The CFA Chicago Book Club met on Feb. 17 to discuss The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia by Shaun Rein. Below is a summary of the discussion based on the reading:
The End of Copycat China by Shaun Rein is a sound read. We started off our discussion by opening it up to the members of the CFA Society Chicago book club and let each individual share a little bit about them and what they found interesting in the book.
We discussed the innovation cycle which you can isolate into three stages. The first being the copycat stage. This is where an emerging economy takes developed economies technology and implements into their own markets to initiate growth. This is a natural process of economic evolution where there is plenty of low hanging fruit. When there is plenty of low hanging fruit coupled with poor intellectual property rights, individuals will not have the incentive to innovate hence stage 1 of the innovation cycle.
Stage 2 of the innovation curve is when companies start to innovate specifically for their target market. For example, stage 2 would involve taking advanced technologies and tailoring to the Chinese people.
Stage 3 is innovation for the world. There is no longer the low hanging fruit, the advanced technologies have been tailored to the emerging economy, and now companies engage in R&D, intellectual property rights are strong, and innovation becomes the way to new long term sustainable growth.
Pollution was obviously a hot topic. There was a point when Beijing had an AQI (Air Quality Index) of 700! To put that in perspective, Los Angeles hovers around 20 and Paris officials will stop half of the city’s traffic if AQI hits 50. China has an abundance of coal. 70% of their energy needs come from coal. Increased auto sales have also added to the pollution problem. They have only recently begun uncovering possible shale formations which they will use U.S. advanced technologies in hydraulic fracturing and horizontal drilling to uncover oil & natural gas. Alternatives to coal are solar, wind, or nuclear power. China is in the process of building nuclear reactors to promote clean energy though it is going to take many years to get up to their target. Solar and wind are both not as stable as coal and given coal is in abundance, coal is relatively inexpensive which further promotes toxic carbon dioxide emissions. The air can be so bad that many people plan their entire day around the AQI while checking their smart phones like they check the stock market. E-commerce is soaring because people don’t want to go outside. They rather hire a delivery guy to bring them groceries than risk going outside. There are 8-year-old girls developing cancer from the poor air quality. N95 masks are what everyday people need to protect themselves. Several marketing strategies result from this. For one, you start to see designer or Sponge Bob N95 masks on an everyday basis. Another example is having malls that offer garage parking that allow for consumers to spend the entire day at one location. For example, having a movie theater, restaurants, shopping, gym, and many other options to avoid having to go outside. Expatriates described it as living on Mars. Given the excess natural gas production in the U.S., the U.S. will be at an exporting advantage as the U.S. begins to liquefy natural gas or convert it into methanol to sell to the Chinese to promote clean energy. The Chinese will be spending billions over the next 50 years investing in clean energy for land, water, and air.
The Chinese are evolving in their brand taste. They are saying good bye to the flashy giant Gucci and Louis Vuitton logos and focusing more on brands that better represent China and their culture. In addition, they are saying goodbye to the mainstream brands and moving towards a higher degree of exclusivity. The knockoffs are starting to fade. Status seems to be important throughout the history books. The new status symbol is sending your kids to elite boarding schools in the U.S.
The emerging middle class in China is growing strong at 875M people. The growth rate is high and they have a higher degree of confidence than the middle class. They plan on buying houses, cars, and traveling in the future. There is a changing dynamic going on in travel. Its seems as though the middle to upper class are looking for places that are more exotic where other Chinese haven’t been. Think New Zealand, Maldives, Mauritius, or South Africa. Paris and Rome have become too common just like the mainstream clothing brands. They don’t want to just copy westerners any longer. They want brands specific to China.
Food safety is a driver of consumer spending. KFC in the 90s is a great example. The Chinese are going to pay a premium for food and health to help offset the issues with pollution. Stay far away from the street vendors, at least the ones that don’t have anyone in line.
Upcoming Book Club Schedule:
March 17, 2015: Bust: Greece, the Euro and the Sovereign Debt Crisis by Matthew Lynn
April 21, 2015: The Forgotten Depression: 1921: The Crash That Cured Itself by James Grant
May 19, 2015: How Latin America Weathered the Global Financial Crisis by Jose De Gregorio