BEIJING — Equity investors are skeptical of Chinese companies’ rapid expansion overseas, according to Goldman Sachs.
The “market wants to look for profitable expansions,” Trina Chen, co-head of Greater China equity research at Goldman Sachs Research, said on a podcast that the investment bank published Tuesday.
Sluggish consumer demand in China has pushed many companies, such as electric car brands, to accelerate plans for entering other countries. Automaker Geely is one of the latest Chinese companies to push further abroad, announcing Friday it plans to enter Canada next year.
Chinese companies’ overseas market share will likely reach 31% by 2035, up from around 18%, Chen and her team predicted in a Sept. 14 report. Their analysis covered more than 10 sectors, including express delivery, industrial robots and so-called white goods such as air conditioners.
Chinese businesses often find higher profit margins abroad than they would at home, enabling the companies to charge lower prices than local competitors.
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 said Tuesday, adding that geopolitics and market access restrictions also weighs on stock performance.
Involution refers to race-to-the-bottom competition in China, which regulators have attempted to address in recent years.
That uncertainty means Chinese companies have very little of their global expansion opportunity priced into their stocks, Chen said.
But on the flip side, she noted that investors are “ruthless” when incumbent companies lose their market share: A 10% to 15% loss could shrink market capitalization by 50% to 80%.
The Chinese players are not just looking at the U.S. and Europe. Goldman Sachs noted some of the most rapid growth is in emerging markets, as the businesses also pursue areas underserved by competitors.
“Chinese brands are no longer simply market challengers,” Euromonitor said in a report last month. “Brands are becoming long-term, embedded competitors capable of reshaping market dynamics across Latin America.