DeepSeek provides unparalleled cost-efficiency – cheap and good.
DS is a typical “China” thing, propelled by limited resources – in this case, limited advanced chips.
This is just not the way that US companies usually pursue – US shall go for the best performance, with unlimited resources ideally.
How wonderful the world balances itself.
Sometimes, it does seem that even SOEs in China doesn’t have monopoly. For example, there are 3 telecom companies, and multiple banks.
However, there are also no real market competitions. E.g. you don’t see China telecom operators competing for customers by offering differentiating product offerings.
Consumers didn’t get a wider range of choices via these seemingly “competing” businesses.
How these businesses “split” profits looks more like a “political” question, rather than a economical one.
As the go-go period ended in China, it’s no longer the era of the fastest runner.
Surprisingly, good culture now matters in China.
1/ Culture matters to employees.
Trip.com founder & CEO James Liang advocates for “hybrid” work mode – employees can choose to have two days WFH during a week.
2/ Culture matters to customers.
PDL (Pangdonglai) is very popular and has a growing influence in China as a retailer – an industry that most people ignore nowadays. PDL is famous for its “customer service, quality and integrity“; the at PDL work 7-hour days, have weekends off, get a string of perks and are entitled to 30-40 days of annual leave.
A common fallacy, especially in the past, is to find a US asset in the similar industry and use it as a reference for valuation.
Why this is less useful, especially in rmb assets?
To put it simply,
asset value = earnings power (e.g. EPS) x multiple (e.g. P/E)
Then we look at these two components:
1/ Industry dynamics can be vastly different.
Demand side can be very different – e.g. work from home has never been a thing in China vs. only ~24% of workers don’t WFH in 2022 in the US.
Supply sides can also be very different in terms of entry barriers, the level of competition etc.
There are just too many different things, thus the projection based on a US company’s past is usually not a good reference.
2/ valuation can be vastly different.
Partially, difference in multiple is reflecting terminal growth, etc., therefore it’s similar to the first point, which is about fundamentals.
Additionally, If you think about bond prices – US treasury yield vs. China gov bond yield, they are on two diverging roads.
What’s good though? Assets in China can produce less correlated return vs. US assets, therefore providing additional benefits to a portfolio.
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Historically, China was a big buyer and still a big holder of US gov debt, which to some extent led to the ultra-low interest rate environment.
Nowadays, China is still helping keep the US interest rate low, indirectly. I think by not providing good return opportunities, China is forcing money to go to other places, indirectly providing more money (with low return alternative) in the global market for the US gov.
It’s not just impacting foreign capital interested in China, but Chinese money as well.
Alternatively, if China has attractive opportunities all over the place, it will compete for global money one way or another.
China’s stock market is back. Everyone knows.
China rolled out policies to help its stock market & economy. This makes sense.
What are the missing parts?
Some might say geopolitical tension is still an unsolved issue.
I won’t disagree. But I feel it’s not as extreme as before.
Some may say a deeper structural reform.
Fair; but in short term this might not change.
What I think is missing (and China can start to think in short term) is how China can better participate & even organize global affairs & how the world economy can grow better with a stronger China.
Historically, China didn’t excel on this. During times when its economy was leading the world, it didn’t take much care of the world. It could give stuff to nearby countries; it could invent and other can learn; however, it didn’t actively “organize the world”.
A strong economy that can’t lead is a loss to the world, I think.
How to lead? How to make other countries live better as China is a bigger part of global GDP? Not by giving free money but in a healthy, organic way.
That’s the question I haven’t seen much discussion.
Nio’s sub brand Onvo just announced its price today.
Without battery, price is 150k rmb, or ~$20k.
If doubling the price due to tariff to $40k, that is still competitive in the US.
Model 3, ID.4 is around that price range in the US (excl. credit).
If counting US gov subsidy, that’s $7.5k price advantage for US-made EV. But this subsidy won’t be here forever.
The point is, even with 100% tariff, it’s not entirely unaffordable for Chinese EV brands.
Over-consumption is ingrained in Chinese culture.
When Chinese people invite other to dinner, they usually over-order to show hospitality. This is over-consumption.
When Chinese people drink liquor on the dinner table, they can push beyond their bodies’ alcohol limit – drinking beyond the limit is usually seen as sincerity and deep friendship. This is over-consumption.
When Chinese people send gifts to each other during holidays, they often send things that are higher end then they consume. This is over-consumption.
The concept of “over-consumption” doesn’t mean it’s not necessary; indeed, those can be seen as “normal” rather than “over-consumption” for most Chinese. It’s only when you compare those consumption levels to countries like US, you can say it’s above the needed/common level.
If Chinese people are going to normalize their consumptions, there can be an oversupply in those categories.
Thinking about this question, here are five potential answers.
1/ For the older generations, shortages are deeply rooted in their memory, so they dislike the idea that anything might be in short supply.
2/ The required return is too low. Many experienced poverty in their youth, therefore lots of effort for little money is still attractive.
3/ The local governments want to create local jobs and boast about industrial upgrades, with banks being the main enablers. When every local government invest in a similar direction at the same time, it’s hard to control and estimate the entire capacity.
4/ For top party members, abundance of all sorts of goods is a sign of victory for socialism and communism.
5/ China is preparing for war. Many capacity will shut down if at war.
It might not be that surprising, but many sponsors of major China local (provincial) soccer clubs in the Chinese Super League didn’t do well after naming the team.
Dalian Wanda and Dalian Shide were the names for Dalian’s soccer club. Dalian is only a city in Liaoning, but Dalian Shide was a strong team in the Chinese Super League. Dalian Aerbin is another club in Liaoning; the boss tried to acquire Dalian Shide.
More people might have heard about Evergrande. Evergrande purchased Guangzhou soccer club in 2010. Guangzhou Evergrande won seven consecutive Chinese Super League titles from 2011 to 2017.
Similar stories could be found for teams across cities/provinces, e.g. Jiangsu, Beijing, Shanghai, etc.
I am not sure if this is common globally. I can think about FTX, which sponsored the Mercedes F1 team and Golden State Warriors. But it’s not something consistently happening on the global stage.
Maybe it’s due to the business model. Property developers were very profitable and can benefit from broader audience with the clubs’ naming. Usually male watch those soccer matches more often, and those who have time and money to watch sports could be wealthier and thus homebuyers.