CHINA OPPORTUNITY: From steel to celluloid

Australia’s resources industry has boomed over the past 20 years and has taken the economy with it, most notably stopped Australia dipping into negative economic growth during the Global Financial Crisis.

The mining boom has a profound effect on Perth, the capital city of WA and its people, as the state grew faster than any other in Australia, in both population and economy. One in three people living in WA was born overseas, the highest proportion of any area in Australia. And Perthians gladly pay $5 for a takeaway coffee.

WA’s Resource Industry & China

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Here are the facts.

Western Australia is the largest iron ore producer in the world, accounting for 37% of global production and 49% of global iron ore exports in 2014. The Pilbara region accounted for 94% of Australia’s iron ore production in 2015 with WA shipping all of its iron ore production.

China is the world’s largest steel producer and iron ore consumer and WA’s biggest export market. In response to growth in Chinese steel production over the past decade, Western Australia’s iron ore producers invested in the construction of new mines and associated infrastructure.

China’s increasing demand for iron ore resulted in the iron ore price rising from around US$30 a tonne in 2002-03 to around US$150 a tonne in 2011-12. The increase in iron ore production in Western Australia displaced higher cost production in China and, combined with lower demand from Chinese steelmakers, led to the iron ore price falling by over 40% in 2014-15.

The fact is that what’s good for China has been good for Australia.

A common mistake is to think that Australia’s trade with China begins and ends with iron ore. This may have been true five years ago but no longer.

So what happened in the land of the dragon?

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China’s Consumer Revolution

In 2011, the mining boom started to come off the boil, and China’s economy began transitioning to growth led by consumption rather than resources-hungry investment.

Here is another fact. Roughly 70% of the U.S. economy is comprised of consumer spending. That is the money that people spend at the grocery store, the shopping mall, at car dealerships, and at favourite restaurants.

Here are some more quick facts confirming the signs of prosperity in China.

In 2015, during its third quarter, Apple saw 112% year-over-year revenue growth in the Greater China region. Revenue in China for Apple grew to $13.2 billion from $6.2 billion in 2014. Revenue in China again surpassed that of Europe at $10.3 billion. The Greater China region remains Apple’s second largest market after the Americas, underscoring the critical importance of this area to Apple’s future growth.

According to Burberry, Luxury goods company, China is its biggest growth market, with sales in double digits in 2013, the year in which China made up 15% of the brand’s global sales. By the end of 2013, the luxury brand had 70 physical stores trading in 35 Chinese cities.

Ford and its joint ventures reported a 14% year-over-year rise in China sales to a record 1.27 million units in 2016, driven by high demand for an expanded vehicle lineup.

When the HSBC China Manufacturing Purchasing Managers Index fell to 48.9 in July 2011, many thought it was a sure sign that the Chinese economy was headed for a painful fall.

The pessimism had some steam in the press.

Whatever side of the debate you assert on China’s growth model, the simple truth about China opportunity is that while the manufacturing sector is slowing down, the consumer sector is more than making up the difference. If this simple yet key concept can be understood, smart investors won’t have any trouble business opportunities to invest in.

From steel to celluloid

In China, while the steel industry is a sunset industry,  the entertainment industry is a sunrise industry in China. 

China’s steel industry is currently operating at only 70% utilisation, with roughly 400 million tonnes of excess capacity. Neither domestic nor international demand will fill that gap. In contrast, many sectors of the Chinese entertainment industry are growing well into double digits on an annualised basis, despite the slowdown in the overall economy.

The growth potential for the entertainment industry has been phenomenal, outperforming China’s traditional industries. Growing at a rate of 17% [per year] in the past five years, already in 2016, the media and entertainment industry is worth $180 billion in China, and the number is only expected to get larger.

The Holy Grail of Success

At the recent China Film Summit in Los Angeles, Mr Wang Jianlin delivered the speech entitled “The Global Film Industry’s China Opportunity” and candidly discussed the future of China’s film market and how Hollywood (international filmmakers) will be able to engage and benefit from the Chinese market’s rapid growth.

Mr Wang is China’s richest man. He is taking steps to build out his Dalian Wanda entertainment and real estate empire. He also owns 20% of the Spanish football club, Atlético Madrid.

Mr Wang pretty much spelt out the Holy Grail of success:

1. Understand China

2. Collaborate with Chinese companies

3. Improve quality of the films

The full transcript of the speech can be found here.

Australia, like the rest of the world, can unlock market potential in China with the right product, capital investment and active collaboration with Chinese industry players.

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