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US companies getting wary of China

Construction workers on the site of the National Stadium being built for the 2008 Beijing Olympic Games weld steel rods earlier this month. China's government is stepping up efforts to curb over-investment in steel, cement and real estate, limiting the amount of money pouring into these sectors, amid fears the economy is growing too fast. PHOTO: AFP

For big US blue-chip companies like General Motors and Coca-Cola, first-quarter results soared on sales in China.

But with many companies heavily invested there, the risk of a government-sponsored economic slowdown gives them reason to view the future with a little trepidation.

China, traditionally seen as only an exporter of low-priced products, is rapidly changing in the eyes of Corporate America.

More US companies are willing to bet big -- with money, time and people -- for the chance to reach consumers in China. With its population of 1.3 billion, China is the world's sixth-biggest economy.

But China's success creates risks. Beijing is worried that annual economic growth of 9.7 percent in the first quarter is fueling inflation.

The central bank raised bank reserve ratios three times in the past seven months, forcing banks to keep more cash on hand instead of lending it. China also slapped bans on new projects such as aluminum smelters.

The next few months will be critical for China and companies relying on it to boost sales and profits.

"I would be cautiously optimistic because the general performance of the Chinese economy has tended to be better than most people have heretofore assumed," said Denis Simon, dean of the Lally School of Management at Rensselaer Polytechnic Institute, of Troy, New York.

"However, I think there are a number of major challenges that the government faces and if it is unable to slow down ... and rein in a lot of this growth, we're in for a bumpy ride."

China's government is trying to cool off the surging economy to curb inflation, which could cut spending on everything from consumer goods to heavy machinery.

The first quarter, though, was clearly a strong one for companies doing business in China.

General Motors Corp, the world's top car manufacturer, and Coca-Cola Co, the world's largest soft-drink maker, as well as Caterpillar Inc, the world's biggest construction equipment maker, have long had an eye on China.

These three companies, among the 30 whose stocks make up the blue-chip Dow Jones industrial average, are finally starting to reap some benefits from their China strategy.

Despite the risks, China offers a multitude of opportunities for many global companies, experts say.

"There's still a tremendous upside in terms of business opportunity in China," Simon said. "That upside comes largely from the fact that we've seen the main targets of foreign investment being basically coastal China or the eastern seaboard, and the Chinese government is making a special effort to get foreign investment to move more toward the western part of the country."

That development will raise the demand for products to improve the nation's infrastructure and serve consumers, said Simon, who previously was general manager of consulting firm Accenture in China.

"Everything from telecom to roads and airports need further investment," he said. "Gradually but steadily, the whole consumer economy is going to develop."

Caterpillar, known for its big yellow tractors, expects sales in China to grow 35 percent this year to US$1 billion. It also has formed a new subsidiary to let Chinese customers lease big construction equipment.
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