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Peter Fuhrman
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Chairman, Founder and Chief Executive Officer at China First Capital ( , China-based international investment bank and advisory firm for private capital markets and M&A transactions. China First Capital has a disciplined focus on -- and strives for a leadership... More
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  • Qinghai Province – The Biggest Small Place in China
    In most things to do with China, the “law of big numbers” applies. A population of 1.4 billion mandates that. So, whether it’s the fact there are over 50 cities larger than Rome, provinces with populations larger than any European country, or that more of just about everything is sold every year in China than anywhere else, the reality of China’s huge population is always a hulking presence.

    Except for Qinghai Province. Here, the numbers are so small Qinghai can seem like one of the Baltic States. The province is a little larger than France, yet has a population of only 5.2 million, or 0.3% of China’s total. The capital city, Xining, where I’m now writing this, has about one million residents. Tibet to the south and Xinjiang to the north are both autonomous regions, rather than provinces. Both are far more well-known and talked-about, both inside China and out, and benefit from much more investment from the central government.

    Qinghai is unlike anywhere I’ve been in China. It is so empty as to be almost desolate. Xining is in the midst of a very rapid transformation from a dusty low-rise backwater to a more obviously modern Chinese city, with high rises, two new expressways, broad boulevards and shiny new shops selling brands familiar in other parts of the country. It sits alongside a tributary of the Yellow River, wedged like a sliver between low barren brown mountains.

    Xining is also the most conspicuously multi-cultural city I’ve been to in China, with a Han majority sharing the city with a large contingent of Tibetans, and a very significant population of Hui Moslems. The Dongguan mosque, on the city’s main street, is one of the largest in China. As many as 30,000 people can worship there. Every twenty paces or so you’ll pass a small brazier with a Hui cook barbecuing lamb kebabs.  Most also sell yak milk yogurt. It’s delicious, in case you’re wondering.

    The Tibetans are more concentrated outside Xining. Qinghai makes up most of the Tibetan region of Amdo, and much of the province’s landmass is inhabited by Tibetan herdsmen. The current Dalai Lama was born not far from Xining, and had some of his first schooling atKumbum Monastery, a 450 year-old establishment that has long been among the most important sites of religious worship and study for Tibetan Buddhists.

    Kumbum is a half-hour drive from Xining.  I’ve wanted to go there for about 30 years, and finally got the chance on this trip. I always felt a pull towards Kumbum because it was established to venerate Tsongkhapa, the founder of the Gelugpa tradition in Tibetan Buddhism. I’ve lived for the last 15 years with a beautiful thangka of Tsongkhapa, and hang it near where I sleep. Here it is:


    If I had a patron saint, it would be him. Tsongkhapa was born where the Monastery now sits, in a small mountain village. The Monastery spreads lengthwise about one mile up a hillside. At its height, it was home to 3,600 monks. Now there are said to be about 500. A lot of the more ancient buildings were destroyed during the Cultural Revolution, and have since been rebuilt. There are also some newer structures in traditional Tibetan monastic style, including one built with a donation from Hong Kong’s richest man, Li Ka-shing.

    Tibetan pilgrims circumambulate the important buildings, do their prostrations, and leave offerings of money and butter. They share Kumbum with Chinese tour groups, who are for the most part respectful, attentive.

    After visiting the Monastery in a steady drizzle, I went to see a doctor at the nearby hospital. I was feeling just fine, but for a little sleepiness from the high altitude.  I’ve had a long, intense interest in Tibetan medicine, and the hospital here is staffed by lamas educated at Kumbum and graduated with the equivalent of a PhD in Tibetan medicine.

    I saw a physician named Lopsang Chunpai, dressed in maroon and yellow monastic robes. He took my pulse, pronounced me healthy, and prescribed a Tibetan herbal medicine called Ratna Sampil, a combination of 70 herbs that is compounded at the hospital. According to the package, it’s used “clearing and activating the channels and collaterals”.

    Though I saw only a very small part of it, Qinghai struck me as an especially lovely place:  a wide, open and arid plateau not unlike parts of the American West. Even accepting the cold winter (with temperatures of 20 to 30 degrees below zero centigrade), it’s hard to understand the high vacancy rate here. It’s population density, at 7 people per square kilometer, is 0.3% of Shanghai’s.

    It’s empty, of course, because comparatively few Chinese have emigrated here. That seems likely to change. The air is clean, the economy is booming and the infrastructure improvements of recent years have made integrated the province much more closely with the highly-settled parts of China to the east.

    Neighboring Tibet and Xinjiang have experienced large Han Chinese migration over the last 60 years. Not so Qinghai. Geography is destiny.  Qinghai, unlike Xinjiang and Tibet, does not border any other country. It has far less military and strategic importance. Xinjiang borders Russia and Tibet borders India. China has fought border wars with both.

    Xinjiang and Tibet have also both recently had some serious ethnic conflicts, including anti-Chinese riots in both places in the last two years.  Although its population is about 20% Moslem and 20% Tibetan, Qinghai has stayed peaceful. It is China’s melting pot.

