Analyst Profile – Munish Malhotra
Throughout the month of May and in celebration of Asian Pacific American Heritage Month, we are highlighting our Portfolio Managers and analysts who are critical to Cambiar’s success.
What’s an investment theme you are focused on in 2021 and why?
One major theme underlying our International portfolios is our direct and indirect exposure to the Asian consumer. This is by no means a new concept or an undiscovered idea. One can run a simple Google search for the “Rise of the Asian consumer” and find a plethora of white papers and industry pieces from various think tanks and consultants projecting the increasing contribution to global growth from Asian economies over the foreseeable future. But perhaps the biggest surprise has been the speed with which Asian societies have converged with and in many cases have leapfrogged the West in terms of not only disrupting legacy industries but creating new businesses along the way. As the saying goes, necessity is the mother of invention and in Asia and many emerging economies, the lack of necessary access to the basic infrastructure and resources we take for granted in most Western societies has led to some innovative business models. There are countless examples of this happening today. According to Forrester Analytics, China and South Korea rank number 1 and number 2 globally in terms of online shopping adoption rates at 37% and 26% respectively. This has been driven not by familiar companies such as Amazon and eBay but by local domestic Asian champions including Alibaba, JD.com, Naver, and Coupang.com. Most of these online internet champions in Asia never had to compete with large entrenched legacy offline players so the path to growth has been both long, wide, and largely unimpeded. Yet these Asian internet giants are creating their own ways in which they’re monetizing users unique from Western peers. Emerging trends such as live stream commerce which began in China have now exploded as a new and entertaining way for internet users to shop online with companies such as Pingduoduo leading the way. This is due to the fact that going to a store or a mall in Asia is often an inconvenient and very time-consuming process given poor roads and lack of retail space. Therefore live shopping online in real-time and with friends is becoming commonplace. Meituan and Pingduoduo also pioneered the idea of group buying whereby users can get together and leverage their collective bargaining power to negotiate deals on everyday household goods and get those goods delivered to their doorstep the same day and sometimes within hours. Coupang.com in South Korea can deliver any product to the majority of South Korea’s 50mln people overnight. In many ways, Internet companies in Asia have had to adapt to their own unique environments by creating new and innovative ways to monetize and service their users. In many cases, these unique business models are now making their way across to Western societies turning many of these companies into the envy of the established Internet giants.
Another great example of Asia leading the way is in terms of Electric Vehicle adoption. China is now leading the charge accounting for nearly 36% of all plug-in electric vehicles sold in 2020, four times more than the US and nearly as much as all 28 European countries, the UK and Scandinavia combined. In fact, of the top 20 plug-in vehicles sold in China in 2020, the vast majority were domestic Chinese brands rather than the established western brands. Asia has long been the epicenter for smartphone manufacturing. Most of the components in an EV are very similar to those in smartphones (Lithium-Ion batteries, semiconductor components, LED and LCD displays, etc) and therefore Asia already has a comparative advantage relative to Western automakers in sourcing and assembling EVs. And consumers are showing an increasing preference for local brands. In China, according to JPMorgan using Baidu keyword searches. In 2009, 62% of search volumes were for foreign brands. That’s down to 30% today. Millennials and Gen Z in China have increasingly more confidence in local brands vs older consumers. Local brands in Asia are learning and adapting quickly from Western peers.
Online food and grocery delivery have also taken off across Asia. In China, Meituan is by far the dominant food delivery platform with a 40% market share. Its 510mln active users purchased nearly $500bln in food and groceries last year. In India, Swiggy has become such a household name for food delivery that consumers often say “Let’s Swiggy It” when they want to order in. Additionally, in Ride-Hailing, 3 out of the 5 leading ride-sharing apps in the world reside in Asia. In India, OLA is virtually neck and neck with Uber for ride-hailing market share across the country. Grab has a 72% market share across the eight countries it serves throughout Southeast Asia not to mention half of the online food delivery market share in the region. In digital payments, China is also leading the rest of the world. Alipay (owned by Alibaba) and WeChatPay (owned by Tencent) are virtual duopolies across China in terms of mobile and online payments. Nearly 90% of people in China’s largest cities use WechatPay and Alipay as their primary payment method at the expense of cash and credit. In 2020, mobile payment transaction volume is estimated to have reached nearly US$70 trillion. Finally, in mobile gaming, Tencent has emerged as the dominant player and disruptive change agent across the gaming universe. Across Asia, PC and console games never really took off given the fact that nearly everyone has a smartphone and therefore mobile gaming is significantly more accessible. In fact, given lower levels of relative income, most games in Asia are free to play, a trend that is now taking off in most developed economies including here in the US.
It seems likely that Asia will increasingly become the center of gravity for global GDP growth as their societies become wealthier over time. Investors have already started to take notice. China’s A share market including Hong Kong is now the second-largest equity market in the world. India is already number seven. This is because, as the above examples suggest, the old playbook of gaining exposure to the Asian consumer solely through Western companies may not apply in this new world. Increasingly we’re seeing opportunities to invest in high-quality, best-in-class businesses and management teams in their domestic markets. This is increasingly an area of focus for us and something we’re excited about.
Learn more about Munish Malhotra.
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