Post by oldman on Aug 1, 2015 10:03:35 GMT 7
Last chapter in my book written in 2012 ...
A potential bubble forming
I once met up with a number of friends who have been doing business in China for many years. Interestingly, they all tell me that if I think doing business in Singapore is tough, I should try doing business in China.
Over there, margins are constantly under pressure from competitors ever willing to sell cheaper than your product. If you think your product is unique, a few months later, you will see similar products appearing. try selling a software product in China and you will be amazed how quickly it will appear in a different guise. This is the reality of doing business in China.
On paper, the market potential is enormous. Hence, business plans nowadays always have some kind of a China angle to show the potential of the business. But the reality is that converting the business plan into money is very difficult in China.
Interesting too is my friends’ observation that there is more good money from selling services to the multinational companies trying to penetrate the China market than selling directly to the vast population in China! If China firms find their internal markets tough, foreign companies are likely to find the going even tougher.
It looks like our world market is simply going for the cheapest available product and many of these products are likely to come from the factories in China and India. Companies that export from China are likely to see increasing business, as the world economy flattens. However, China companies serving their own internal markets may not see the kind of growth that we all expect from such a huge market. this is probably because most of us may not fully appreciate the kind of competition that happens when a market is large and everyone is fighting for market share.
A crash in China’s markets would be very terrible for the following reasons:
1. Most Mainland Chinese investors are very new to the concept of the stock market (as they have not experienced stock market crashes
before). Many may simply treat the stock market as a casino. For quite a while, it must have been relatively easy to make money in the Chinese stock market, as it was then climbing all the time. this sucked in almost all the early non-believers. For those who already make easy money, they would continue betting more and more, helping to fuel one of the biggest bubbles the world had ever seen, as the number of trading accounts in China had exceeded 130 million.
2. Foreign investors are likely to pour even more money into the Chinese stock markets (which include the Hong Kong market and its structured products that are available worldwide), as their own home markets start stagnating, and this will make the Chinese bubble even larger. Listed companies elsewhere will join in the party by buying into more Chinese companies, as investors all over the world want a piece of the China action.
3. China had been manufacturing goods for the once booming uS and other advanced economies. But when the world economy slows down, I doubt the slack in the orders could be filled by the demand of China’s own domestic economy. the products that China produces are of much higher specifications than what may be required by its own domestic economy.
Any slowdown in China is also likely to drastically affect many regional economies. I believe however that these developments will take a much longer time to pan out than most of us think. one must also remember that human beings are very creative and adaptive. Also, governments and financial institutions will find ways to support the markets.
Mass retail businesses will get tougher
When things become cheaper, more of us would want to own them. Will we be ‘richer’ as we can buy more things? I don’t think so. If the price of goods falls, then the margins for the production and marketing of goods have to come down and most of us will be affected in one way or another.
A lot of supportive jobs are actually ‘middleman’ jobs. Those of us in sales and marketing, especially, may find ourselves being crushed in this space where price becomes more important than any other factor. As the margins thin, there is less to pass on to the marketing folks.
Most products follow the 1/3:1/3:1/3 rule for their pricing: one-third goes to production, one-third to distribution and the remaining third to marketing. there are only so much ‘savings’ that one can obtain from reducing the cost of the goods. At the end of the day, for goods to fall substantially in price, the other two components of pricing must also be curtailed.
Distribution is becoming more and more efficient, with international firms operating in most countries. the only other significant cost in the pricing of any product is marketing. If one cuts this, a lot of players will be affected – advertisers, marketeers, retailers, etc.
When this happens, there is likely to be a stronger differentiation between the pricing of goods for the rich and the pricing of goods for the rest of us. Sure, there will always be good margins for those of us involved in marketing to the rich. But for the rest of us, marketing may not be that lucrative in the years ahead.
Perhaps, a good bet is therefore to invest in companies that service the rich more than the rest of the population.
Investing in under developed countries
It may also be timely for us to look into investing in countries that are less matured. In Singapore, in the early ‘70s, I think most folks would have saved enough even before considering taking a loan. Banks then would be super kiasu (afraid to lose), so it was probably quite hard to get a bank loan.
As Singapore developed, money rushed into the country. Banks were now flush with cash and fought with each other to offer loans. With many borrowing from the banks, the economy boomed because, all of a sudden, everyone had money to spend, albeit ‘borrowed’ money. this borrowed
money fueled our economic boom in the ‘70s and ‘80s – a process that I call “the capitalist effect on a developing economy”.
Today, many of us have already borrowed to the hilt, as we are laden with housing loans, which are unlikely to be small, given the price of houses in Singapore. So for Singapore, the capitalist effect on a developing economy is over. Hence, it is most unlikely that we will ever see the type of appreciation that we saw in the past. We are now a mature economy, which is another way of saying that many of us are already debtors and the boom from borrowed money is over.
Now, Singapore has to attract more foreigners to make Singapore their home so that we can ride on the next potential boom generated by new foreign money coming into Singapore. But this boom is unpredictable and a slowing down of the world economy will not help because foreign money has no roots and can come and go anytime. Hence, I think in the future, the economy of Singapore will go through much larger swings of booms and busts – and these will be reflected in both our property and stock markets.
