Analysis: Some companies change tack in China with no recovery in sight

Schindler Holding AG

28/10/2024 05:00

* 
      Executives downbeat about China early in Q3 earnings
season
    

        * 
      Property crisis, youth unemployment remain a problem
    

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      Beijing has pledged stimulus, investors say may not be
enough
    

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      China Q3 GDP slowest since early 2023
    

  
    By Bernadette Hogg, Ananya Mariam Rajesh and Helen Reid
       GDANSK/BENGALURU/LONDON, Oct 28 (Reuters) - Companies
around the world are starting to cut prices and costs and scale
back activity in China, as the world's second-biggest economy
continues to flag despite Beijing's efforts to turn things
around.
    Big names including Hermes  HRMS.PA , L'Oreal  OREP.PA ,
Coca-Cola  KO.N , United Airlines  UAL.O , Unilever  ULVR.L  and
Mercedes  MBGn.DE  said Chinese customers are curbing spending
as a property crisis drags on and youth unemployment stays
high. 
    Some are already shifting their China strategies.
    French carbon graphite maker Mersen  CBLP.PA  said last week
it would close a factory making power transmission products in
China because it cannot compete with local rivals.
    International food companies such as Danone  DANO.PA  and
Nestle  NESN.S  have meanwhile deepened price cuts or are
seeking to boost online shopping volumes. 
    Coca-Cola CEO James Quincey said on an Oct. 23 earning call
that the operating environment in China remained challenging.
    "The economy is kind of not taking off," he told investors.
    The Chinese government has promised more help, but the scope
and timing of further stimulus is uncertain, and investors are
so far not convinced that its efforts will spur the $18.6
trillion economy.
    Some companies are still investing despite the downturn.
    Birkin handbag maker Hermes is compensating for lower
traffic in China with higher average basket values, selling
jewellery, leather goods and ready-to-wear for men and women.
    After opening a store in Shenzhen last week, Hermes plans a
second opening in Shenyang in December and a flagship outlet in
Beijing next year.
    But for others, business in China has changed for the long
term.
    "We used to fly, I think, roughly 10 flights a day to China,
and I think those days are gone," United Airlines CEO Scott
Kirby said. 
    The company now has up to three flights a day from Los
Angeles to Shanghai, and does not expect that to change soon.
    "It's just a completely different world," Kirby added.
     
    THIRD-QUARTER GLOOM
    The third-quarter earnings season, now in full swing, has
seen a string of company executives describe a troubled Chinese
business environment.
    Ermenegildo Zegna, chairman and CEO of the Italian luxury
group of the same name  JN0.F , said he expects "challenging"
times in China to continue into at least early 2025.
    The luxury goods sector has borne the brunt of the downturn,
as economic uncertainty weighs on middle-class shoppers and
makes even China's wealthy more reluctant to spend.
    LVMH  LVMH.PA , whose Chinese sales helped make it Europe's
biggest company by market capitalisation until last year, said
consumer confidence in the country was at an all-time low.
     With China's massive Singles' Day shopping event underway,
many local vendors expect flat or at best tepid sales growth,
reporting that consumers are still very much dispirited by the
country's economic troubles.
    Heavy industry has also had a rough ride that it expects to
last a while longer.
    "So far, I'd like to stress, there is no recovery visible
nor in sight,"  SCHP.S  CEO Silvio Napoli said after Swiss
elevator and escalator maker Schindler reported quarterly
revenue on Oct. 17.
    Having returned from a trip to China earlier this month,
Napoli said he had not seen any signs the market had reached a
bottom. China accounted for 15% of Schindler's revenue last
year.
    The CEO said he did not consider the stimulus measures to be
the "bazooka" the economy needed, but that there might be more
visibility in February when the company releases full-year
results. 
     
     
    WAITING GAME
    It is still early in earnings season, but expectations for
companies with Chinese exposure were already low.
    And there are more potential downbeat assessments to come,
as only a small number of the hundreds of companies on the
pan-European STOXX 600  .STOXX  and U.S. S&P 500 indices  .SPX 
have so far reported.
    "We have heard from a lot of companies about it being much
more of a cyclical slowdown than something that is structural,
so it's waiting for that confidence to return, waiting for that
stimulus to really kick in," said Gillian Diesen, portfolio
manager at Pictet Asset Management in Geneva.
    That will depend on Chinese government stimulus feeding
through to households and encouraging them to splash cash again.
    "The government has clearly shown they understand the
country has several large problems," said Eric Clark, portfolio
manager of the Rational Dynamic Brands Fund. "Thus far, their
approach to trying to fix them seems akin to putting a few
band-aids on catastrophic wounds." 
    Companies face other potential headwinds, too. 
    European carmakers and white goods manufacturers like
Electrolux  ELUXb.ST  are struggling to compete in their home
markets with Chinese rivals who are able to make and sell goods
more cheaply.
    Donald Trump has also threatened blanket 60% import tariffs
on Chinese goods if he wins Nov. 5's U.S. presidential election,
potentially putting huge pressure on China's industrial base.
    This week, Brussels will impose duties of up to 35.3% on
China-made electric vehicles, ratcheting up a trade dispute with
Beijing which has launched its own retaliatory steps.
     
     

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
China GDP growth slows in Q3    https://reut.rs/4frJPG3
China's jobless youth    https://reut.rs/3BQRLlv
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 (Reporting by Bernadette Hogg and Piotr Lipinski in Gdansk,
Helen Reid and Lucy Raitano in London, Dominique Patton and
Mimosa Spencer in Paris, Elisa Anzolin in Milan, and Christy
Santosh, Niket Nishant, Jaspreet Singh, Harshita Varghese,
Shivansh Tiwary, Aishwarya Jain, Vallari Srivastava and Ananya
Mariam Rajesh in Bengaluru, Casey Hall in Shanghai; 
Writing by Josephine Mason and David Gaffen; Editing by Jane
Merriman and Catherine Evans)
 ((mailto:Josephine.Mason@thomsonreuters.com; +44 207 542 7695;
Reuters Messaging:
rm://josephine.mason.reuters.com@reuters.net/))