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Guinness Atkinson Asia Brief
December 2004
Edmund Harris
Fund Manager Asia Focus Fund, China & Hong Kong Fund
China Moves into the Mainstream
The Personal Computer market was founded by IBM in 1981. In 2004 IBM announced its exit from the market with the sale of its PC division to China’s largest computer supplier, Lenovo Group. They will see their sales increase over 4 times to $12 billion and they will be able to use the IBM brand for five years and it gives them control of the ‘Think’ trademark for Notebook PCs. Lenovo has appointed Stephen Ward from IBM as CEO, it is shifting its headquarters to New York and the company will list on the New York Stock Exchange within a year. IBM will retain a stake of 18.9%.
The purchase gives Lenovo a huge boost to its computer business; but as the first Chinese company to acquire a world-famous brand it has also taken on a massive weight of expectation. So far, Chinese companies have focused on acquiring companies to secure the supply of natural resources required for economic growth. The current deal is a step forward. Lenovo has not done this deal to serve a national interest but for sound commercial reasons. The acquisition will make them the number three PC maker in the world behind Hewlett Packard and Dell. The company will gain access to US and European markets but it will also give them a major brand with which to tackle the home market and fight the inroads made by HP and Dell. Finally, the quality of Lenovo’s product will gain an immediate and substantial lift.
These issues have some major implications. Firstly, this is the largest foreign acquisition made by a Chinese company and it was done with commercial rather than national security issues in mind. As spending slows and the developed market becomes saturated with PCs, China and Asia will become the new battleground both as target markets and as a cheaper source of manufacture. Dell clearly views China as a key part of its international growth strategy. As a consumer market China is looking irresistible. There are approximately 65 million computers in China, second only in the world to the US with 200 million PCs. But over the next ten years growth in China’s PC demand is estimated by CSFB to exceed 16.5% a year on which basis it will surpass the US in 2011. It should be noted that China surpassed the US in TV ownership in 1991 and in mobile phones in 2002.
Secondly, acquisitions of this kind will allow Chinese companies to leapfrog years of domestic corporate development. The comparison is often drawn between China’s economic approach of low-cost manufacturing and industrialization on the one hand and on the other, India’s creative approach which has given rise to the development of rapidly growing IT Services and Pharmaceutical sectors. At present it is the Chinese approach which is generating the greatest wealth and this could give it the financial muscle to overcome the perceived lack of innovation in China’s industrial model.
There are many who are reluctant to accept China’s emergence onto the world economic scene as anything more than a temporary phenomenon. However, the weight of evidence points to the contrary. China is now the major swing factor in demand for commodities: it has taken up 47% of the increase in oil production since 2001 and it took up 95% of the increase in world production of alumina in 2003. China has attracted over $50 billion of foreign direct investment each year in 2002, 2003 and 2004. Its foreign exchange reserves stand at over $500 billion. And finally the size of the middle class, the spending class with annual household income of $12,000, is expected to grow from an estimated 40 million to 120-140 million over the next decade.
The first phase of China’s emergence is there for all to see. The next phase, signalled by Lenovo’s acquisition of IBM’s PC division is just beginning. The weight of economic growth is shifting to Asia and the mobilization of China’s economy, with all it imbalances, will continue that process. Chinese companies are likely to become much more familiar as potential acquirers. And if those lobbying for China to revalue their currency by 20% or so get their way then acquisition targets are going to become 20% cheaper. China is set to become a whole lot more mainstream.
Edmund Harriss
December 13, 2004
The Guinness Atkinson China & Hong Kong Fund invests in foreign securities which involves greater volatility, political, economic and currency risks and differences in accounting methods. The Fund is non-diversified meaning it concentrates its assets in fewer holdings than diversified funds. Therefore, this Fund is more exposed to individual stock volatility than diversified funds.
As of September 30, 2004, the Fund did not hold any shares of Lenovo Group. The Fund’s holdings may change at any time due to ongoing portfolio management. References to specific investments should not be construed as a recommendation by the Fund or Guinness Atkinson Asset Management, LLC to buy or sell the securities.
This information is authorized for use when preceded or accompanied by a prospectus for the Guinness Atkinson China & Hong Kong Fund. The prospectus contains more complete information, including investment objectives, risks, fees and expenses related to an ongoing investment in the Fund. Please read the prospectus carefully before investing. Mutual fund investing involves risk and loss of principal is possible.
Distributed by Quasar Distributors, LLC (12/04).
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