Analysis – Some companies are changing tack in China despite the recovery seen by Reuters
By Bernadette Hogg, Ananya Mariam Rajesh and Helen Reid
GDANSK/BENGALURU/LONDON (Reuters) – Companies around the world are starting to cut prices and cut costs and cut jobs in China, as the world’s second-largest economy continues to shine despite Beijing’s efforts to turn things around.
Big names include Hermes, L’Oreal, Coca-Cola (NYSE :), United Airlines, Unilever (LON:) and Mercedes said Chinese customers are cutting back on spending as the property crisis continues and youth unemployment remains high.
Others are already changing their China strategies.
French carbon graphite company Mersen said last week it will close a factory that makes electrical products in China because it cannot compete with its competitors.
International food companies such as Danone and Nestle have currently deepened price cuts or are looking to increase online shopping prices.
Coca-Cola CEO James Quincey said on October 23 he received a report that the workplace in China remains a challenge.
“The economy is not going well,” he told investors.
The Chinese government has promised more aid, but the scope and timing of further stimulus are not guaranteed, and investors are not yet convinced that their efforts will boost the $18.6 trillion economy.
Some companies are still investing despite the recession.
Birkin handbag maker Hermes is offsetting low traffic in China with mid-range basket values, selling jewelry, leather goods and men’s and women’s ready-to-wear.
After opening a store in Shenzhen last week, Hermes is planning a second opening in Shenyang in December and a flagship location in Beijing next year.
But for some, business in China has changed for a long time.
“We used to fly, I think, about 10 flights a day to China, and I think those days are gone,” said United Airlines CEO Scott Kirby (NYSE: ).
The company now has up to three flights a day from Los Angeles to Shanghai, and it doesn’t expect that to change anytime soon.
“It’s a completely different world,” added Kirby.
THIRD QUARTER MEAT
The third-quarter earnings season, now in full swing, has seen a string of corporate executives describe China’s troubled business environment.
Ermenegildo Zegna, chairman and CEO of the Italian group of the same name, said he expects “challenging” times in China to continue at least until early 2025.
The luxury goods sector has been hit hard by the economic downturn, as economic instability weighs on middle-class consumers and makes even China’s wealthy reluctant to spend.
LVMH, whose Chinese sales helped make it Europe’s biggest company by market capitalization until last year, said consumer confidence in the country was at an all-time low.
As China’s biggest Singles’ Day shopping event continues, many local retailers expect slow or sluggish sales growth, reporting that consumers are still largely depressed by the country’s economic woes.
Heavy industry has also had a rough ride that it expects to last for a long time.
“So far, I would like to emphasize, there is no visible or visible recovery,” said CEO Silvio Napoli after Swiss elevator and escalator manufacturer Schindler reported quarterly earnings on October 17.
Having returned from a trip to China earlier this month, Napoli said he had never seen any signs that the market had bottomed out. China accounted for 15% of Schindler’s revenue last year.
The CEO said he does not view the stimulus measures as a necessary “bazooka” for the economy, but there may be more visibility in February when the company releases full-year results.
THE WAITING GAME
It’s still early in the earnings season, but expectations for companies with exposure to China are already low.
And there is a possibility of a decline to come, as only a small number of the hundreds of companies in the pan-European and US indices have reported so far.
“We’ve heard from a lot of companies that the decline is gradual rather than systematic, so it’s waiting for confidence to come back, waiting for that recovery to come in,” said Gillian Diesen, portfolio manager. Pictet Asset Management in Geneva.
That will depend on the Chinese government’s stimulus to feed households and encourage them to spend again.
“The government has clearly shown that it understands that the country has serious problems,” said Eric Clark, portfolio manager of the Rational Dynamic Brands Fund. “So far, their approach to trying to fix themselves seems to be like putting a band-aid on the wounds of a disaster.”
Companies face other potential storms, too.
European car manufacturers and white goods manufacturers such as Electrolux are struggling to compete in their domestic markets with Chinese rivals who can make and sell goods at a lower cost.
Donald Trump has also threatened a 60% import tariff on Chinese goods if he wins the November 5 US presidential election, which could put more pressure on China’s industrial bases.
This week, Brussels will impose duties of up to 35.3% on electric vehicles made in China, settling a trade dispute with Beijing that has launched its own retaliatory measures.
