Major global firms warn of slow China sales as post-pandemic surge fades

Global firms from consumer goods giant Unilever to automaker Nissan and machinery maker Caterpillar have warned of slowing earnings in China as the world's second-largest economy loses its post-pandemic bounce.

A continued rebound has been limited to a handful of sectors such as dining and luxury goods, driving double-digit China sales growth for the likes of Starbucks, LVMH, and Hugo Boss.

But even those bellwethers have stopped short of raising their China outlook, wary of lackluster economic data, while consumer goods firms such as Procter & Gamble, L'Oreal and Coca-Cola have taken a cautious stance.

"What we're seeing is a very cautious consumer in China, a declining property market, and reduced export demand," Unilever finance chief Graeme Pitkethly told an April-June earnings call last week.

"And there is high unemployment in China, particularly youth unemployment ... As much as we can tell, we're at the historical low point in terms of Chinese consumer confidence."

Ireland-based Kerry Group, which supplies ingredients to companies like McDonald's, said its volumes have increased in China since COVID restrictions ended.

But chief executive Edmond Scanlon cautioned on Wednesday that business would not get back to normal there until 2024.

Beijing has rolled out a series of policy measures in recent weeks to shore up the flagging economy, but weak manufacturing data for July on Tuesday underscored concerns it is still far from turning a corner.

That is a particular blow for European companies that are major exporters to China, which are already struggling with persistent global price pressures and rising borrowing costs.

"China is stimulating right now and we'll have to see what the success of those efforts are," said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors.

Global automakers are also having to contend with increased competition from rivals in China, which for the first time took a more than 50% share of the Chinese market in the first half of 2023. Volkswagen cut its full-year sales target last week after sales dipped in China, its top market.

"Unfortunately, our (China) sales outlook is now falling far below our production capacity," Nissan CEO Makoto Uchida said last week. Earnings recovery in the world's biggest auto market is likely to take time, he said.

Expectations for second-quarter earnings are already low due in part to China's weakness. Refinitiv I/B/E/S data show U.S. and European companies are expected to report their worst quarterly results in years.

The short-lived bounce in economic activity after China lifted its long COVID lockdowns also highlights poor global demand, DHL Group, one of the world's biggest shippers, said on Tuesday.

The company saw drops of 15.95% and 7.1% respectively in air and ocean freight volumes in the first half, particularly on routes between China and its two biggest trading partners, the United States and Europe.

FALLING SHORT
 

In technology, chipmakers such as Samsung and SK Hynix said China's reopening after lengthy virus-busting lockdown measures had failed to spark a revival in the smartphone market, and that they were extending production cuts of NAND memory chips used in handsets to store data.

Even Apple, which reports earnings on Thursday, is likely to post flat iPhone sales in its third-largest market - though better than the 2.1% contraction researcher IDC estimated for China's overall smartphone market in April-June.

Top miners and heavy machinery makers have also taken a hit from a prolonged property sector slump.

"We mentioned during our last earnings call that we expected sales in China to be below the typical 5% to 10% of our enterprise sales. We now expect further weakness as the 10-ton-and-above excavator industry has declined even more than we anticipated," Caterpillar CEO Jim Umpleby told an earnings call on Tuesday.

Rio Tinto, the world's biggest iron ore producer, is nevertheless cautiously optimistic on China as the government has pledged more policies to boost growth.

"Our experience with China is that if things are going less well, then the Chinese have a quite impressive ability to also manage the economy," Rio Tinto CEO Jacob Stausholm said after reporting earnings last week.

BRIGHT SPOTS

Eateries and luxury goods makers have been among few economic bright spots as Chinese consumers splurge following the lifting of COVID-19 restrictions on movement.

Starbucks reported a 46% surge in comparable China sales last quarter - a rebound in line with its expectations and which is likely to last, company officials told investors in a call on Tuesday.

Yum China, owner of the KFC and Pizza Hut chains in mainland China, reported a 25% rise in second-quarter revenue as traffic returned, but said spending per person had decreased as consumers become more "rational" in their outlay.

LVMH, whose 75 brands include Louis Vuitton and U.S. jeweller Tiffany, reported a better-than-expected 17% rise in global second-quarter sales due to rebound in China, but refrained from giving an outlook for the rest of the year.

"The global mood is not one of 'revenge buying' like we saw in 2021 and 2022," LVMH finance chief Jean-Jacques Guiony said last week. "We have no visibility, (but) we are not pessimistic and don't have a reason to be (pessimistic) in China."