A slowdown in China is forcing multinational companies to treat the world’s second-largest economy more like a developed market, turning away from a headlong dash for growth to focus on premium businesses, or improving productivity by investing in staff.
As the main driver of global growth for much of the past decade, China has been a godsend to big international firms looking to boost profits as economies elsewhere struggled.
Now, though, Beijing is attempting to re-balance its economy to a more sustainable rate of expansion dubbed the “new normal” by Chinese President Xi Jinping (習近平), and with growth at its slowest in a generation, the current quarter has seen a slew of companies citing China as a reason for underwhelming earnings.
“We’ve entered the new phase, a new normal with slower growth, and that changes the business dynamic, and it changes the outlook,” John Lawler, Ford China’s chief executive officer said at a recent conference for US businesses in Shanghai.
REDUCED FORECASTS
In recent weeks, weakness in Chinese demand has been blamed for soft sales and trimmed forecasts from companies ranging from luxury fashion retailers such as Burberry PLC and fast-food purveyors such as KFC owner Yum Brands Inc to US computer hardware and consulting firm IBM Corp and Japanese robot maker Yaskawa Electric Corp.
Economic data released last month also showed export growth slowing sharply in Japan, while South Korean exports fell — both blamed on the slowdown in their giant neighbor.
Companies in sectors such as construction and mining have felt the biggest pinch.
Peoria, Illinois-based heavy equipment maker Caterpillar Inc has outlined plans to slash capital spending and cut about 10,000 jobs, while Hartford, Connecticut-based industrial conglomerate United Technologies Corp said that its business in China could drop as much as 15 percent next year.
And the days of double-digit growth that had foreign companies scrambling to enter China in the first decade of the millennium might not be coming back.
LONG-TERM SHIFT
Xi on Tuesday said that growth would remain at about 7 percent for the next five years.
As Beijing tries to steer the economy away from the export and investment-led growth model that fueled China’s rise, companies are having to re-evaluate their strategy.
“Generally, it has probably moved from ‘go, go, go, growth, growth, growth,’ to ‘things are getting complicated,’” said Abinta Malik, general manager for Gap Inc in Greater China, when asked at the Shanghai conference how the message from head office had changed.
In response, some companies are investing more in development to cater to Chinese consumers’ growing sophistication.
CHANGING HABITS
“We have reformulated our products, we have invested in innovation and renovation very much like we do in Europe,” Nestle SA chief executive Paul Bulcke told reporters after the world’s biggest packaged food firm said last month that it would miss its long-term growth target this year.
Chinese Premier Li Keqiang (李克強) on Sunday last week said that Beijing’s policymakers had estimated consumption in China’s vast market was still only half its capacity.
The problem is that consumers are not yet picking up the slack from falling industrial demand.
“The rapidly rising consumer spending has yet to offset the decline in traditional industrial investments,” Swiss engineering group ABB Ltd chief executive Ulrich Spiesshofer last week said after reporting a fall in net profit and revenues for the third quarter.
FINDING GROWTH
However, healthcare appears to be one promising area to target as the Chinese consumer grows older, richer and better informed.
“The underlying fundamentals haven’t changed,” General Electric Co chief financial officer Jeff Bornstein said of GE’s healthcare technology business last month.
“There is still 1.5 billion people. They’re still building hospitals. The private market in China has grown 15 percent to 20 percent a quarter,” Bornstein said.
Drugmaker Roche Holding AG, which bucked the trend by increasing third-quarter sales in China, said that the market for its mainstay cancer drugs was growing strongly, offsetting struggling sales for older products facing generic competition.
“What we’re really seeing is our strategic products that are just beginning to really find their way to patients in China are growing very well, double-digit growth overall,” said Dan O’Day, head of pharmaceuticals at Roche.
Flatlining vehicle sales have prompted global automakers, such as BMW AG, to intensify their training programs, teaching dealers who have previously derived the bulk of their income from selling new cars how to instead maximize their revenue from auto financing, repairs and insurance.
POST-SALES SERVICE
Services have been one of the few recent economic bright spots, with a private sector survey on Wednesday showing the fastest pace of expansion in three months.
Spiesshofer said that his company had opened a new service center to supply spare parts, maintenance and consulting services for oil and gas, chemical, utility, metals, transport and infrastructure sectors.
“Historically, customers have not yet taken out the service offering as strongly,” he said.
“We are pushing that very hard,” he added.
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