BHP BHP Group Limited

By Laurie Burkitt 

BEIJING--The China economic slowdown that has rattled global markets is also shaking the fortunes of multinationals that do business here.

Those that fed China's traditional boom industries of infrastructure, energy and steel--like Anglo-Australian miner BHP Billiton Ltd. and French energy-equipment maker Schneider Electric SE--are suffering precipitous falls in revenue there after years when their profits were boosted by the country's 10%-plus economic growth. Many also face heavy write-downs as investment plans predicated on surging China demand look increasingly unrealistic as the country's growth slows.

In contrast, companies like iPhone maker Apple Inc. and luggage maker Samsonite International SA that cater to China's consumers are faring much better as retail demand overall remains strong.

"We're spending as much as we always do," said Zhen Lin, a 27-year-old magazine editor on maternity leave, emerging from a Beijing supermarket with a cart half full of groceries. Ms. Lin said she eats out several times a week and isn't holding back on her spending. Among the purchases she is planning: a new computer this year and a new car some time in the next two.

The shifting fortunes of international companies in the world's second-largest economy come after two decades when China has not only been the world's factory floor, but an El Dorado for foreign companies of all stripes.

Major luxury and retail brands as well as car makers piled in, becoming as prevalent on the streets of Shanghai as they are in New York or London. China became the world's largest car market--a critical venue for companies like General Motors Co. and Volkswagen AG. Sales of luxury goods in China jumped 30% to 266 billion yuan ($41.4 billion) in 2011, and by 2012, Chinese shoppers made a quarter of all global luxury purchases. Giorgio Armani SpA had around 300 stores in China then, just shy of Wal-Mart Stores Inc.'s 380.

Major oil companies like BP PLC and Royal Dutch Shell PLC invested in projects in China, and hundreds of other industrial companies boosted output around the world to meet China's demand. China still consumes nearly half the world's copper and has become the world's second-largest oil importer. It also consumes 45% of global steel, but some analysts reckon its demand may have already peaked.

The slowdown in China's rate of growth that began in 2011 is changing the equation. Industrial production in July grew 6% over the year-earlier period, less than half its year-over-year growth rate of 14% in July 2011. Property development has ground to a halt as empty malls and apartment buildings dot many of the country's smaller cities. Office-building construction starts fell nearly 15% in the first seven months of this year versus a year earlier; in 2014, they'd grown 6.7%.

But retail sales have held up relatively well during the past few years, with growth slowing to 10.5% in July from 12.2% the same month last year and 17.2% in 2011.

The contrasting fortunes in the corporate world are stark.

BHP Billiton, the world's biggest miner, which had racked up $23.6 billion in profit four years ago, last year made only $1.9 billion. On Tuesday it scrapped its long-held belief that China will produce more than one billion tons of steel a year by the mid-2020s and now sees output peaking as low as 935 million tons. U.S. oil giant Chevron Corp. took a $2 billion impairment charge in the second quarter after a lower crude-price outlook led it to suspend projects; the company said slower Chinese growth was partly to blame.

Schneider Electric, one of the world's leading suppliers of switches, circuit breakers and other electrical gear used in buildings and power grids, cut its profitability target for the year, blaming in large part China's slowing growth. The country's ebbing demand for elevators and escalators as its building boom cooled hit the Otis elevator unit of United Technologies Corp., which in July reported a 5% decline in second-quarter sales. Caterpillar Inc. said in July that Asia-Pacific sales of its construction equipment were down 30% in the second quarter, with much of that decline in China.

Meanwhile, luggage maker Samsonite Wednesday said sales in China during the first half of the year rose 30% excluding currency effects, helping push overall revenue to a record $1.2 billion. Apple said its business in China more than doubled to $13.23 billion in the latest quarter, and Chief Executive Tim Cook assured spooked investors earlier in the week that its business was still strong there in July and August. German sportswear brand Adidas AG's China sales in the first half of the year in China increased EUR1.16 billion ($1.34 billion), up 20% from a year earlier excluding currency effects. Much of the growth came from aggressive expansion across China, where Adidas has more than 8,400 stores.

