By Austen Hufford and Theo Francis
To gauge the scope of China's economic slowdown, begin with
forklifts.
The factory workhorses are a barometer of the manufacturing
sector's fitness. Changes in demand can ease or worsen concerns
about China.
By that measure, EnerSys sees trouble.
The Reading, Pa., maker of batteries that power forklifts said
those sales in China fell in the latest quarter after rising 10% or
more earlier in the year.
"We've seen a slowdown," said Michael Schmidtlein, EnerSys's
finance chief. "Given that forklifts are a good indicator of
economic activity, their general economy has slowed, and maybe far
greater than the authorities are indicating."
Fourth-quarter results from U.S. companies highlight the many
and varied ways that China's cooling economy affects American
business, and, in turn, offer a glimpse of what's happening inside
China. The indications are that slowing growth there is broad, if
still modest.
For U.S. businesses, the repercussions extend well beyond
slowing sales at companies with the biggest exposure to China's
vast economy.
Companies like EnerSys are struggling with weaker demand from
export manufacturers in China, which are pulling back amid fears
that trade tensions will worsen. Retailers and other companies
catering to Chinese consumers face signs of weakness among the
country's growing middle class. They are buying fewer cars, phones
and are traveling less.
Some analysts expect that China's slowing growth, and its
effects on U.S. companies, will worsen in the first quarter. A
recent business-sentiment survey from Oxford Economics found that
many North American and European businesses see elevated risks of a
sharp global downturn, with many citing China's economy and its
policy response as significant risks.
"The expectation is that Q1 is going to be brutal," said Brad
Setser, former deputy assistant Treasury secretary for
international economic analysis in the Obama administration, and
now a senior fellow in international economics at the Council on
Foreign Relations.
Chinese exports slowed in December and are likely to decelerate
more sharply in the first quarter, Mr. Setser said, especially if
trade tensions with the U.S. aren't resolved: "The question is,
will the trade truce plus China's internal stimulus put China's
economy back on a stable path?"
U.S. and Chinese officials will meet this week for trade
negotiations ahead of a March 1 deadline. President Trump in early
December delayed plans to increase tariffs on $200 billion of
Chinese goods to 25% from 10%, giving the two sides time to strike
a comprehensive trade deal.
The uncertainty over the path of China's economy has gripped the
attention of U.S. executives and Wall Street analysts. They
mentioned China 225 times during investor conferences and calls for
current S&P 500 companies through the first full week of
February -- the most over the same period in at least a decade,
according to a Wall Street Journal analysis of transcripts from
FactSet.
General Motors Co. reported a 25% decline in the number of
vehicles it sold in China in the fourth quarter compared with a
year earlier -- a grim turn in a year with a 9.8% sales drop. GM's
sales shrank faster than those of the industry as a whole, which
declined 20% in the fourth quarter and about 6% for the year.
GM attributed its weaker performance largely to its lower-margin
Wuling and Baojun brands in smaller Chinese cities, where a
softening real-estate market has soured consumer sentiment. The
company's luxury Cadillac brand, however, rose 17% last year over
2017, driven by sales in China's largest and most affluent
cities.
One bright spot comes from continued spending by wealthy buyers.
Estée Lauder Cos. said sales in the Asia-Pacific market, led by
China and Hong Kong, rose 20% in the second half of last year.
Chief executive Fabrizio Freda said in an earnings call last week
that high-end beauty products are a relatively affordable luxury
that younger Chinese shoppers keep buying, despite a decelerating
national economy.
Jeweler Tiffany & Co., which rings up as much as 30% of its
sales from Chinese consumers, said sales in China rose by more than
10% in the two-month holiday period ending Dec. 31.
Outside China, the prospects look less cheery. Analysts say most
of Tiffany's sales to Chinese consumers are from Chinese tourists
shopping in Hong Kong, Europe and elsewhere. That business hasn't
held up as well. Chinese tourists bought less in the Americas and
in Hong Kong in the quarter the ended in late October, the company
said.
Tourism sales also slipped over the holiday period, Tiffany said
in a mid-January report. The company traces softened tourist sales
to a stronger dollar, which raises travel and overseas shopping
costs for Chinese consumers.
Gene Ma, head of China research for the Institute of
International Finance in Washington, D.C., said government rules to
stem capital outflows, including tighter ATM withdrawal limits,
likely depressed sales to Chinese tourists abroad, among other
factors.
China's girth
Despite slowing, China still posted economic growth above 6%
last year, easily surpassing the U.S. and Europe.
The country's 1.4 billion people and rising middle class bought
nearly $52 billion worth of iPhones and other Apple Inc. products
in the fiscal year that ended on Sept. 29. Rapidly expanding
megacities such as Shanghai are dotted with Starbucks coffee shops,
and new buildings ferry passengers on Otis elevators made by United
Technologies Corp.
