AgBank IPO and Jilin Trip Report
Yesterday, I was interviewed on CCTV News about Agricultural Bank of China (AgBank)’s upcoming share offering, which is shaping up to set a new record as the world’s largest IPO. You can watch the clip here. I also wrote a column on the subject about a week ago for Motley Fool, which you can check out here.
Last week, I visited Jilin province (in China’s northeastern Rust Belt) with a delegation from the American Chamber of Commerce in China (Amcham-China). I promised I would share some of my impressions.
One of the highlights of our trip was a tour of the FAW-Volkswagen auto plant in Changchun, one of the largest car manufacturing facilities in China. FAW stands for “First Auto Works” — China’s first automobile factory, which was founded in the city in 1953 as part of the first five-year plan. Volkswagen has had a joint venture with FAW since 1990, and our tour was given by one of the many German managers who have made Changchun their home away from home.
Just based on visual impressions, the plant we toured matches any of the auto plants I’ve visited in the U.S. or Europe, including BMW’s main plant outside Munich, in terms of automation, organization, and efficiency. I can’t say how it matches up on metrics like quality control, but it is clearly a world-class production facility — which is something I certainly can’t say about most Chinese factories I’ve visited.
Most of the “imported” brands in China are actually made in joint-venture facilities like this. Although China aspires to become an export base, supplying the world with Chinese-made automobiles, so far these factories have their hands full supplying the domestic market. As I’ve mentioned before, Chinese demand for buying automobiles has exploded these past few years. According to our guide, the main challenge at FAW-Volkswagen is ramping up output just to keep pace. The company’s sales were up 60% year-on-year. If they can make a car, they can sell it, and their salespeople are constantly begging them to make more. This is much the same story I heard last year at a General Motors plant in Guangxi, which produces minivans that are selling like hotcakes in China’s rural areas. The managers there were probably the only GM employees on the planet who weren’t worried about their jobs. (We asked, by the way, about the Honda strike and whether FAW-VW had encountered any similar labor difficulties. Our guide said that no, they hadn’t, in part because VW pays its Chinese workers more than Japanese carmakers do, but that they definitely saw the need to pay attention to employees’ rising expectations, particularly in regards to working conditions).
This apparently insatiable Chinese demand for buying new cars reminds me to mention an interesting conversation I had with a Toyota salesman in Beijing about a week ago, when I took my own car in for its 6-month maintenance check-up. We got to talking about business, and I mentioned the discrepency that many analysts have noted between runaway car sales in China and relatively flat gasoline consumption. Various commentators have offered up different explanations for the gap. Gordon Chang, for instance, has argued that it proves the auto sales figures are fraudulent. Jack Perkowski contends that the divergence is due to people trading up from gas-guzzling “inkfish” (the wonderfully descriptive Chinese term for cheap vehicles that spew clouds of exhaust) to more fuel-efficient modern cars. I’ve heard other knowledgable analysts offer two other theories. The first is that a great deal of gasoline is being diluted between the refinery (where estimates of apparent demand are being measured) and the pump, in a sort of petro version of China’s melamine-contaminated milk scandal. The second is that inexperienced Chinese auto buyers tend to underestimate the cost of driving and maintaining their car on an ongoing basis, and end up driving them less than their Western counterparts.
Our Toyota salesman had the following thoughts. First, he believes (as I do) that the boom in auto sales is real, and that it is being driven by genuine retail demand, not just by fleet sales to state-owned enterprises (SOEs). One would expect him to be thrilled about it, but he wasn’t. He says he sees a lot of people who are buying cars, not because they need them, but because they have reached a certain income level and a car represents that accomplishment. He thinks that since most people can’t afford an apartment, in the face of skyrocketing real estate prices, they buy a car instead as a way of validating their middle class status. Given the worsening parking situation — he says most residential developments in Beijing plan parking spaces for just 40% of their tenants, even as many tenants are now buying second cars — he says it would make more sense for customers to purchase smaller cars, but when they come into the showroom, all they want to see are big SUVs. Status is very important — he says businessmen need at least a Toyota to have credibility, while a BMW or Mercedes might attract too much attention. Many of these buyers, in his view, have no idea how much owning a car really costs, and based on the odometer readings he sees during maintenance checks, they end up not driving them very much — consistent with the last explanation I gave for the gas gap.