It is a tale of two economies, said Andrew Polk, economist at research group Conference Board. "The old growth drivers are clearly in the tank. The new growth drivers--consumption and service--are holding up for now, but the jury is still out," Mr. Polk said.

Some of the strongest corporate performers are targeting a newly affluent population that looks increasingly like the American middle class. They are spending for the first time on goodies like overseas travel, imported food and concert tickets. Demand for prime splurging products like Japanese diapers, Mexican avocados and Chilean salmon is surging, and it hasn't been overturned by the crash in stocks--where average Chinese still have little invested.

Income is climbing for large segments of the population. Between 2005 and 2012, roughly 50 million urban households graduated into the middle class, which now numbers around 147 million households, roughly 49% of China's urban population, according to the Boston Consulting Group. Those consumers started buying products like Dove shampoo from Unilever PLC and Crest toothpaste from Procter & Gamble Co. rather than local goods.

Now, the fastest shift is in households moving to the equivalent of upper-middle class, with monthly incomes between 12,000 yuan and 20,000 yuan ($1,868 to $3,114) and a taste for spas, organic food and vacations in Tokyo and Bangkok. BCG estimates there are more than 25 million of such households now, and the number will more than triple by 2020.

"We are on the spend side of the economy," said Samsonite Chief Executive Ramesh Tainwala, adding that many of the company's customers are first-time overseas travelers. "Despite the 'New Normal,' the urge to travel has not changed."

Mr. Tainwala said that the price of Samsonite's best-selling luggage in China has dropped to around $250 from $400 a few years ago as some of the more reckless spenders of the boom times are replaced by buyers looking for good value for their money. The company has reached out to consumers in smaller Chinese cities and tackled local rivals by stressing its global warranty and internationally known brand.

To be sure, plenty of consumer-facing firms are also struggling. Purveyors of luxury goods like Prada SpA have seen sales in China pummeled by a government crackdown on corruption and extravagance. Companies like Unilever and P&G that peddle basic consumer goods have seen sales eroded by a host of savvy local rivals with soap and shampoo brands that now rival theirs in popularity. Global car makers have cut back production as sales fall, amid Chinese government complaints that the companies were overcharging consumers.

Consumer spending isn't enough to replace the industrial investment that powered China's economic boom, and if economic fallout continues, many consumers may lose the jobs that are fueling their spending. Already Chinese wage growth has slowed in the past year. Smaller cities, which have been targets for corporate expansion, may no longer be bright spots for growth, Conference Board's Mr. Polk said.

Adidas China head Colin Currie said executives plan to keep a close eye on business, tracking real-time sales data to see if there is any fallout in China's smallest cities, where the brand has rapidly expanded in the past five years. The company clusters its store data by regions and store formats, enabling executives to compare what strategies are working and to switch everything from design to distribution for those that aren't.

"We know that the Chinese consumer changes very quickly," said Mr. Currie. "As a brand and a business, we have to watch these changes. It's one of our strengths."

Multinationals have seen promise--and sometimes disappointment--in China's vast consumer market for more than a century, embodied by an oft-repeated 19th-century saying that if every man in China added an inch to his shirttail, then the mills of Lancashire, England, would run for a generation.

Consumer companies were among the first to invest when China began opening its economy to outsiders in the late 1970s. Coca-Cola Co., which entered the market in 1978, said in 1980 it would build its first bottling plant in Beijing. Kentucky Fried Chicken--now KFC--opened its first outlet in the 1980s and quickly became the most popular foreign food chain in China.

Heavy industry investment jumped after China joined the World Trade Organization in 2001. By 2002, foreign direct investment had jumped to $52.74 billion from $40.4 billion in 1999. By 2011 it had more than doubled to $124 billion before easing, and last year totaled $119.57 billion.

Brian Spegele and Phred Dvorak contributed to this article.

Write to Laurie Burkitt at laurie.burkitt@wsj.com

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August 26, 2015 19:28 ET (23:28 GMT)

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