This week I realised first-hand the difference in timelines around individual countries’ experiences of the spread of Covid-19. Opening a lockdown care package from friends in Hong Kong, I found all their spare hand sanitiser and surgical masks because, well, they felt we had more of a need for them now.
As we see virus-imposed lockdowns move west, and the focus turns to Italy, Spain, the UK and the US who are still trying to stymie the spread, it’s worth checking in on how the first-affected communities are doing. With the West following a lot of safety measures already adopted in mainland China, it could give us an idea of things to come once we start to emerge on the other side.
Supply chains suffering
Today’s reports of a 40% fall in Chinese industrial profits might not be too surprising, given the measures the nation has had to take to quell the spread. But, there’s an interesting narrative behind the figures. This number takes into account the fall in supply, as Chinese manufacturers forced into lockdown were unable to fulfil orders for foreign buyers. And whether that means building tools, clothes or electrical goods, a lot of those buyers were European, keen to get their products before factories shut down. Fast forward a few weeks and the other part of this fall in profits is due to the same eager buyers shutting up shop, even with manufacturers coming back online.
For now, any business with a Sino-European supply chain is likely to continue experiencing disruption. But, whereas in previous decades this might have included a high percentage of Chinese industrial output, recent governmental efforts to turn China into a nation of consumers have put a different slant on how fast different business sectors will recover in the country.
On a trip to London a few weeks ago, Fidelity investment director Catherine Yeung filled me in on how that change could shape the recovery. She said: “There‘s a Chinese sports apparel company called Li Ning. What they did over the past couple of years was to forge this new strategy called China Li Ning, with sports gear that you can only buy in China. The margins are higher than the main brand and they’ve shown the collection in fashion weeks around the world but the point is they weren’t copying other international brands - they were making something truly Chinese and identified with the consumers.”
And, with fewer hurdles to reaching their own domestic market and shoppers happy to buy Chinese brands over foreign incumbents, it is the consumer space that’s starting to show signs of life first.
According to Fidelity analysts in the space, more than 80% of retail stores have reopened in China with the local brands the first to regain interest.
Elsewhere, shoppers coming out of quarantine are heading to buy simple consumer staples like instant noodles and frozen foods over bigger-ticket purchases like luxury goods.
And while that might seem obvious, our analysts estimate over 50% of the restaurants in large Chinese cities have reopened, so there is the opportunity for discretionary spending to grow back.
Most of the interest so far has been in fast-food chains rather than high-end venues, with large restaurants seeing daily turnover around 50% lower than pre-outbreak levels.
As consumer confidence increases, and the prospect of a summer holiday to Europe fades, discretionary spending in restaurants and luxury goods could actually outstrip previous years. China cut a luxury consumption tax last year, adding to the incentive to shop locally.
The likes of the tourism sector and European/American-focused export businesses still face an uphill struggle but initial insights show there are some areas of opportunity. The more global supply chains are affected, the more Chinese consumers could look internally - leading foreign names will be hoping they can regain their momentum in the country as soon as possible.
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