Arisaig Partners

Back on the ground in China: 8 anecdotes from our first post-Covid visit

The Arisaig team were back in China last month visiting Shenzhen, Dongguan, Guangzhou, and Beijing. Given the scale and complexity of the country we steer clear of making any great proclamations but below are eight anecdotal reflections from our visit. Our general sense is that China has returned to normal and people are very much back to work and life, however, demand will remain weak for a period as consumer confidence builds over time. It is widely covered that property prices have been weak, which inevitably has dampened enthusiasm via the wealth effect. Whilst consumers are out and about, our sense is that business confidence could lag even further behind. Fundamentally, people in China remain uncertain of the future and the knock-on impact is that companies are unwilling yet to spend on hiring and capex.

1. Traffic is back and people are out and about 

The crowds in Guangzhou are surging, and it appears that the pandemic is completely over. Walking on the streets of Tianhe District, the density of people in the streets was high. Similarly in the morning work commute at 9am in Shenzhen. Though we weren’t there for long, we found Dongguan to be a notably quieter exception. This is a city in the heart of the Pearl River Delta economic zone that has historically been an important manufacturing centre – it is estimated that 75% of the nearly 10 million people that live in this city are migrant workers. There could be pain for these cities as China evolves its economic model, and as export demand drops for geopolitical reasons. Sample size of just one, but something to keep in view.

2. Mask wearing is not endemic despite covid opening being so recent

The team travelled by train, plane and automobile during their trip. The only place where mask wearing was required was on the Singapore airlines flights into the country. On the ground in tier 1 cities we would estimate mask wearing at 70%, much lower than we anticipated. When we visited the parks, as well as restaurants, it was clear that the elderly were also confident enough to return to normal life.

3. COVID infrastructure has gone

Throughout our long trip, the only remnant of the lockdown we found was in Beijing: one lone COVID swabbing booth in the process of being dismantled, as well as a testing sign.

4. Food delivery is structurally important in China’s major cities and infrastructure has evolved

Meituan riders (in their yellow jackets) dominated the streets in cities we visited. Meituan is now delivering 50 million orders per day (on average) vs 27 million pre-COVID. Food deliveries in China are highly efficient as 20-minute deliveries have become a hygiene factor for success in Tier 1 cities. Cities are adapting, and riders are asked to drop orders on racks in the lobbies of shopping malls or office buildings, and message the customer that the food has been placed for collection. This saves the time required for riders to send the orders to door. What this means is that Meituan riders can deliver 40-50 orders per day compared to riders elsewhere who can only deliver 25-30 orders. Order density is perhaps the crucial determinant to enabling favourable unit economics in the food delivery space, in our experience.

5. Competition in food delivery has increased but Meituan remains dominant in terms of delivery speed and offering

We ordered from the same merchant on both Meituan and Douyin, the new competitor. Meituan’s delivery was twice as fast as Douyin’s. It also had a greater selection of merchants and menu items for customers to choose from, as well as providing a complete delivery log and real-time GPS tracking. An anecdote we heard during our trip: “Consumers who use Douyin tend to have the time to kill, while those who use Meituan are looking to save time and want it fast.”

6. Healthcare enhancement is a focus for the government post-COVID, and aligns to government focus on moving up the manufacturing curve

The lack of healthcare infrastructure in China was brought to light during COVID, and is something that the government is taking steps to address. For example, China has a much lower number of ICU beds compared to the US (18 vs 40 beds per 100k people). By FY24, China aims to increase the total number of ICU beds to 600,000 from fewer than 200,000 last year. Investments will be made across other healthcare verticals also. Local companies that invest in innovation will benefit and win out over Western peers who aren’t willing to meet pricing levels demanded by the government.

In terms of local healthcare businesses, our meeting with Mindray and expert calls continued to reinforce the strength of the manufacturing base in China. ‘Made in China’ is not what it used to be. You can find Mindray products in teaching hospitals in the US and Europe, a clear endorsement of their quality, but they are priced 20-30% lower than Western-made peers. Despite its growing reputation abroad, Mindray’s local market is still very much its primary growth opportunity.

7. EVs are rapidly taking over the car market

All the ride hailing cars we took when in China were EVs except for Beijing where combustion engines still dominate given the car lottery system in place to restrict new additions to the roads. When visiting a car mall, it was noticeable that BYD was the only showroom with a crowd whilst foreign brands, including Toyota, Honda were dead quiet with sales staff standing idly. Electric is the way now in China, whether on 4 wheels or 2. Based on our discussions with EV drivers and salespeople, it was clear that consumers knew they were buying a battery as much as a car. For example, consumers have the perception (rightly or wrongly) that the BYD battery is the best and safest. For Tesla, the showroom showcases their single-piece casting technology (as shown below) and salespeople emphasise how safe the cars are in crash situations. More broadly, the attraction is that the battery warranty for Tesla is tagged to the car so a transfer of ownership means the new owner will be covered, whereas with BYD the battery warranty cannot be transferred. Because of this, Tesla cars enjoy superior resale values compared to BYDs.

8. Humble and hardworking management teams are back at work, and focusing on building brands and businesses

A lot of international commentary on the Chinese market tends to centre around the globally important tech industry, but these trips are helpful for shining light on the numerous businesses focused squarely on China’s vast domestic demand. Few would assume the below picture is the headquarters of a USD16 billion restaurant empire. One of our key takeaways from the channel checks was that the strength of the Haidilao brand has remained undimmed by the pandemic. During our visits, it was clear to us that despite being in the worst locations (corner stores or at high levels of a building) within inferior malls (within a high traffic shopping district), consumers are willing to go out of their way to dine in Haidilao. Its competitor restaurants, meanwhile, are mostly located in the highest traffic malls due to their inability to attract dedicated footfall. As a result, Haidilao’s rent as a percentage of sales, just 4%, is a fraction of that of its peers.

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