China's size and rapid growth in recent years, together with the
expansion of American businesses within its economy, means even a
modest slowdown can be felt along supply chains that stretch
world-wide.
As more companies flagged economic weakness in China in their
fourth quarter results, investors and analysts have worked to
untangle the impact on U.S. companies and economic sectors. Many
companies disclose sales in Asia, and to a lesser extent in China,
but exposure to the Chinese economy is much broader.
Companies such as Mastercard Inc., for instance, have no direct
business within China's domestic economy. Yet it can see the effect
of slowing growth, Mastercard CEO Ajay Banga told analysts in a
Jan. 31 conference call. "Given the size of the Chinese economy, it
does impact the global economic picture."
About a third of companies in the S&P 500 generate no direct
revenue from China, according to estimates by FactSet, based in
part on company disclosures. Another third generate at least 3% of
sales in China. About 60 of the biggest U.S. companies generate 10%
or more of sales there.
Many are technology and industrial companies that sell
components to manufacturers that make products in China for export
elsewhere, limiting their exposure to a slowing Chinese
economy.
"Everything is built in China but it doesn't necessarily stay in
China," said Christopher Rolland, a semiconductor analyst at
Susquehanna International Group. Sales numbers, he added, can be
"an overrepresentation of true Chinese demand."
Not all business problems in China are driven by tariffs or
slower growth there. Tupperware Brands Corp., which markets its
plastic food containers through a network of individual sellers,
last month said revenue and profit across several of its units were
below internal projections. The company, in part, blamed weakness
in China. The company's shares fell 27% that day.
Doug Lane, who runs a boutique investment research firm, said
other direct sellers haven't mentioned similar problems in China.
"When companies are reporting numbers below expectations, they tend
to blame a lot of things," he said.
Tupperware said it generated more than $200 million in revenue
in China in 2018, or about 10% of its sales, through 6,700
independent retail locations. It declined to comment.
Under pressure
EnerSys, the Pennsylvania-based battery maker, is feeling
pressure from all sides: a slowing Chinese economy, new government
rules and the China-U.S. trade battle.
The company generates about 5% of its total sales in China and
about 60% come from the Americas. But it makes some of its
batteries in China, and the company competes with Chinese battery
makers that sell backup power supplies.
EnerSys said sales in Asia in its most recent quarter fell 11%
from the prior quarter. A government mandate prompted one of its
largest Chinese customers to use more recycled batteries.
In response to slowing sales, EnerSys had planned to use a
Chinese factory to produce more products for export to the U.S.
That idea was scrapped when the U.S. imposed tariffs on batteries
imported from China. EnerSys says now it will export from its
Chinese factory to other countries.
The cooling Chinese economy has driven down the price of raw
materials, including the lead used to make batteries, but it isn't
much of a silver lining.
"Our inputs are cheaper but the broad demand for our product is
less," said Mr. Schmidtlein, the EnerSys finance chief.
Other companies are benefiting from lower-priced raw materials
on the one hand, and getting pinched by U.S. tariffs on the
other.
Masco Corp., which makes Delta faucets and Hansgrohe shower
heads, said it was poised to benefit from lower copper and zinc
prices in the second half of last year. Masco also faces increased
costs of about $150 million if the U.S. follows through on its
threat to raise some tariffs on Chinese imports to 25% this year,
the company said In its annual report filed Thursday.
If forklift demand is one rough gauge of economic growth,
microchips are another. Consumer appetite for high-price
electronics, including smartphones, has slowed. So has
construction, which means fewer appliance sales. Both are bad news
for semiconductor makers, whose chips span all those products.
"Industrial and consumer end markets have been especially weak
in greater China," Keith Jackson, chief executive of ON
Semiconductor Corp., said.
Chinese manufacturers are cutting back orders of microchips to
avoid being left with unsold goods, in case the U.S.-China trade
dispute yields higher tariffs, and demand for Chinese-made goods
falters.
"They're risk averse. They're not going to take any chances.
They're not going to hold inventory," Thad Trent, the financial
chief at Cypress Semiconductor Corp., said Jan. 16 at a conference.
"We see customers waiting at the last minute to place orders."
Chip makers link China's slowing growth with the U.S.-China
trade fight. "Trade is the problem why Chinese economy is weakening
so much," said Steve Sanghi, CEO of Microchip Technology Inc.,
which makes microcontrollers used in electronic and industrial
components.
Some executives and analysts have said economic softness would
dissipate if the trade issues were resolved. Others aren't so
sure.
"There are some underlying economic and end-demand issues in
China that still need to be dealt with and resolved," said John
Vinh, a semiconductors analyst with KeyBanc Capital Markets Inc.
"There is not potentially a quick fix as easy as resolving the
tariff conflict."
Write to Austen Hufford at austen.hufford@wsj.com and Theo
Francis at theo.francis@wsj.com
(END) Dow Jones Newswires
February 11, 2019 13:27 ET (18:27 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.