By Perry Wu
The foreign devil you know may be better than the devil you don't know. But judging by the hype generated by some recent Chinese tech IPOs, many investors prefer the devil they don't know. They seem to think the way to profit from China's tech boom is to buy home-grown Chinese tech companies. They are ignoring the ancient Chinese idiom to not assume "distant things are fragrant but those nearby are not" (yuan xiang jin chou).
With new Chinese tech companies going IPO every month and investors looking for the new new thing, it helps to remember this saying. When all is said and done, it probably will not be the newest Chinese tech companies that will give tech investors in China the greatest returns over time, but the familiar names that investors know already. A more secure and lucrative route just might mean buying a well-managed foreign company that knows what it is doing in China and has proven successful.
Take a look at Dell Computer. Sure, Dell's business is still anchored in the U.S. but it is now enjoying enormous success on the mainland. Since opening for business as a direct seller on the mainland in August 1998, Dell has planned and executed its China strategy almost seamlessly. Sure there have been copycats in design and marketing cropping up in China, but China is now Dell's fourth largest national market. And it's growing in China.
According to Dell, in the past year Dell's shipments in China increased almost 60%, four times that of the rest of the industry, with revenue in its China business increasing 40%. With its customer service center headquartered in Xiamen, its notebook and desktop computer customer service capacity has tripled since opening just six years ago. It now employs over 2,000 employees dedicated to customer service and has won several quality control certifications for its customer service, such as ISO 9001.
Dell's strategy of cutting out the middle man by selling directly to consumers has turned into a winner with China's exceptionally price-conscious consumers. According to the IDC company, Dell's market share in China in the fourth quarter of 2003 was ranked number three at 7.3%, a very high percentage considering the enormous number of hardware manufacturers in China.
It is not just with consumers that Dell has been successful. Some of the bluest of China's blue-chip companies now do much of their IT hardware purchasing with Dell. PetroChina, China's mammoth oil company, and China Telecom, China's number one mobile service provider, now select Dell for much of their hardware needs.
Also very important from a marketing standpoint, Dell's customers in China include a lot of early-adopters. This is the customer segment that marketers so covet because early-adopters are the people who first use a product. Average consumers then follow suit and buy the product. Early-adopters in China include the numerous small tech companies that now dot the business landscape of cities such as Beijing and Shanghai.
Most important to investors, Dell has an established track record of creating shareholder value. No doubt, Michael Dell, who just stepped down last week as head of the company, has made himself fabulously wealthy. Forbes magazine recently ranked him as the tenth richest man in the world, with a net worth of US$13 billion. But in the process, he has made countless other investors well off too. When Dell went public in the 1980s, Michael Dell was a young upstart techie with grand visions of what his company could accomplish. He has used other people's money like it should be used: to make other people rich (as well as himself). Now, how many Chinese tech companies out there will have done that over a long period?
From January 1, 1990 until the present, Dell's stock has grown nearly 600 times (from six cents to thirty five dollars, split adjusted). With a current market capitalization of US$90 billion, that sort of shareholder value growth will never happen again with Dell (unless you believe its market cap can be in the tens of trillions of US dollars-more than the combined GDPs of both the U.S. and China). This proves that Michael Dell knows how to translate growth and profits into shareholder wealth. Whatever Dell's performance in the future, albeit less than in the past, shareholders will share in the wealth.
Microsoft has an even better record of creating shareholder wealth, but in terms of China, it has fallen on its face. It is still seeking a magic strategy that will allow it to end-run the rampant piracy, even among large Chinese companies, of its software and growing Chinese gravitation in government and business towards Linux. But it just doesn't pay to try to pirate a Dell computer, so Dell has not had major problems with piracy besides occasional battery fiascos.
Add to all this, there have been persistent rumblings of a possible appreciation of the CNY, only adding to the attractiveness of Dell as an investment in China. Even without the CNY appreciating, the continuing decline of the U.S. dollar in other Dell national markets could make this an especially timely investment.
Even so, the valuation of Dell is still not cheap. Dell's P/E ratio currently stands at 33, in an industry especially vulnerable to economic cycles. But over time, it almost surely will be a better bet than just about any currently-listed Chinese tech company. These companies are currently not just overvalued but ludicrously expensive. Imagine now buying a share of Sina.com, Sohu, Netease and Dell Computer and placing each share certificate in a box, leaving the box unopened for ten years. After ten years, which share do you think will show the greatest appreciation? It almost certainly will be Dell, in no small part due to China.
So if you believe in the continuing tech boom in China, then buy Dell, a full participant in the boom. If you buy most listed Chinese tech companies, you can expect the managers to focus on ill-gotten gains (from stock dilution), ill-conceived acquisitions (from over-dependence on bankers and over-active libidos), and mostly, ill investors. You may not electrify your friends by buying the familiar and un-exotic Dell company, but you will be rewarded financially in good time.
About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.