Arthur Ntale 
James Moncrieff 
Dear clients,
What image does ‘Made in China’ conjure up in your mind? You’d be forgiven if it wasn’t electric vehicles, container ships, cutting-edge batteries and renewable energy. In fact, China is now a dominant global player in all these areas and more.
Investors should take notice – and double-check their portfolio holdings. In our own case, many of our portfolio companies are disruptors in their fields of expertise. So a big part of our job is to ask “who might disrupt the disruptors?”
As part of our regular scanning of the horizon, Investment Partners @James Moncrieff and @Arthur Ntale, recently spent a week in China to see at first hand how Chinese companies are becoming leaders in higher-value goods. The trip gave us plenty of food for thought and prompted us to reassess our portfolio companies’ competitiveness and defensive moats.
China’s ambition to move up the manufacturing value chain is nothing new. Back 2015 it highlighted ten key industries where it wished to become a global leader under its ‘Made in China 2025’ plan.
What is new is the pace of change. Since our last visit four years ago, China has overtaken Germany, Japan and South Korea to become the world’s largest exporter of vehicles, and quickly. Chinese auto exports have quintupled since 2020[1].
Its industries are also becoming much more sophisticated. You might be surprised to learn that China installed half the world’s industrial robots in 2021[2]. Meanwhile, the performance of Chinese-made semiconductors in Huawei’s latest smartphones have far exceeded expectations.
China’s ability to manufacture at vast scale and export at rock-bottom prices spells trouble for the west’s manufacturers of higher-margin goods. Just as China came to dominate areas such as household appliances and solar panels, the west may now struggle to compete with a slew of good-quality Chinese products that range from cars to robotics, aircraft engines and semiconductors.
Know what you own
Having tightly focused and conviction-led portfolios of 25-40 stocks means that we can assess our exposure to China relatively easily. Where we do have exposure, it has been chosen carefully and is via companies that our research indicates have strong competitive advantages.
We currently have no direct investments in China. This is partly because of the high bar we set for portfolio companies in terms of quality and consistency of earnings and growth, but it’s also driven by liquidity, governance and policy risks that must be considered when investing directly in China.
‘Kicking the tyres’ of the companies we invest in and monitoring the strength of underlying trends is central to our long-term investment approach. It is essential that we remain alert to anything that could derail the long-term compounding ability of our portfolio companies, whether from China or elsewhere. We will keep scanning the horizon for such risks.
Best wishes,
The Investment Team
Disclaimers
- Past performance should not be seen as an indication of future performance.
- The value of investments and the income from them may fluctuate and are not Guaranteed.
- Investors may not get back the whole amount they have invested.
- Changes in rates of exchange between currencies may cause the value of investments to diminish or to increase.
This is not a financial promotion. This is provided for information only.
[1] FT.com, China’s electric vehicle dominance presents a challenge to the west, 5th January 2024. https://ifr.org/downloads/press2018/2022_WR_extended_version.pdf https://www.ft.com/content/de696ddb-2201-4830-848b-6301b64ad0e5
[2] International Federation of Robotics, World Robotics 2022 (presentation), October 2022.