AB on the Ground

Wuhan and Changsha, Central China

20 June 2019

5 min read

Days of On-the-Ground Research

Cities in Central China

Companies Visited

China’s growth story seems familiar: robust infrastructure investment combined with heavy manufacturing driven by cheap labor—and a healthy dose of pollution. But those keeping close tabs on current trends among Chinese businesses know that these assumptions don’t always hold anymore.

AB’s China team makes frequent visits around the country to get an on-the-ground look at how this dynamic economy is evolving. Our recent journey took us to Wuhan, a city of 11 million in central China, a transportation and manufacturing hub. We also stopped in Changsha, a city that has experienced phenomenal growth over the last decade.

In a packed four days, three important trends emerged: more firms are automating operations as labor costs rise; Beijing’s push for environmentally responsible regulations is driving industry-wide changes; and the trade war with the US is on everyone’s minds, especially telecommunications manufacturers suffering the brunt of the fallout.

Here’s what we heard and saw.

Day 1: Grocery Shopping in Wuhan

Our first stop was at the French supermarket chain Carrefour, an early arrival in China with expansive superstores. In the centrally located store, Chinese brands—from detergents to snacks to wines—were prominently displayed, while foreign products were often hard to find.

At Hema, Alibaba’s brick-and-mortar supermarket, the bright, compact layout seemed to be geared toward younger, mobile-savvy customers. A conveyor belt spanned the floor, and staff buzzed about picking and packing orders placed via the Hema app.

Despite the different shopping experiences, at both supermarkets it was clear that local brands have become very competitive across most consumer staples. Moreover, automation is now common and integrated with mobile payments. Even at the older Carrefour store, self-checkout coupled with mobile payment is becoming the norm.

Chinese brands on prominent display

Conveyor belts stretching the floor at Hema

Self-checkout using facial recognition

Day 2: From Automotive Manufacturers to Telecom Makers

We got an early start en route to the suburban headquarters of Dongfeng Motor, one of China’s largest state-owned automakers. Given the recent slump in domestic auto sales, our discussion covered sales drivers and potential government stimulus policies. We also focused on the impact of the government’s China VI regulations—set to take effect one year ahead of schedule—to reduce harmful vehicle emissions.

Our next stop was the distribution headquarters of China Resources Pharmaceutical Group (CR Pharma), which supplies large government-owned hospitals. CR Pharma’s logistics system was highly automated. The main warehouse area was darkened because the robot sorting system relies on wireless tags and does not need to “see.”

In the afternoon, we visited two technology companies—a reminder of how Wuhan has evolved beyond heavy manufacturing into a tech hub. At FiberHome, a maker of telecommunications equipment, the impact of US–China tensions and the risks to China’s telecommunications equipment ecosystem took center stage in our talks.

An auto showroom at Dongfeng

Touring the logistics center at CR Pharma

Day 3: Tracking Speed and Temperature

We began our last day in Wuhan at Jointown Pharmaceutical Group, a niche regional drug distributor. Though it competes with CR Pharma, Jointown focuses on smaller clinics and independent pharmacies in small cities and rural areas.

Jointown’s logistics facility was even more sophisticated than CR Pharma, handling larger SKUs (stock keeping units) with lower volumes. We were most impressed with the software tracking system, which gave real-time updates on everything from delivery-truck location and speed to refrigeration-unit temperature.

In the afternoon, we visited fiber-optic cable manufacturer YOFC. Like our chat at FiberHome the day before, we focused on the trade war and its potential to delay the global 5G rollout.

Logistics control center at Jointown Pharmaceutical Group

Visiting the fiber-optic cable company YOFC in Wuhan

Day 4: Changsha’s Construction Machinery Manufacturers

From Wuhan, we traveled south to Changsha, a city of 7.5 million people. Though it takes four hours by car, we arrived in only an hour and a half by hopping on China’s high-speed train.

We began at Aier Eye Hospital, a private hospital that carved a niche as a specialist in a range of eye care services. We discussed eye care demand in China, as well as financing for the hospital’s rapid expansion. Afterward, we headed to the newly listed Bank of Changsha for a discussion about government monetary policy and liquidity management.

Equipment at Aier Eye Hospital

Sany Heavy excavators

Following lunch, we visited two leaders in construction machinery that are also part of AB’s China equity portfolio: Zoomlion and Sany Heavy Industry. Both are gaining market share from foreign brands and are expanding into new machinery categories.

We learned that new environmental regulations are generating orders. For instance, because of new sensitivity to dust and noise pollution at urban construction sites, 24-hour work activity is now generally prohibited. Municipalities want jobs finished more quickly to minimize pollution and disruption. The solution? More equipment so contractors can squeeze as much activity as possible into a narrower time window.

As we wrapped up, we noted how both the domestic environmental agenda and the geopolitical trade friction have real—sometimes dramatic—fallout for both individual companies and entire industries. We were also grateful that growing automation had yielded a bumper of coffee vending machines to power another packed visit.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

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AB on the Ground

Wuhan and Changsha, Central China

Day 1: Grocery Shopping in Wuhan

Day 2: From Automotive Manufacturers to Telecom Makers

Day 3: Tracking Speed and Temperature

Day 4: Changsha’s Construction Machinery Manufacturers

Solutions

Lifetime Income: Bolstering Financial Security in Retirement

Leveling the Retirement Income Playing Field

Resources

The Plan Sponsor’s Guide to Retirement Income

AB on the Ground

Wuhan and Changsha, Central China

Day 1: Grocery Shopping in Wuhan

Day 2: From Automotive Manufacturers to Telecom Makers

Day 3: Tracking Speed and Temperature

Day 4: Changsha’s Construction Machinery Manufacturers

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