Why luxury cars are selling like hotcakes in Beijing - Carl Kawaja, a manager of the Capital International - Global Equity portfolio, shares an anecdote from a recent group research trip to China.
1. China’s growth may change the investment landscape (click on image to view the video, or here)
Carl Kawaja: Well, some of you I met last night, and thank you very much for coming to spend some time with us and learn more about how, how we do things. The, I have spent a fair bit of my career here looking at markets outside the United States, and as you may have heard or will hear going forward, our process really kind of begins from the bottom up visiting companies and coming to conclusions about them, and I'd say a pretty good example of that would be the last month. Because in the last month we had a big trip where 82 of us were in China visiting companies. We were in, on four different tracks. One group of folks in Beijing, which I was part of; one group in Shanghai; one group in Shenzhen; and one group in Hong Kong. And we had 90 meetings over the course of three days, I think. Then we all convened in Hong Kong and discussed what we learned there.
And, of course, we go to China separately and to other countries on individual trips, but this was sort of a group trip to get together and share ideas. And I also last month was in India, as well.
But the, you know, that is typically our process, to get on the road and try and figure out what's going on around the world, and last month I was in China and India, in particular, because I think that this is something that's very important that's happening in the world, the growth of those two countries and the growth of the developing world in general. And Rob, to my left, has been involved in our emerging markets effort for a long time. Starting in 1985, we started managing money in emerging markets with a fund called Emerging Markets Growth Fund* that, that we were approached to start by a division of the World Bank, and since then we've been very focused on these markets and spend a lot of time going to them.
And as Canadians, you might have a greater sense even than I think Americans do of how important those markets are, 'cause they, obviously they've been big consumers of things that Canada produces a lot of, and I think they will be bigger consumers going forward.
But initially, those countries have been consumers of things like iron ore and potash and oil and, and liquefied natural gas and so on. But going forward, as those economies get richer and more complex, I think they're going to be buying things like Starbucks and buying TVs and cars. And I think cars is a particularly interesting area and is kind of indicative of how these countries are going to change the investment landscape going forward.
2. When I was in Beijing… (click on image below to view video, or here)
Carl Kawaja: When I was in Beijing, I met with Mercedes, the head of Mercedes in China, and I also met with a, the head of the largest luxury automotive retailer in China, luxury car dealership company in China, a company called Zhongcheng, and then before that, when I was in India, I met with Tata Motors, which is the company that owns Jaguar and Land Rover now, and previously to that I had met with BMW. And sales of those companies' products in China are really booming to an extraordinary extent. And, in fact, this year Mercedes will sell roughly 125,000 cars in China, and that compares to 68,000 cars in 2009 and 36,000 cars in 2008. And of those 125,000 cars that they'll sell in China this year – I mean, they're basically there, 'cause we're in November – 23,000 of them will be S Classes, and Mercedes makes most of its money on the S Class.
If you know Mercedes cars, you know, the main breakdown is C Class, which is sort of the, you know, cheaper version of a Mercedes, the smaller cars. Then the E Class, and then the S Class. And S Class is a pretty premium car. You know, S Class prices sort of start in the United States and in Canada now, too, now that we've got dollar parity, at $100,000 and up. And the, in China there are import duties on the S Class. So the nice, the fanciest S Class is the S600, and in the United States that sells for about $160,000, $165,000. And in China that car sells for $325,000. And, as I said, they're going to sell 23,000 S Classes. Not all of those are S600s, but they're going to sell 23,000 cars that are $250,000 and up, which is really extraordinary.
And actually, on that car, they realize about 30,000 more net of import duties and so on than they do in Germany on sales of that vehicle. So if you think that they make 30,000 Euros more on 23,000 cars, that's 690 million Euros of profit just on S Classes in China, which is very, you know, it's about a billion dollars. That's very material for Daimler, which is a company that we own in the funds. And I think it speaks to something that we see happening around the world, which is that emerging markets, instead of kind of being a temporary phenomenon or a more marginal phenomenon, if anything, are getting bigger and more important than you think. And as Rob can attest, 'cause we're in the same Investment Group, I'm someone who occasionally has expressed some skepticism about things related to China. And I think there are reasons to like many markets other than China. And, you know, I point out internally that, you know, China didn't invent the iPad and China didn't invent Google and China hasn't, didn't invent Medtronic and Merck and lots of other great companies.
And the one thing I want to sort of leave you with as part of that story is, a lot of our process is going to companies and countries and trying to figure out what's happening, but sometimes the most exciting thing that is happening in a country, will result in an investment in another place.
A concern that you might have about our firm is that we have grown and are big and are a large firm and some people think you need to be small and nimble to figure everything out. But increasingly, I think the world is a bigger and more complex place, and you need to be a bigger and more complex institution to figure it out. And I really believe we are that institution.
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