To read Henry Blodget’s first dispatch from Hong Kong, click here.
In Hong Kong, between dumplings at Wang Fu and beer at the Foreign Correspondents’ Club, I stopped by 2 Pacific Place to learn how professional investors invest in China.
I met with some of the best. Beyond its reputation as a symbol of connection capitalism, the Carlyle Group is also an investment firm, and a big one at that. It manages $19 billion of assets and employs 300 people in 14 countries. The firm’s strategy is to “leverage local insights,” and it accomplishes this not only by having a local presence—Asia investments are managed out of offices in Bangalore, Seoul, Shanghai, Singapore, Tokyo, Hong Kong, Mumbai, Sydney, and Beijing—but by hiring natives.
Both Carlyle managing directors I met, Wayne Wen-Sui Tsou of the Asia venture fund and Xiang-Dong (X.D.) Yang of the Asia buyout fund, are from China. Both have MBAs from Harvard, and Tsou also has an M.S. in electrical engineering and a J.D. Both have more than a decade of professional investment and Wall Street experience. Both control hundreds of millions of dollars and have armies of analysts scouring China for opportunities. Both, needless to say, are fabulously well-connected.
It is pleasant to think—as the financial press forever suggests—that with a little gumption and homework, we will unearth opportunities that Tsou, Yang, and their brethren miss. In some cases, we can (we win at roulette occasionally, too). And in some cases even TCG, et al., makes awful mistakes. But before we bet the farm on a China stock—a topic this series will return to—we should recognize that we are at as much of a disadvantage in this endeavor as we would be batting against Randy Johnson.
According to Yang, China’s entry into the WTO opened the door for buyout funds, which take control of companies, then fix, grow, and/or sell them. Many China buyout opportunities result from the Chinese government looking to unload state-owned enterprises, and the deals are so complex that only a handful of firms can do them. Here, TCG and other foreign funds are benefiting from a temporary bit of good fortune. A recent swoon of China’s domestic stock market has shrunk capital that would otherwise be available to local buyout groups. So the Carlyle Group has cash to spend now that Chinese firms don’t. TCG fears native competition: In every Chinese city, Yang says, there is someone with more connections, cheaper capital, and better information. One of Tsou’s investments, a lithium-ion battery company, suddenly faces competition from a factory built with a fortune made in the Chinese real-estate market. Foreign China investors are also stiffer competition, Yang says. Americans, Europeans, and others aren’t making the really dumb mistakes they made in the early 1990s.
The Carlyle Group’s buyout investments include a department store chain—which is thriving as the wealth of some Chinese consumers skyrockets—a consumer finance company, and the largest manufacturer of artificial Christmas trees.
Making an artificial tree these days means more than pouring green plastic into a mold. Boto, the tree-maker that Carlyle bought most of for $136 million, employs 8,000 workers at a 3-million-square-foot factory in Shenzhen, including 50 in research and development. The company makes 400 different types of trees, including green, gold, silver, flocked, frosted, pre-lighted, and fiber-optic, and it ships more than 6 million a year. Some of Boto’s trees spray snow, some have real pine cones, some play music, some rotate, and some count down to New Year’s and then launch into “Auld Lang Syne” (according to the Wall Street Journal, the latter model took five months to design and sold a disappointing 500,000 units). Consumers hate putting trees together, so some of Boto’s open like umbrellas. Boto is developing a tree that assembles itself at the touch of a button, and someday, perhaps, the company will tackle the real advantage of the competition: smell.
Why does Boto need the Carlyle Group’s money? In part because the plastic Christmas-tree industry is under attack from the biological Christmas-tree industry. A month ago, the National Christmas Tree Association jubilantly reported that the sale of “Real Christmas Trees” (their caps) in the United States increased to 27 million in 2004, while consumption of artificial trees declined. “Consumers are obviously demanding more of the traditional, farm-grown, natural trees instead of the fake ones from China,” the chairman of NCTA’s Market Expansion Task Force declared. The association hammers on the risks of “possible metal toxins like lead” and notes that artificial trees clog landfills “forever.” (NCTA leaves it to others to point out that biological trees are used once, shed needles, die for the cause, and occasionally burst into flames.) If not for the fact that American companies make “fake trees,” too, the NCTA would no doubt also play the job card: the Real Christmas Tree business employs 100,000 people on 22,000 farms—another instance of “China” threatening an American industry.
The Carlyle Group is a member of an American industry, too, of course, and the several hundred American pension funds, endowments, and others it invests for are doing fine. The firm doesn’t release statistics by fund, but, as a whole, it returned $5.3 billion to investors last year—including, perhaps, investors who manage the 401(k)s of some in the Real Christmas Tree industry.
Next: Riding China’s Maglev train—zero to 270 in three minutes. As always, please send feedback, corrections, and suggestions to chinagoldrush@yahoo.com.
