What is needed to realize Chinas potential?
A trip reveals what’s often not easily seen
By Kim Da-ye
The bus was driving at over 100 kilometers per hour for more than an hour.
During the journey from Fuzhou Changle International Airport to the city center, spread out on either side of the expressway were endless construction sites, massive port, factories, civil engineering works including many overpasses and tunnels and densely covered mountains with small temples scattered here and there.
The scale of the landscape was dazzling, and Fuzhou, the capital of the Fujian province, isn’t even a major city in China. Fujian Province is the 17th largest with a population of 37 million ― compared to the largest of 104 million in Guangdong Province.
The burgeoning city in southeastern China clearly shows the nation’s growth potential on which Korean investors are betting when they buy shares in Chinese companies listed on the Seoul bourse.
The Korea Times last week visited seven of the listed companies with the Korea Exchange (KRX).
Shared aspects were noted among the companies. Many of them are small- and medium-sized enterprises and regional players that have shown double digit growth in sales in the past few years.
They also target middle- or low-income earners in developing regions near their bases.
One of the larger firms was China Engine Group, China’s largest lawnmower maker. It is also the largest motorcycle and gear manufacturer in Fujian Province.
China Engine’s sales grew 16.4 percent to 927 million Chinese yuan in 2010 from 797 million yuan in 2009 while operating profit rose 10 percent from 202 million yuan to 222 million yuan.
The firm’s strategy is to produce lawnmowers and motorcycles at low prices, so that consumers can replace old models with new ones relatively sooner than in the past. It says that its Sanli-brand lawnmower costs one fifth the price of one made by Japan’s Honda.
Another is China Great Star (CGS) International, a sports shoe manufacturer, which saw its sales, operating profit and net profit rise by 20 percentage points between 2009 and 2010.
The company said that its Worldcape brand is China’s 10th largest sportswear brand with a three percent market share.
With some 2,400 franchises, the CGS targets middle- or low-income earners living in the relatively less developed regions of central and western China and doesn’t have an immediate plan to target the higher-income group.
One exception that targets the wealthy was China Ocean Resources, a deep-sea fishing company specialized in catching groupers. The fish is mostly farmed, but China Ocean goes out to the Indian Ocean to catch wild groupers that are considered a luxury dish in China.
The company said that one kilogram of grouper sold at 175 yuan in the first quarter this year, up 25.1 percent from the previous quarter.
These businesses are now expanding in size to meet the fast growing purchasing power of the Chinese population.
Producing tin cans for warm drinks and soups, this year China Food Packaging will open two plants which would add 900 million to the current production capacity of 1.5 billion cans a year.
Its CEO Man Chan said it doesn’t have an agenda to raise capital because of the firm’s excessive profits. Sales grew 64.6 percent to 718 million yuan in 2010 from a year ago while the operating profit rose 38.5 percent to 62 million yuan, the firm’s latest unaudited earnings showed.
Another sportswear manufacturer East Asia Sports is mulling over acquiring a clothing manufacturer in Jiangsu Province for 30 million yuan before September in a bold venture to innovate the company.
The new facility in the site as large as 33,000 square meters is expected to cost 100 million yuan.
East Asia’s CEO Ding Shao Ying said that through the acquisition, the company plans to increase the portion of clothing to 50 percent of the total sales as its profit margin is higher than that of shoes.
The China Engine Group is in discussion with an American company to set up a joint venture and expand to enter the U.S. lawnmower market while considering buying another Chinese company for less than 100 million yuan.
The expansion, however, seems to be made at the expense of research and development (R&D) as most of the visited companies failed to explain any detailed R&D investment plans.
Their plants were traditional manufacturing sites with no cutting-edge machinery or equipment while their end products lacked original technology.
China King-Highway Holdings was an exception with unusual skills which has to invest in R&D due to the nature of its business.
This company produces nutritional supplements whose main ingredient is Cordyceps militaris, a mushroom resembling a caterpillar.
This rare fungus is known to cost 55 million won per kilogram, and the company claims it has a unique technology to culture and amplify components of Cordyceps militaris.
Between January and March, its sales rose 44.5 percent from the same period in 2010 and operating profit climbed only 0.15 percent because of sales and maintenance costs that grew 53.6 percent.
The company is also diversifying its portfolio to include cosmetics products based on the rare fungus.
Another problem the Chinese firms are facing is soaring wages as most of these companies are in labor-intensive industries, particularly the sportswear sector.
At one of CGS’s plants in Quanzhou, Fujian Province, workers at the sewing machines were young with many still only teenagers.
Kunliang Wu, chairman of CGS, said that young workers tend to quit after a few years and the firm provides them with free meals and a room shared by four in the dormitory that has a basketball court and an internet cafe.
The ultimate solution is outsourcing a large part of the production. The sportswear maker outsources 60 percent of its products ― mostly cheaper items ― and makes high-priced ones in its own factories.