|
 Double digit growth rates during the first decade of the millennium
lured scores of Western companies to invest heavily in China. But in
recent years growth has slowed sharply, hitting demand and raising
doubts about the financial health of Chinese companies.
A recent equities market rout has dashed hopes China will, in the
coming years, return to the robust growth it saw in the past.
“We had five fabulous years in China, of course, where we grew
strong double-digit, and it has been gradually slowing down.
Currently, in China we had negative order intake,” said Frans van
Houten, chief executive of Dutch electronics group Philips NV <PHG.AS>,
on a call with analysts on Monday.
“Going forward, we need to be much more modest on expectations with
regard to China growth; that's just being realistic,” he said.
The size of China’s economy means executives are not talking about
withdrawing from the market but they say business cannot continue as
normal.
“I'm optimistic long-term and medium-term that China will come back.
Short-term, we need to manage through the drought that we see,” said
Ulrich Spiesshofer, CEO of Swiss-based industrial conglomerate ABB <ABBN.VX>.
ABB is carefully managing costs and working hard to convince
customers its products offer value despite premium prices. Stuart
Rowley, vice president at Ford Motor Company <F.N>, said his company
had responded to the softening market by cutting production.
Such actions have knock-on impacts on suppliers, which are also
often Western. French auto components group Valeo <VLOF.PA> said
slackening demand from Chinese car factories was forcing it to
review its growth plans.
“We see the growth rate slowing down. And in the summertime, some of
our customers are extending their summer holidays ... Of course, we
adapt hiring and CapEx (capital expenditure) to current market
conditions,” said CEO Jacques Aschenbroich.
CHANGE IN TACK
Will Hallyer, partner with Strategy Consultants OC&C, said the
toughening conditions were prompting companies to shift their focus
from boosting market share to ensuring their operations were
profitable or at least reducing any losses.
“It had been more of a land grab mentality -- buy a position, invest
heavily in growth and have confidence that at some point you’ll be
able to make money,” he said.
“As the market slows down, it accelerates the shift toward people
thinking hard about making sure they have a business that makes
money,” he added.
Strategies vary across companies and sectors.
Some have focused on cost reductions -- General Motors flagged
"material cost performance" in China to investors. Acting CEO of
Sweden's Volvo AB Jan Gurander said this was easier to achieve
in China than in Europe, where workers enjoy more protections and
factory shutdowns can be politically sensitive.
Others, including BMW and eyewear manufacturing Luxottica, are
trying to attract increasingly cautious Chinese consumers with price
cuts.
[to top of second column] |
Some companies are rethinking their product lines. French dairy
group Danone told investors it was offloading its Chinese business,
Dumex, which operates in a highly competitive, commoditized market,
to a joint venture partner to allow it focus on marketing its
international brands which offer the potential for higher margins.
CREDIT RISK
The deteriorating Chinese environment is also forcing companies to
think harder about credit risks.
Swedish lockmaker Assa Abloy Ab’s Chinese unit is heavily exposed to
the hard-hit construction industry. Chief Financial Officer Carolina
Happe said the time it took for Assa’s Chinese customers to pay had
increased by a month in the past year, to 99 days. That compares to
a group average of 55 days. The change could lead to increased bad
debt provisions, she said.
Volvo issued a warning to investors last year that it would have to
take a 650 million Swedish Crown ($75 million) charge for expected
credit losses in China. Gurander told investors in mid July his
company was having tough discussions with dealers about outstanding
debts but it was hard to know if the situation was stabilizing or
not.
Growing credit risks are also prompting some Western banks to
rethink their exposure to China. Sergio Ermotti, CEO of Swiss-based
UBS AG, said it had stopped lending money to onshore clients in
China.
But even as they moderate their ambitions in China, companies retain
an eye for growth opportunities. Some are hoping the stock market
drop could help them snap up local companies cheaply.
But with many Chinese companies still supported by government
interventions like cheap credit, bargains are few, executives said.
“There are many, many companies for sale, and we are looking to many
of those. Still they haven't felt the heat of the downturn in full
yet. That means that they (the owners) expect to get paid,” Assa
Abloy CEO Johan Molin told investors.
(This version of the story corrects spelling of consultant's name in
paragraph 11 to "Hayllar" from "Hallyer")
(Additional reporting by Tom Pfeiffer and Ben Hirschler in London;
Editing by Giles Elgood)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
