalry means for the companies we own.

It has been ten years since my last visit to China. I expected to see better products and more advanced technology. Yet what stayed with me was how little time a successful business has to enjoy its success. Chinese companies are competing fiercely with one another.

The Orient Express began in Singapore, where Foord’s global investment team is based, then took a group of investment advisers and professional investors through several Chinese cities. We met managers, visited businesses and saw how people use their products. I came away with a sharper sense of the pressure those managers face at home.

At Unitree, more than half the workforce works in research and development. The robotics company redesigns its humanoid robots every six to twelve months. That speed is impressive, but it is also necessary when rivals are improving their own machines just as quickly. A company can build a better robot and still struggle to earn much from it before the next one arrives.

Beijing helps to set the pace of innovation. The Chinese government chooses industries it wants to advance and offers cheap land and power, tax breaks and faster approvals. Entrepreneurs put those advantages to work. China’s political system may be communist, but its businesses are intensely commercial.

Yet the state can also change the rules. Companies have room to innovate while their plans fit Beijing’s priorities. Those that disturb the social harmony the government expects may face penalties. Government support can help a business grow rapidly, but it gives investors less certainty about what happens when that business grows in an unwelcome direction.

Chinese electric vehicles show how much this system can achieve. The old assumption that a Chinese car must be inferior to a Western one is out of date. Quality has improved sharply, including at the luxury end of the market — yet the number of capable local manufacturers makes life difficult for each of them. A new feature soon becomes something customers expect from every brand. Prices come under pressure while development costs keep rising. The cars may be excellent without the carmakers proving a good investment.

Tencent offers a different perspective. South Africans have a particular interest in the company since almost every one of us has some indirect exposure to the stock via Naspers or Prosus, while Foord also owns Tencent directly in the Foord Global Equity Fund. Its shares have fallen by a third over the past year, even though WeChat remains woven into daily life for an enormous number of consumers. Management is now changing its approach to AI. We think the share price leaves too little credit for what Tencent could earn from a network that a billion customers use throughout the day.

The companies we met were also finding ways to deal with restrictions on trade and technology, including building or renting capacity abroad. Their response was practical, though these workarounds cost money. And the political risks have not disappeared.

I returned from the Orient Express tour with greater confidence in the capabilities of several Chinese businesses we own, and some that we do not. I was reminded, too, how hard their rivals make it to hold on to an advantage. China’s pace is good news for its customers. For shareholders, the question is how much of the benefit a company can keep.