The reopening of China could light a fire under two very different companies in our Automation and Evolving Consumption themes.
A big story for investors since the start of this year has been China’s abrupt reopening in early January, which has spurred investors to pour money into both China and global emerging markets at one of the fastest rates in living memory. This could be welcome news for global economic growth this year, once the peak of infections has passed, although it could also add to the inflationary pressures that central bankers are so desperately trying to reduce.
The reopening is having a multiplier effect across Asia, not least because China’s trade with ten of its neighbours has grown by a remarkable 71% since US tariffs were applied in 2018, and with India by 49% over the same period. This surge will only accelerate as China reopens, partly due to a change in Chinese investment patterns.
Gone is the profligate lending that characterised China’s Belt and Road initiative in the pre-pandemic era and spawned a number of dubious infrastructure projects - including Sri Lanka’s Mattala Rajapaksa airport (dubbed by Forbes ‘the world’s emptiest international airport’) and Montenegro’s ‘highway to nowhere’. Instead, China now appears to be focusing on providing investment to economically useful and geographically close neighbours.
For global thematic investors such as ourselves, large-scale macro-economic developments such as these are naturally of interest – they show us the prevailing wind and help direct us towards fruitful investment sub-themes for medium-term exposure.
Our key focus is on finding quality businesses that are likely to flourish as a result of social change and also demonstrate the potential to provide our clients with above-GDP growth over a 10-year time horizon.
In November we wrote about increasing our exposure to Hong Kong-listed AIA, a market leader in the high-growth business of personal insurance in Asia. AIA’s sales model relies heavily on face-to-face meetings between clients and their advisers, and the latter will no doubt be delighted by the new opportunities provided by China’s reopening. This article focuses on two very different Japanese companies that stand to benefit from increased economic activity as Asian economic activity ramps up and China’s experience-hungry consumers loosen their purse strings – Keyence (Automation) and Shiseido (Evolving Consumption).
Vision of the future
Keyence is a world leader in designing and making the sensors, machine vision and measuring instruments needed to automate areas such as factories and warehouses. Following the supply chain disruption of the pandemic and with an eye on labour shortages and rising labour costs – which have shrunk the payback period for investment in automation - warehouse operators and factory owners are beginning to take notice.
As a technologically-advanced country with an ageing population and expensive labour, it is no surprise that Japan was early in producing a company such as Keyence, which now boasts an impressive list of industry firsts. Keyence’s leadership in applying machine vision and integrating automation with the internet of things makes it not dissimilar to ASML, whose technology has become essential in the world of semiconductors.
China’s e-commerce giant JD.com lays claim to having opened the world’s first robot-operated warehouse as long ago as 2017, but the vast majority of warehouse owners are still in the low foothills of introducing automation and figuring out how unpredictable humans can be made to dovetail with the speed and precision made possible by introducing robot co-workers – or cobots. In fact, data from 2021 shows that approximately 80% of the world’s warehouses still have no automation whatsoever, which flags up the huge potential that is up for grabs in this investment subtheme.
Shiseido – still looking good at 151
A world away from dark warehouses, the skincare products created by Shiseido offer an excellent way to tap into Chinese economic growth and changing consumer preferences.
Founded in 1872 by a former pharmacist to the Japanese navy, Shiseido is now one of the world’s largest cosmetics companies and is increasingly able to compete with names such as L’Oréal and Estée Lauder at the prestige, higher-margin end of the cosmetics market, where Shiseido seeks to position itself.
Prestige cosmetics show strong thematic growth credentials, and our research suggests that Shiseido’s ability to improve its operating margins towards those achieved by the likes of L’Oréal and Estée Lauder has been underestimated by the market.
The popularity of its products among Chinese consumers is a key engine of growth for Shiseido: in 2013, 13% of its revenue came from China, while in their last set of financial accounts China accounted for over 33% of total revenues.
The company has a history of innovative marketing stretching back at least to 1902, when it installed a new-fangled soda fountain in its Tokyo store and introduced Japanese consumers to ice cream. In 2022 Shiseido and Revive, a ‘personalised digital brand experience company’, launched a popular AI-driven personalised makeup service that enables customers to have a virtual makeup audition and receive personalised product recommendations.
Shiseido has proved adept at making itself welcome in China through initiatives such as building its second-largest research and development centre in China – its largest overseas market - and creating a US$142mn China-based innovation fund7.
Shiseido’s business is also surprisingly resilient when economic conditions worsen. Far from being a dispensable luxury item, face cream is considered by many to be a necessity and is subject to the Lipstick Effect, whereby sales of some beauty products actually rise in recessions as consumers seek the comfort and reassurance of small indulgences. For Chinese consumers these indulgences could even be guilt free: Shiseido’s green growth and circular economy initiatives include plans to launch over 150 refillable products in the Chinese market in 2023.
 Wall Street Journal, China Increases Trade in Asia as U.S. Pushes Toward Decoupling, 28 December 2022
 https://www.forbes.com/sites/wadeshepard/2016/05/28/the-story-behind-the-worlds-emptiest-international-airport-sri-lankas-mattala-rajapaksa/?sh=31e8a96e7cea; https://jalopnik.com/highway-to-nowhere-drives-entire-country-deep-into-debt-1847204969
 See, for example, A New Era of Overseas Lending, The Economist, 23 February 2023.
 Bloomberg, 08 March 2023
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