Hence, it may be a good time to start looking at investing in less developed countries in our region.
A potential bubble forming
I once met up with a number of friends who have been doing business in China for many years. Interestingly, they all tell me that if I think doing business in Singapore is tough, I should try doing business in China.
Over there, margins are constantly under pressure from competitors ever willing to sell cheaper than your product. If you think your product is unique, a few months later, you will see similar products appearing. try selling a software product in China and you will be amazed how quickly it will appear in a different guise. This is the reality of doing business in China.
On paper, the market potential is enormous. Hence, business plans nowadays always have some kind of a China angle to show the potential of the business. But the reality is that converting the business plan into money is very difficult in China.
Interesting too is my friends’ observation that there is more good money from selling services to the multinational companies trying to penetrate the China market than selling directly to the vast population in China! If China firms find their internal markets tough, foreign companies are likely to find the going even tougher.
It looks like our world market is simply going for the cheapest available product and many of these products are likely to come from the factories in China and India. Companies that export from China are likely to see increasing business, as the world economy flattens. However, China companies serving their own internal markets may not see the kind of growth that we all expect from such a huge market. this is probably because most of us may not fully appreciate the kind of competition that happens when a market is large and everyone is fighting for market share.
A crash in China’s markets would be very terrible for the following reasons:
1. Most Mainland Chinese investors are very new to the concept of the stock market (as they have not experienced stock market crashes
before). Many may simply treat the stock market as a casino. For quite a while, it must have been relatively easy to make money in the Chinese stock market, as it was then climbing all the time. this sucked in almost all the early non-believers. For those who already make easy money, they would continue betting more and more, helping to fuel one of the biggest bubbles the world had ever seen, as the number of trading accounts in China had exceeded 130 million.
2. Foreign investors are likely to pour even more money into the Chinese stock markets (which include the Hong Kong market and its structured products that are available worldwide), as their own home markets start stagnating, and this will make the Chinese bubble even larger. Listed companies elsewhere will join in the party by buying into more Chinese companies, as investors all over the world want a piece of the China action.
3. China had been manufacturing goods for the once booming uS and other advanced economies. But when the world economy slows down, I doubt the slack in the orders could be filled by the demand of China’s own domestic economy. the products that China produces are of much higher specifications than what may be required by its own domestic economy.
Any slowdown in China is also likely to drastically affect many regional economies. I believe however that these developments will take a much longer time to pan out than most of us think. one must also remember that human beings are very creative and adaptive. Also, governments and financial institutions will find ways to support the markets.
Mass retail businesses will get tougher
When things become cheaper, more of us would want to own them. Will we be ‘richer’ as we can buy more things? I don’t think so. If the price of goods falls, then the margins for the production and marketing of goods have to come down and most of us will be affected in one way or another.
A lot of supportive jobs are actually ‘middleman’ jobs. Those of us in sales and marketing, especially, may find ourselves being crushed in this space where price becomes more important than any other factor. As the margins thin, there is less to pass on to the marketing folks.
Most products follow the 1/3:1/3:1/3 rule for their pricing: one-third goes to production, one-third to distribution and the remaining third to marketing. there are only so much ‘savings’ that one can obtain from reducing the cost of the goods. At the end of the day, for goods to fall substantially in price, the other two components of pricing must also be curtailed.
Distribution is becoming more and more efficient, with international firms operating in most countries. the only other significant cost in the pricing of any product is marketing. If one cuts this, a lot of players will be affected – advertisers, marketeers, retailers, etc.
When this happens, there is likely to be a stronger differentiation between the pricing of goods for the rich and the pricing of goods for the rest of us. Sure, there will always be good margins for those of us involved in marketing to the rich. But for the rest of us, marketing may not be that lucrative in the years ahead.
Perhaps, a good bet is therefore to invest in companies that service the rich more than the rest of the population.
Investing in under developed countries
It may also be timely for us to look into investing in countries that are less matured. In Singapore, in the early ‘70s, I think most folks would have saved enough even before considering taking a loan. Banks then would be super kiasu (afraid to lose), so it was probably quite hard to get a bank loan.
As Singapore developed, money rushed into the country. Banks were now flush with cash and fought with each other to offer loans. With many borrowing from the banks, the economy boomed because, all of a sudden, everyone had money to spend, albeit ‘borrowed’ money. this borrowed
money fueled our economic boom in the ‘70s and ‘80s – a process that I call “the capitalist effect on a developing economy”.
Today, many of us have already borrowed to the hilt, as we are laden with housing loans, which are unlikely to be small, given the price of houses in Singapore. So for Singapore, the capitalist effect on a developing economy is over. Hence, it is most unlikely that we will ever see the type of appreciation that we saw in the past. We are now a mature economy, which is another way of saying that many of us are already debtors and the boom from borrowed money is over.
Now, Singapore has to attract more foreigners to make Singapore their home so that we can ride on the next potential boom generated by new foreign money coming into Singapore. But this boom is unpredictable and a slowing down of the world economy will not help because foreign money has no roots and can come and go anytime. Hence, I think in the future, the economy of Singapore will go through much larger swings of booms and busts – and these will be reflected in both our property and stock markets.
Hence, it may be a good time to start looking at investing in less developed countries in our region.
