William Lam, Co-Head of Asian and Emerging Market Equities
Can Chinese companies transfer their work culture to factories in the US and make a success of it?
Fuyao Glass
The first Chinese ‘A’ share we owned in the Invesco Asian Fund (UK) was a company called Fuyao Glass.
Although we no longer own Fuyao, two other Chinese auto parts companies with clear parallels – Huayu and Minth – are currently held in this fund.
Fuyao has a 70% domestic market share of auto glass and a 25% global market share.
It makes well over 30% gross margin on its auto glass and a net profit margin in the high teens. (Source: Bloomberg, August 2019)
Given it operates in the very competitive auto parts industry, where many companies struggle to make money, it is clearly doing something very right.
Fuyao is not only very profitable and successful – it is also seen as one of the best governed companies in China.
This is partly because its chairman and founder, Cao Dewang, has established a charitable foundation (the Heren Foundation) and donated at least US$500m worth of his Fuyao shares to it.
This charity uses the significant annual dividends received from Fuyao to support causes such as poverty, disaster relief, education and the environment.
Apparently the Heren Foundation is the largest charitable foundation in China.
Netflix documentary
Recently I watched the new Netflix documentary called American Factory – made by a production company backed by the Obamas – which gives us some insights into how Fuyao operates.
American Factory charts the story of how Fuyao opened up a new plant in Dayton, Ohio, where an old GM factory has closed down with the loss of 2000 jobs.
In one of many revealing data points, a worker who used to work at GM for nearly US$30 per hour now gets paid under US$15 per hour at the Fuyao plant.
Chinese workers are much more productive than their American counterparts, at least at the beginning.
This is partly because they work harder and longer.
American Factory touches on so many areas that are of interest at this juncture for us as Asian equity investors.
These include:
- whether there is any realistic possibility for global companies to move production out of China and into the US
- why Chinese production is so much lower cost, and whether that cost advantage is sustainable
- how automation is replacing factory workers
- how ESG interacts with profitability and shareholder interests
The individual versus the group
As the documentary so clearly illustrates, Chinese culture is less focused on the rights, needs and desires of the individual and more focused on the common goal of the wider group (whether that be the company or the country).
Chinese workers at Fuyao have only two days off a month (including weekends) and tend to work 12 hour shifts. Many Chinese workers at Fuyao live so far away from their spouses and children that they only see them once a year.
For good or bad, this is the sort of dedication to work that most US workers are unlikely to be able to match.
Another unsurprising learning point from the documentary is the difference in safety standards at Fuyao compared to what US workers had been accustomed to at GM.
But while of course most Dayton workers don’t like the safety risks at Fuyao, they also clearly appreciate having a job.
It is difficult to watch the documentary without feeling a tension between working conditions on the one hand and profitability and sustainability on the other.
Which is more sustainable – a plant which breaks even and has an impeccable safety record, high pay for its workers and plenty of holiday entitlement, or a plant which makes a decent return but has a less perfect safety record and pays its workers only what it needs to?
Or can we have our cake and eat it by asking for high profits, high pay for workers and impeccable safety?
Optimism despite the trade war?
Fuyao is a well- managed company and has spent the best part of three years trying to make a US factory profitable.
The first two years didn’t go very well (as the documentary attests) but in its most recent results Fuyao disclosed that net profit from its US factory grew over 40% and now represents 10% of total profit. (Source: Bloomberg, August 2019).
It has been a hard slog but they seem to be making a success of it now.
Ultimately the Fuyao story over the last few years indicates there are ways to make progress which broadly suit both China and the US, despite the trade war.
But the Fuyao story is admittedly rare, even perhaps one of a kind!
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