    Qinghai is rich in mineral resources, including large seams of high-grade coal. As the transport system improves, more Chinese will migrate there to work in mines. Xining, as small as it is, is the only proper city in all of Qinghai.

    The ostensible reason for my visit was to speak at a conference on private equity. The provincial government has a target to increase the number of Qinghai companies going public. The mayor of Xining, who I met briefly, was until recently a successful businessman, running one of the province’s largest state-run companies.

    I met a few local entrepreneurs and visited one factory making wine from buckthorn berries, using technology developed by Tsinghua University. It’s a healthier, lower-proof alternative to China’s lethal “baijiu”, the highly alcoholic spirit, mainly distilled from sorghum,  that is widely consumed across China.

    Up to now, as far as I can tell,  there’s been no private equity investment in Qinghai. I’d like to change that. It’s a special part of China. Though it’s statistically one of the poorest provinces, Qinghai will continue every year to close the gap. More capital, more opportunity, more prosperity — and more inhabitants. This is Qinghai’s certain future.

    Disclosure: none
    Sep 29 11:43 PM | Link | Comment!
  • China’s Booming Mobile Phone Market Is Maxxing Out on Growth
    During the first eight months of this year, 547 million mobile phones were sold in China, a 36% increase over the same period last year. At the current rate, more mobile phones will be sold in China this year than there are mobile users. In other words, on average, everyone of China’s 780 million mobile subscribers will buy a new mobile phone this year.

    Can this possibly be true? Outside of China, mobile phone sales are basically flat, with most of the growth now coming from sales of smartphones like those made by Apple and HTC. Based on the current sales pattern, China will account for over 60% of all new mobile phone sales in 2010.

    What is happening in China that could account for phenomenally high growth rate? I’m at a loss to explain it. Anecdotally, I can’t find much evidence of this remarkably high rate of new phone sales.

    Most Chinese I know are using phones that are at least a year old. Nokia phones are particularly common in my circle. Overall, Nokia is still the biggest selling mobile phone brand in China. But, its sales in China are not doing very well, and the company is losing market share. One reason is that the phones are well-made and tend to last a long time.

    China’s Ministry of Industry and Information Technology compiles the statistics on Chinese mobile phone sales. They do a professional job gathering and transmitting data on China’s mobile market. So, I have no reason to doubt the basic accuracy of the numbers. The absolute number may possibly be off, but the 36% growth rate is probably correct.

    If so, the larger question may not be one of accuracy, but of sustainability. In other words, if mobile phone sales are growing by 36% a year, is there any way that rate of year-on-year growth could continue into 2011 and beyond? I have severe doubts about this. For one thing, if the 36% annual growth rates continued through 2012, overall annual sales will double from the current high level. If so, every Chinese mobile subscriber on average would end up buying two new mobile phones a year. That, as the British like to say, “beggars belief”.

    It may well be that the fantastically high growth rate we now see in China will begin to plateau very soon. If so, the overall market dynamic will change from one of rampant growth, in which even the weakest players register growth every year, to one where a company’s ability to generate sales growth will comes mainly from increasing market share.

    In other words, from a manufacturer’s standpoint, the market changes from one of absolute growth to one of relative growth – or loss. It will happen soonest for products like mobile phones, where the market is reaching saturation.

    There is still plenty of organic growth left for other fast-growing items like new cars, computers, white goods, and a full range of brand name products, from laundry detergent to Italian suits.

    I bought a new phone recently,  an HTC Legend, running on Google’s Android operating system. But, it didn’t register on the Ministry’s figures.

    Like a lot of people living in Shenzhen, I bought my new phone in Hong Kong, where prices are as much as 35% cheaper, and there’s far more certainty of getting a phone with all its original circuitry intact. It’s not all that uncommon for brand name phones in China to be doctored before sale. They look authentic on the outside, but have some cheaper, replacement parts within.

    HTC is still a niche brand in China, though with very ambitious plans for growth over the next year. I bought the HTC in large part because the company is an investor and partner of one of my clients.  I like the phone, and like the fact it’s not an iPhone.

    I have nothing against the Apple product. I just prefer, in phones and most other things, to choose brands that aren’t already dominant in their market.

    Apple phones, either genuine or knockoff, are far more common in China than anywhere else in the world, as far as I can tell. Apple just announced plans finally to begin selling its new iPhone4 in China, months after it went on sale in the US, Europe and much of Asia. The price is still well above the level in Hong Kong, but I have no doubt the phone will sell well.

    Apple computers are still very rare in China. There are very few places to buy one. This is a major untapped opportunity for the California company, since anything with the Apple brand is going to sell well in China. Apple has begun opening retail stores in China, but as of now, there are only two, one each in Beijing and Shanghai.

    Apple is certainly one of the companies that should continue to thrive in China’s mobile market, even as it shifts from absolute to relative growth. HTC too. As for the others, both global and domestic brands, it’s going to be a dogfight.

