Michael Porter is one of the world's leading authorities on the
subjects of corporate strategy and the competitiveness of nations.
His books and case studies form the foundation for many business
school curriculums. As a Harvard Business School professor he has
helped many CEO's position their companies for success.
It can be hard to decipher such nebulous topics as strategy
since there are so many variables: what's the timeframe? Who are
the stakeholders? What are the threats? And so on...
There is no such mystery surrounding China's strategy for world
domination right now however. And you don't need to be an Ivy
School MBA to understand why you need to care - and how you can
We'll use one of Porter's simple and elegant business school
models to explain why - the value chain. In its simplest form, the
value chain analyzes the activities through which a country (or
company) can gain advantage over its competitors.
There are five value chain activities, and each step up the
value chain is supposed to add value above the cost of achieving
that next step.
This image from
helps explain. As an example in the second activity, the operations
of China's economy - for instance the manufacturing sector - adds
tremendous value to inbound materials. This activity is what has
fueled much of American consumerism over the past 25 years.
In the context of China's goal to become a global economic
leader, this simple model means that China is working on 5 fronts
simultaneously - all with the goal of moving its
economy up the value chain to the point where it is a global
exporter of technology and high value services.
One recent example of this strategy playing out was the 2005
PC business by China's number one computer maker, Lenovo. Lenovo's
chairman, Liu Chuanzhi, clearly referred to the acquisition as
helping China achieve its strategy to move up the value chain when
"This acquisition will allow Chinese industry to make
significant inroads on its path to globalization."
If you think I'm trying to pull some voodoo-magic with this
model - don't be so quick to stick a pin in my eye.
You need to care about this if you want to make money investing
over the next decade - period.
Right now, companies around the world are trying to figure out
how they can be a piece of the puzzle that will help China achieve
its goal to create high value goods and services. Not necessarily
because they want to help the 1.3 billion people that live in
China, but because doing so will help their own company gain
advantage over its competitors.
China 's progress toward its goal has been astounding. Consider
following comparisons from consulting group
The 'gap' is the number of years difference between China and the
U.S. on four competitive fronts, from low value to high value: OEM
(Original Equipment Manufacturer), ODM (Original Design
Manufacturer), OBM (Original Branded Manufacturer), and finally to
high value services.
The punch-line of this image is that in the 1980's China looked
like the United States in 1900 in terms of its manufacturing
competitiveness. That's a comfortable 80 year gap for the U.S.
In 2005, China looked more like the U.S. in 1990. That's only a
15 year gap - not quite as comfortable a margin.
And that comparison was from 6 years ago.
The way things are going I wouldn't want to bet against China
right now. But I would want to invest in the things that China
needs in order to continue to close the gap with the rest of the
It should come as no surprise that on the top of the
'recommended investment' list are resources, and more specifically
As China looks to move even further up the value chain it needs
to acquire raw materials, not only for manufacturing, but simply to
keep the power on. It's hard to build a service oriented economy
when there's nothing to power the computers and servers.
So what resources does China buy?
The majority of China's imports are fuels, followed by iron ore
and copper alloys.
Your investing strategy? Buy shares of strong companies that
provide fuels, iron ore, and copper alloys to China and you'll have
a shot at moving up along the value chain with the world's most
You don't need to be a Harvard Business School professor to
understand that this strategy will help you achieve investment
success. You just need to act.
There is one fuel that eludes the headlines, and China is going
after it in a big way. That fuel is Liquefied Natural Gas (
). One of LNG's benefits over dry natural gas is that LNG is easy
to transport - meaning that shippers can deliver it to China's
ports relatively easily.
Right now, China and other undeveloped countries in Asia are
lining up supplies of LNG to start being delivered in 2014.
The big boy in this space is
Exxon Mobil (
(Full disclosure: I own shares of XOM in my personal investment
account). But you won't see much of a change in the price of
Exxon's stock as China starts to take delivery of LNG.
To help investors really cash in on China's drive to increase
Small Cap Investor Pro
Lead analyst Tyler Laundon and I recently uncovered a small
exploration company with potentially huge LNG reserves. If these
reserves are proved to exist, this company will be trying to move
up its value chain and start exporting LNG to China and the rest of
This company is a recent addition to the
Small Cap Investor PRO
portfolio. So recent in fact that we haven't even had a chance to
update the coverage beyond our original research report on the
The report is only for paying subscribers, so
you'll want to sign up here- t hen go to our'Weekly Letter'
section and read 'The Best Oil and Gas Prospects are in the
Undeveloped World .