Equity investors are casting a critical eye over the rapid overseas expansion of Chinese companies, demanding clear evidence of profitability, according to a recent analysis from Goldman Sachs.
"The market wants to look for profitable expansions," stated Trina Chen, co-head of Greater China equity research at Goldman Sachs Research, during a podcast published by the investment bank on Tuesday. You can listen to the discussion here: Goldman Sachs Podcast.
With sluggish consumer demand at home in China, numerous companies, from electric car manufacturers to industrial players, are aggressively pursuing international markets. This includes companies like automaker Geely, which recently announced plans to enter the Canadian market next year, accelerating its global footprint.
Goldman Sachs predicts a significant shift, with Chinese companies' overseas market share expected to surge from approximately 18% to 31% by 2035. This projection, detailed in a September 14 report by Chen and her team, encompasses over ten sectors, including logistics, robotics, and household appliances.
Often, Chinese businesses find more lucrative profit margins in international markets than they do domestically, a factor that allows them to competitively price their products lower than local rivals.
However, investors remain cautious. They seek reassurance that this global push won't lead to "involution" – a term describing a race-to-the-bottom price war akin to what has been observed in China. "Investors need to be convinced the global expansion 'does not end up with something similar to involution, where the price actually gets killed because of competition'," Chen emphasized, also highlighting the ongoing concerns around geopolitics and market access restrictions impacting stock performance.
This widespread uncertainty means that the immense global expansion potential of Chinese companies is largely undervalued and not yet reflected in their current stock prices, Chen observed.
Conversely, Goldman Sachs points out the harsh reality for established companies that fail to maintain their market position. Investors are "ruthless," with a market share loss of 10% to 15% potentially slashing a company's market capitalization by 50% to 80%.
Chinese expansion isn't solely focused on established Western markets like the U.S. and Europe. Goldman Sachs notes that some of the most dynamic growth is occurring in emerging markets, where Chinese businesses are successfully targeting underserved segments. As Euromonitor highlighted in a recent report, "Chinese brands are no longer simply market challengers... Brands are becoming long-term, embedded competitors capable of reshaping market dynamics across Latin America."