    Disclosure: None
    Sep 23 10:22 AM | Link | Comment!
  • Great Retail Food Businesses in China Are in Short Supply
     One of the world’s great discount retailing entrepreneurs, Theo Albrecht, died recently. He and his brother built Aldi into one of the world’s largest discount supermarket chains, with consolidated sales likely of over $50 billion. Along the way,  Theo also managed to buy what was then a small food store in Southern California, Trader Joe’s,  and then build it into one of the best and fastest-growing food retailing companies anywhere. 

    Where is the Theo Albrecht of China? The question is not an idle one. No country can now match in absolute numbers or recent financial success the entrepreneurs of China. There are great home-grown Chinese companies everywhere, in just about every industry. But, not in food retailing. 

    This is surprising. Food, of course, is the main thread, along with family, that weaves together Chinese civilization.  As nowhere else, people’s lives are organized around shopping, preparing and consuming of food. While it’s no longer a primary form of greeting as it was until about a century ago, the phrase “吃饭了吗?”, or “Have you eaten?” is still spoken or written by SMS more times each day in China than any other. 

    The most successful retailers in China are, for the most part, all Western companies: Wal-Mart, Ikea, Carrefour, Zara. The most successful fast food chains: McDonalds and Kentucky Fried Chicken. There are Chinese competitors, some of which are quite good. But, in food retailing, the picture is bleak. There are lots of supermarkets in China, modeled on the American style, but none I’ve been to does anything special.  Certainly, there is no Chinese food store that can compare with the two chains Theo Albrecht built. 

    I’ve yet to find a Chinese food chain that even attempts to be a source for quality discounted products, the formula Albrecht’s stores do so well. One result: supermarket food prices in China tend to high, considering income levels. There is no real low-end competition. 

    Chinese love bargains at least as much as Germans and Americans. The Chinese market couldn’t be bigger, or more primed for a great discount food retailer to enter. The fact none has yet to surface in China is a source of real bewilderment to me – in part, because I’d likely be a frequent customer. 

    A Chinese version of Aldi would be a great place to start. For those who’ve never been, Aldi stores tend to be much smaller than a typical supermarket. Everything about an Aldi store is bare bones – the merchandise is mainly stacked in corrugated cardboard shipping cartons, placed in pallets on the floor.

    Aldi stores have a narrow range of mainly brand-name food products, things like cereal, detergent, beer, processed meats. Prices are low, probably around 25%-40% below prices in full-range supermarkets. Customer service is all but non-existent. Everything about the store screams at you: “come here to buy stuff cheap, not for the ambiance”. 

    Aldi’s retail model, with its small stores and efficient use of floor space,  would work well in Chinese cities, where real estate prices are high. A limited range of only the most-commonly bought products is also suited to China. The Chinese market is simpler. People haven’t yet developed a preference, as many Americans have, for stores stocking 200 different permutations of potato chip. Margins at a Chinese Aldi would grow consistently over time. As the number of stores grows, the company would have more buying power and greater leverage with the brand-name manufacturers. 

    If anything, a Chinese Trader Joe’s might do even better. Again, the store size is smaller than a typical supermarket. But, where Aldi focuses on selling mainly well-known global brands, almost everything sold at Trader Joe’s is the store’s “own brand”.

    The Trader Joe’s products are all high-quality, as good or better than national brands. But, the prices can be much lower than branded products, since Trader Joe’s isn’t spending/wasting anything on marketing or advertising. That’s the retail proposition Trader Joe’s makes to its customers: “If you don’t mind buying our brand, we’ll sell you better stuff at lower prices than you can buy anywhere else”. 

    If going to Aldi is like a trip to a supermarket stock room, a visit to Trader Joe’s is far more pleasant. The stores are always in nice areas, with helpful and friendly staff, free samples, wide and well-organized aisles. The customers seem overwhelmingly affluent and educated. They shop at Trader Joe’s because they like and care about good food, but don’t want to pay an unnecessary premium for a big brand. 

    Trader Joe’s sells both staples like coffee, pasta, cooking oil, bread, milk, and also prepared foods, including fresh salads and soups. Non-food items include detergent,  vitamins, pet food, plants, and flowers. Every Trader Joe’s I’ve been to is crowded at all hours of the day. According toBusinessweek, the company has the highest sales per square foot of any food retailer in the US. 

    High quality “own brand” food items at lower prices sold in a nice environment is a retail idea I think would work very well in China’s major cities like Shanghai, Beijing, Shenzhen. There’s a big market for higher-quality food products. What’s more, big brands have only been around in China for about a decade. So, it should be comparatively easier in China than in the US to get people to support a single brand that offers top quality across a range of products. 

    The Chinese market is ready. The big mystery is why no Chinese entrepreneurs have attacked it.  


    Disclosure: none
    Sep 07 10:08 AM | Link | 1 Comment
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