Bottom line: ZTE’s move into smart cars and Gome’s into smartphones follow a typical Chinese pattern of herd mentality investing, and are both likely to fare poorly.
A couple of headlines are shining a spotlight on the herd mentality you often see among Chinese companies looking for the next big growth opportunity. One of those has telecoms stalwart ZTE (HKEx: 763; Shenzhen: 000063) buying a small bus maker, parroting a trend among a growing number of firms who see the future in smart vehicles. The other has the increasingly irrelevant electronics retailer Gome (HKEx: 493) rolling into the smartphone business, an area in desperate need of consolidation due to cutthroat competition.
Anyone reading this can tell I’m often quite skeptical of this kind of move, and in both of these headlines that’s definitely the case. But I should also add that moving into new product areas is obviously a fundamental requirement for any company to survive over the longer term. That’s because technology and consumer demand are constantly changing, and today’s popular product will almost certainly become obsolete in a decade or two at the most.
The problem for Chinese companies is that they seem to move into new product areas with little or no actual planning, and often simply follow the latest hot trend or government directive. The result is that such areas often go through sudden massive explosions, which are inevitably followed by busts and huge losses as companies drop out due to poor execution.
All that said, let’s take a closer look at these two latest deals that follow that trend, starting with ZTE’s purchase of a bus maker called Granton. (Chinese article) The news comes from an executive in ZTE’s smart vehicle division, who says his company wants to become one of the nation’s top 5 bus makers over an unspecified period. That’s probably not too big of a challenge, since I doubt China has all that many bus makers.
The report says the deal followed about a year of negotiations and carried a price tag in the hundreds of millions of yuan, or probably around $100 million. It also points out that Granton is a relatively small company, with sales of only around 1,000 buses per year. But it also points out that a single bus can sell for up to 3 million yuan ($435,000), and that the company has exported to places like Germany and the Netherlands.
I can’t comment too much on Granton, since I know nothing about the company. But sales of 1,000 buses per year obviously means that none of the overseas orders are too large, which is what you’d hope to see from a company with good growth potential. What’s more, there’s no indication that Granton has any particular edge in the smart vehicle business, since it’s obviously quite small and has limited resources.
Of course ZTE has access to both telecoms technology and cash, which would be critical for any transformation into a smart vehicle business. Granton is also located in Zhuhai, which is just a short distance from ZTE’s home in Shenzhen, which would make communication easier. Still, the business looks quite tangential in relation to ZTE’s core telecoms business, and I honestly don’t see this investment doing very well.
Late to the Smartphone Party
Next there Gome, which used to be China’s leading retailer but has faced a long decline due to its failure to parlay its early success into e-commerce. Now the company is announcing plans to develop a social networking business ecosystem, using just about every cliche and buzzword in the Chinese high-tech business world right now. (Chinese article) As part of that drive, it’s also rolling out its own brand smartphone, complete with a self-developed processor and operating system.
Apparently all of this is part of Gome’s 30th birthday celebration, which is really quite an achievement in today’s China where 3 decades is the equivalent of an eternity. But the way things are going, I have serious doubts about whether Gome will be around in another decade to celebrate a similar 40th birthday.
Gome’s smartphone move is probably about 2 years too late, as anyone who watches the market knows it’s currently extremely overheated with dozens of large and minor brands fighting for market share. What’s more, just about everyone under the sun is trying to build similar ecosystems, many of them smartphone makers like Xiaomi, LeEco (Shenzhen: 300104) and Qihoo 360. Needless to say, I give this new Gome initiative even less chance of success than ZTE’s, largely because it’s coming way too late and involves just about every cliche in the book.