Capricorn Fusion China Fund joining forces around a shared investment belief
Leuven, Belgium: 13 October 2020 – The Capricorn Fusion China Fund invests in companies with transcontinental ambitions between Europe and Asia (with a focus on China). We look at both directions as the underlying rationale, i.e. the complementarity between the two economic blocks, works both ways. There is however nuance to be applied when looking more closely at the value drivers for both directions. I would therefore like to use this article to zoom in on the road to China we see for European companies.
The opportunity for European companies going to China often refers to the size of the Chinese economy and the growth rate it will continue to deploy in years and decades ahead. A quick peak at the size of the global economy and the underlying growth rates in different zones suffices to illustrate our belief that European companies should look for ways to contribute to this mega-trend. To paraphrase a statement of our cornerstone investors:
“The choice between being a mere spectator or an active contributor is a no brainer, certainly if you want to take responsibility for Europe’s future generations”.
There are many ways to structure the underlying forces underneath the economic mega-trend, but for Capricorn Fusion China Fund, it hinges on a set of 4 underlying developments.
The Changing Chinese Consumers
Throughout the 20th century, America’s middle class was perceived as the world’s economic growth engine. In today’s world, this engine has shifted towards Asia-Pacific, which will account for 66% of the world’s middle class by 2030, allowing us to play into the changes in demographics and how that impacts consumer preferences over the next decade. China’s working population, which stood at 806 million people in 2018, which is more than double the 375 million combined working population of the US and Europe. The increased household incomes and consumption will elevate about 180 million low- and lower-middle-income households to a higher income bracket between 2018 and 2027 and lead to different consumption patterns:
Other than the sheer size, two demographic groups have our special attention:
- By 2027, 22% of the population in China, or roughly 324 million people, will be over 60 years of age. The ‘silver economy’ will provide numerous opportunities for products and services tailored to these demographics. Elderly consumers will focus on health-related products and services such as disease treatments, dietary supplements, senior care and insurance. Senior housing is expected to increase in importance. This is especially true as the children of this generation are the by-products of the one-child policy, which was in effect for 35 years. In this respect, China can learn immensely from Europe’s mature Silver Economy.
- On the other side of the spectrum, the generations born in the 1990s and 2000s will account for 36% of the population by 2027 and they differ substantially from other generations. These generations have received substantial financial support from their parents and grandparents while growing up in a period of rapid expansion empowered by technology. These young and digital savvy consumers will be less price conscious than their predecessors and will seek out highly personalized and premium goods and services. Additionally, more two-child families will form in the coming years, which will lead to an increase in demand in areas such as housing, education, health and baby-related goods and services.
China as the factory of the world is often referred to as a thing of the past. We fully agree with this statement, if looked at in isolation. China has however clearly understood that a shift towards the production of higher value products is needed. Since 2001, China’s manufacturing net output has grown at a staggering compound annual growth rate of 12.8%, compared to 1.4% during the same period in the US, and virtually no growth in the UK. In 2017, China accounted for 27% of global manufacturing value-added, which is 1.7 times the US, 2.8 times Japan and 4.4 times bigger than Germany. Between 2004 and 2018, China’s manufacturing (value-added) net output averaged $2,2 trillion annually.
By 2030, China has the ability to boost its manufacturing net output by another $2 trillion as a result of its immense scale, increasingly powerful domestic markets, top notch internal supply chains, productivity gains through advanced manufacturing systems and increasing investments and skilled labour in high-tech.
An uncontested truth is that China is home to the largest online community in the world. Since the opening up of their economy, internet giants in China have exponentially been able to perform a digital makeover on key aspects in the daily lives of Chinese people. Alibaba, Tencent, Baidu, Meituan Dianping and Didi are some of the giants that have enabled this in recent years.
These giants are investing resources to increase their exposure into the industrial internet. As such, they are deep-diving into new verticals and B2B markets, delving into areas from product design and manufacturing to supply chains and logistics. Their efforts, in line with China’s vision, spearheads the transformation of traditional industries. This is especially true given the massive amounts of digital data, tools and know-how that has been generated within China through the rise of the consumer internet. These factors will in turn provide a strong basis to make inroads into the Industrial Internet, which still lags behind in China compared to other developed economies. This provides a timely environment for economic growth and we see internet giants delve deeper into the industrial internet in order to serve a larger part of the internet’s value chain.
It comes as no surprise that China’s urbanization strategy in the past four decades has resulted in improved living standards and prosperity in China. In 1978, China’s urban population compared to the total population was just below 18% and now the figure is 61%. This spurred continuous efficiency increases in supply chains, boosted China’s productivity and was a leading factor for China’s rising middle class.
The second urbanization wave that started in 2016 will be driven by smart tech supercities, which has implications for industries such as telecommunications, tech, agriculture, utilities and more. By 2030, the urbanization rate is expected to grow to 75%, which will add 220 million new urban dwellers with half of them settling in super city clusters.
We have a firm belief that opportunities will arise for European companies in China’s huge and ever-growing economy. The fact that 20 years from now China will be the world’s largest economy at 1.5 times US GDP is an important symbolic metric supporting that conviction.
We have identified four key areas that China will excel in over the next decade and allow it to grow into the world’s leading economy. As mentioned throughout the investment thesis, the four key areas are:
- Changing consumer patterns as a result of changing demographics.
- Manufacturing capabilities and the shift from labour intensive production to high-end manufacturing.
- The digitalization in China and the effect it will have on the industrial internet, where China still has significant catching up to do compared to their Western counterparts.
- The second wave of urbanization, and how that will impact urban dwellers in the next decade.
Capricorn Partners’ know-how in lifestyle brands and the industrial economy, digital innovation such as artificial intelligence, industry 4.0 and digital health, cleantech and healthcare allows us to source and identify great European businesses that can serve each of these key GDP growth drivers in China.