Are some global companies too reliant on China?
Consumer companies like Apple, BMW, and Starbucks saw profits rise last quarter because of surging sales in China, while industrial companies like Caterpillar and ABB struggled. Slowing Chinese growth could threaten the latter, but not the former as much.
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A presence in China is no guarantee of success. Ford profits fell by nearly half in the first quarter compared with a year ago, because surging sales in the US weren't matched overseas. In China, falling sales caused an operating loss of $95 million, compared with a profit of $33 million the year before. Ford has spent $4.9 billion there in hopes of doubling sales.Skip to next paragraph
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“You can’t decide to be a player in China overnight,” says Michael Robinet, managing director of IHS Automotive Consulting in Detroit. Companies like BMW, Daimler and Audi have spent time developing relationships, including dealer networks, as well as brand identities. “Chinese consumers think highly of German engineering,” he adds.
If China can avoid a "hard landing," some companies with strong brands may not even notice the slowdown. With its popular iPhone, for example, Apple may ride the boom in demand for smartphones. With more than 1 billion subscribers, China has now surpassed the United States as the No. 1 market for smartphones, according to analytics firm Canalys. Sales in the first quarter of 2012 doubled from a year ago (up only 5 percent in the US).
Starbucks, for one, is betting big. Its China sales have grown at least 20 percent for each of the past seven quarters. That's where the coffee company earns its highest profit margins. So Starbucks is accelerating its expansion in China.
All of this may signal a shift into more of a consumer society in China, an economic rebalancing that could provide a more stable foundation for long-term growth. Many analysts believe this process has yet to begin in earnest. But Huang Yiping, an economist at Beijing University, argues that the process is further along than most people believe.
“China’s consumption share of GDP was probably underestimated by an average of 3.1 percentage points during the past decade,” Mr. Huang wrote in a recent article for East Asia Forum, a quarterly and online policy publication for the Asia-Pacific region. “These figures could mean that China’s long-awaited economic rebalancing has already begun…. Reports of China’s declining consumption share are exaggerated, and the official statistics are partly to blame. Rather, the opposite appears to be true, with China’s consumption share already starting to expand.”
While that bodes well for China's economy in the long term – and for those companies that can capitalize on it – the transition may be bumpy.
“Everything will depend on policy,” says Mr. Lardy, senior fellow at the Peterson Institute. “In the last five years, China has relied too much in investment and real estate for growth. The role of property can’t continue to expand as it has over the last eight years."