Over the past decade, China has experienced an explosion in the growth of its middle class. This development and its impact on the nation’s socioeconomic landscape have significant private equity implications. Investment opportunities abound, as this emerging group with greater spending power demands higher-quality products, safer food and better access to healthcare, among other desires typical of a growing consumer base.
China’s Increasing Middle Class
China has approximately 300 million people who qualify as middle class based on their disposable income. For comparison purposes, the United States’ entire population – including the lower, middle and upper classes – is only slightly larger than that. Per capita GDP in China was $5,400 in 2011, which represents a 23% increase from 2010. When compared with U.S. GDP per capita at $48,000, it seems quite reasonable to assume that Chinese purchasing power will continue to grow. Such growth represents an incredible opportunity for various industries and sectors to benefit both directly and indirectly, including healthcare, education, retail, travel, automotive and luxury goods.
Leveraging Trends for Operational Success
From an investment perspective, the keys to capitalizing on this trend for Baird Private Equity lie in our approach. We identify sectors where consumer demand is growing, where we believe we have a competitive advantage in terms of resources and expertise, and where we find companies with talented management teams that we can partner with to build fundamental value. For example, Baird recognized the growing demand among Chinese consumers for access to safer food. In China, most perishable foods are shipped by non-refrigerated trucks as the cold supply chain market is underdeveloped, resulting in 20-40% food spoilage loss with value at over $65 billion annually. Baird, along with its investment partner, worked for three years to identify the right opportunity in the cold chain industry that could take advantage of this demand. As a result, we recently invested in a leading refrigerated truck manufacturer that plays a significant role in the cold chain logistic industry. The combination of our investment partner’s industry experience and our on-the-ground investment team is expected to accelerate the company’s growth and expand its market leadership.
A Tale of Two Countries
Due to the stratified nature of Chinese industrialization, the investment outlook provides different opportunities for growth in different areas of the country. China’s prosperous coastal region, including areas such as Taiwan, Hong Kong and Macau, has become a hungry market for higher-quality, luxury goods. Meanwhile the majority of the country’s western provinces are not yet as developed and require basic infrastructure additions, like airports and high speed train stations.
This regional gap is expected to narrow, or in some areas disappear entirely, as development continues. This will bode well for businesses that can participate in that development, like construction and scaffolding firms. To leverage this trend, Baird performed extensive due diligence in search of growth opportunities in the infrastructure sector, and two years ago invested in a leading company involved in the rental and service of engineered scaffolding in China. Since then, the company has successfully served several high profile projects, including the 2010 Asia Games, and has expanded nationwide from its home base in Beijing.
The Home Field Advantage
Our ability to recognize and leverage this middle-class trend in China is just one illustration of the key competitive advantage our local presence and global network of seasoned investment and operating professionals represents. By combining our local connections with the insight of industry experts around the world, we believe Baird is able to identify and source high-caliber opportunities. We believe our experience helps us deliver results by leveraging global trends.
Huaming Gu is a Partner of Baird Capital Partners Asia, the China-focused growth equity fund of Baird Private Equity.