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Small Town China: Personal Perspectives

I am living and working on a long term assignment in Zhejiang Province of China. Since I have several years on assignment here, I decided to try and get a feel for the country. So, I spend much of my free time exploring small town China, not the few major cities like Shanghai. The reason I decided to spend time exploring the smaller towns was to get away from spheres of heavy international influence. Shanghai is a great city, yet most Chinese people do not live there and you can find just about anything in Shanghai that you can find in other international cities like Beijing, London, Mexico City, New York City, Paris, Sao Paulo, and Tokyo. There is nothing wrong with this, I just wanted to get a feel for Chinese China, not "internationalized" China. The region that I spend most of my time in is the eastern part of China between Shanghai and Hong Kong. My home here in China is on the coast near a village of about thirty houses or so. The nearest city is 45 minutes away by bus.

I like to wander into the open markets, grocery stores, dry goods stores, and other shops to see what stuff is for sale...and who made it. Often I go shopping or traveling with Chinese friends. My language skills are still growing, so traveling with friends makes it possible to strike up a three-way conversation with people we meet. I can tell you for a fact that there is a big difference between Chinese people that deal with foreigners on a regular basis and those that have not!

At first, I did this out of curiosity, then it occurred to me that I should keep track of what stuff is widely available for investment purposes. I tend to invest in dividend growth companies that have significant international sales. Coke is the classical example of a company with world-wide sales. I have bought Coke in every country that I ever worked in or traveled through (NYSE:KO). One of my favorite companies is McCormick (NYSE:MKC). I like to buy their spices and I like to invest in the company. I knew that McCormick had international sales, yet this was not real to me until I wandered into a small town grocery store here and saw some Chinese market McCormick Strawberry jam on the shelf. Of course I bought some, you can see it on the left in the picture above. It occurred to me that if small town China was selling a product, then that product probably had significant penetration in the Chinese markets. On the other hand, if I found a product only in a major city, then the demand might be more from foreigners than locals. One thing that I have learned about Chinese small businesses is that they will move fast to import goods that local foreigners will buy. Even in a village if there are some foreigners that shop there.

As I learned more about China, I began to see a disparity between the financial and news media of the USA and what I was experiencing first hand here. One of the larger differences is between the attitudes and motivations that my home countrymen attribute to the Chinese people and the actual attitudes and motivations that I observe here. My observations suggest that the Chinese culture, mindset, and approach to life and its problems are very different than those of European ancestry cultures with Judeo-Christian religious influence. I am fortunate to work with Chinese citizens from many places in China. Not only do I have an opportunity to talk with them, I also get to see the various viewpoints and opinions from other regions.

My personal experience led me to comment on some articles published here on Seeking Alpha. From those comments I received some requests to write some articles. I intend to do that and decided to put up this Instablog post to document my personal perspectives and biases.

So, if I happen to put up another Instablog or get an article published and you happen to read it, please note the following:

1. When talking about small town China, I am not necessarily talking about rural areas or small populations. What I have found in China is that a place may have half a million people in it yet less infrastructure than a city of 25,000 in the USA. So many people live in huge apartment complexes that it is hard to get a feel for the population of a place. You will not see census signs like those found on the outskirts of cities in the USA.

In my mind, I arbitrarily define a Chinese place in terms of its infrastructure.

A village will not have any high-rise apartment complexes. Along the coastal areas in Zhejiang, I see a few of those. I live next to one of those.

A small town will have at least a clinic or hospital, one or more open markets, at least one grocery store, at least one furniture store, and at least one place to buy dry goods, yet no foreign chain stores. There probably will be at least one high-rise apartment building.

A town will have at least one McDonald's (NYSE:MCD) or KFC (NYSE:YUM), a hospital, and more of the shops found in a small town.

If the place has more than this, it is a city. A good rule of thumb for a city in my mind is to see multiple locations of KFC and McDonald's there.