In any event, I found this conversation an interesting backdrop to my FAW-Volkswagen factory tour. Not only did we visit the main assembly plant, but also the surrounding network of parts suppliers, including Fuyao Glass (which makes windshields) and a JV between FAW and Johnson Controls (which makes seats and interior consoles). They all seemed to be thriving. Whatever the rationale for Chinese demand, in my view China’s car buying boom is real, and seems to be laying the foundation for a strong industry.
I wish I could say the same for real estate — or rather, I wish I could say that my impressions of Changchun and Jilin City changed my mind about what’s happening in China’s property sector. If anything, they made me more worried about 2nd and 3rd-tier cities.
Even before my plane landed in Changchun, I could tell from just looking at the city out my window that it was in the midst of an incredible building boom. Row upon row of high-end villas and apartment towers were sprouting like crops all along the outskirts of the city. The same image greeted us on our approach to Jilin City by bus — I couldn’t even count the number of cranes rising over half-completed projects. It’s not any one development, it’s a cumulative impression made by dozens of projects, one after another, on a scale that’s overwhelming. Remember, despite the booming auto industry, this is still a relatively depressed and out-of-the-way part of China. I don’t like to use the Dubai comparison — China is not just a dream in the desert — but I was in Dubai two years ago, and the resemblance is creepy.
We visited one luxury residential development up close. I won’t name the developer, not only because they were our hosts, and I don’t want to be ungracious, but also because they don’t really deserve to be singled out. They’re just doing what dozens of other developers are doing, all around them. This particular project, we were told, had 100 buildings (although I only saw about 40 or so on the display model), the last of which had just been completed. Over the past two years, prices had risen from RMB 3,000 per square meter to RMB 6,000. The entire project was 90% sold out. It was clear, though, that it was also completely unoccupied. Row upon row of buildings stood in pristine luxuriousness, with not a resident in sight.
Maybe that’s just a temporary situation, and the new owners plan to move in soon, but given the equally empty condition of countless developments surrounding it, I’m betting it’s far more likely they’re holding multiple units empty as investments, like I’ve seen all over China. The developer’s brochure portrays the project as a replacement for the “slums” that once occupied those same districts. But based on my conversation with the taxi driver who took me back to the airport, it’s unlikely any former “slumdwellers” could afford to live there. Asked whether he had considered buying one of the new apartments being built, he said they were way too expensive for working people like him to afford.
A couple interesting tidbits: I asked the developer how the government’s cooling measures, designed to reign in a potential property bubble, were affecting their activities. The manager told me that those policies mainly affect Beijing and Shanghai, and have not really had much of an impact on the market in Changchun. Second tidbit: it turns out that the developer we talked to owns a big stake in the main provincial bank, which controls lending for property development and mortgages. Convenient, but a bit disturbing.
In addition to the auto and real estate sectors, we also visited a factory that makes huge wind turbines — part of China’s big green energy technology push – a semiconductor fab, and a pharmaceutical plant churning out vaccines (apparently Changchun is a major production center for vaccines, because they store and transport well in the relatively cooler climate). We also visited the huge petrochemical refinery in Jilin City that caused the devastating 2005 benzene spill which contaminated the Songhua River and cut off drinking water to several major cities, such as Harbin, for weeks. Being polite guests, we didn’t bring up the topic, and they didn’t mention it either.
One last little item I noticed, as our bus was driving around Jilin City: a statue of Deng Xiaoping. Now that may not seem so unusual, given that Deng was China’s paramount leader for nearly 20 years, and the father of the country’s modern economic miracle. There are certainly plenty of statues of Mao all over the place. But as I understand it, Deng specifically avoided having any statues or similar depictions of himself, in order to distance himself from Mao’s “cult of personality,” of which Deng was highly critical. I’ve seen a few billboards featuring Deng, but I’ve never seen a statue. Wikipedia notes that Shenzhen, the special economic zone that Deng made the focal point for his reforms, erected one in 2000, while his hometown in Sichuan province put one up in 2004, to commemorate his 100th birthday, but that’s pretty much it (there were rumors, last year, of Deng replacing Mao’s face on the 100 Renminbi note, but nothing’s come of that so far). Still, he keeps a pretty modest profile.