If a place is large enough to have an airport, Starbucks (NASDAQ:SBUX), Pizza Hut, KFC, and more international companies, it is a major city and will usually have a significant population of foreigners living in it. Again, these are arbitrary distinctions, more like rules of thumb, that I made up.

Note that by my arbitrary definitions, there are some places in China with half a million people that I would call a small town! Just remember that I use these terms to differentiate infrastructure, not population.

2. If you look closely at the picture above, you will see that all of the products have both Chinese and English printed on the original package. In my mind, these are products that are produced for the China market. My belief is that the producers of these dual labeled products have a commitment for the China market and sell them here.

The labeling may not be obvious for the Del Monte corn (DLM). If you look at the bottom right of the can in the picture, you can see the Chinese characters for the weight of the contents. I pictured both sides of the Coke Zero and the Snickers since they have Chinese on one side and English on the other.

Why do I bring this up? I am looking for products whose revenues are attributed to China and I use the dual label as an indicator of this. I assume that products with dual language labels were either made in China or were made specifically for the Chinese market. I also assume that the revenues for such products will be attributed to China by the manufacturer.

In some areas I find products with foreign language only labels. Sometimes, there is also a Chinese language sticker applied to the package.

In the first case with a single foreign language label, I cannot tell whether the sales of the product get reported in China or in foreign shores. Usually these types of goods are found near areas where there are foreigners. A local business may make special purchases to import them or a foreigner may bring back a suitcase load. So the revenues for these type products are probably reported where they were manufactured and sold originally, not China.

In the second case with a Chinese label added to the product, I still cannot tell where the manufacturer will report the revenues. I assume the product was not made in China or it would have integral Chinese language in the label. As I write this, I am drinking some Italian coffee whose package was in Italian with a Chinese label sticker added later. I assume the label was added here and the manufacturer will report revenues from the sale in Italy. That assumption may be false. However, where ever the revenues are reported, this stick-on label still leads me to believe that the manufacturer does not have a Chinese factory to produce the product locally.

3. I have not run into people or businesses that are trying to export a product internationally. Virtually everyone that I meet is working to produce goods or services for consumption here in China. Most people have never been out of China and many have never been out of their province. They remind me of growing up in small town Oklahoma.

4. My opinion is that the Chinese government and its concerns are just as far removed from the small town Chinese citizen as the USA government is from the small town USA citizen. So the motivations and actions of governments should not be confused with the motivations and actions of consumers.

As a general rule, I stay away from discussing politics. I never bring politics up in conversation. In the very rare times that someone asks me about USA politics, I try to shy away or answer very obliquely. I am living in a foreign country after all. Also keep in mind that certain rights guaranteed by the US constitution are not rights at all in China.

5. I am not conducting scientific market studies. So, if I state that you can buy Coke everywhere in China, I base that statement on my experience and observations. I make an assumption that IF several small towns in China offer some product for sale to LOCAL CHINESE people, THEN the product must have gained wide acceptance in this country and significant market penetration. Yet at the same time, such assumptions cannot quantify the actual market position or dominance of a product.

Consider this. Most of China is made up of towns, small towns, and villages. When someone writes about some fast food company having saturated the Chinese market, I have to laugh. Can you go to a place in the USA with 50,000 people that does not have either a KFC, a McDonald's, a Pizza Hut, a Starbucks, or a Taco Bell? You can do that easily in China.

6. Typically, when I ask Chinese citizens about an issue, I do not ask leading questions. Instead, I try to ask general questions and see what the response is. I am more interested in their motivations and reasoning than in projecting my western mindset. For example with gold, I noted that several of my acquaintances were buying gold Panda coins. I asked them why, and did not frame it with leading questions about inflation or fiat money or storehouse of value. None of their responses included any mention of these things yet were very interesting all the same.

(By way of disclosure, I am invested in all of the companies mentioned above or whose products are in the picture at the beginning of this article. I tend to invest on a periodic basis, so it is entirely possible that I may add to my position in one or more of the companies mentioned at any time.)

Edited on 2018.04.20 Beijing time to remove extraneous characters from the title.