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Chinese Consumers Step Back, Pinching Firms; Canon, Nike and Apple Feel Squeeze in Economic Slowdown

August 22, 2013, 5:48 p.m. ET

Chinese Consumers Step Back, Pinching Firms

Canon, Nike and Apple Feel Squeeze in Economic Slowdown

RICHARD SILK

BEIJING—Companies as diverse as retailers and gadget makers are reporting weakened results from China, as the economic slowdown there blunts Beijing’s drive to make the nation’s consumers a bigger driver of growth. Last month, Canon Inc. 7751.TO +1.07% cut the Japanese company’s year-end profit forecast to ¥380 billion ($3.89 billion), off 16% from forecasts three months earlier, citing in part the slowdown in China. Nike Inc. NKE -0.72% reported falling China sales in its latest results, while British supermarket chain Tesco TSCO.LN +1.42%PLC is in talks with a local company, China Resources Enterprise Ltd.,0291.HK -1.51% about folding its 131 underperforming Chinese stores into a joint venture.Apple Inc. AAPL -0.41% said last month that its revenue from the greater China region fell 14% from a year earlier to $4.6 billion for the quarter ended June 29. The figure represents a 43% decline from the previous quarter.

“A lot of the China story that companies would tell their shareholders was always about 15% nominal growth in gross domestic product, 20% increases in sales,” said Derek Scissors, an expert on China’s economy at the Heritage Foundation, a Washington, D.C., think tank. “That overarching growth story has weakened.”

Many are blaming China’s economic slowdown for at least part of their performance. Growth slowed to 7.5% year-to-year in the second quarter, compared with 7.7% in the first.

That has slowed efforts to empower the Chinese consumer. Retail sales slowed to 12.8% year-to-year growth in July, down from 14.3% in 2012. Consumer confidence edged up from June’s figure, according to the National Bureau of Statistics, but remained close to its lowest level in the 23-year history of the official series.

The property market has also slowed from earlier in the year, when Beijing relaxed controls and more homebuyers went into the market, hitting consumer spending. In line with that slowdown, consumer-electronics sales rose 7.5% year-to-year in July, down from a 20.9% gain in the first two months of the year, according to official figures. Furniture sales cooled off a little too, with growth slipping to 17.6% from 20.9%.

The picture isn’t uniformly gloomy. German sportswear company Adidas AG’sADS.XE -1.36% Greater China sales increased 6% in the company’s second quarter, while French-Taiwanese supermarket chain Sun Art Retail Group Ltd. reported a 15% increase in net income to 1.58 billion yuan ($258 million) in the first half at its 284 outlets in China. Passenger-car sales have maintained a healthy pace.

Some analysts are optimistic that the slowdown in consumer spending is temporary.

“I don’t think all the weakness in consumer sales is due to structural weakness in China,” said Xiaopo Wei, an analyst at CLSA, a brokerage that is based in Hong Kong. “When the macroeconomic picture weakens, discretionary demand is dampened. But when the macro outlook improves, discretionary demand will rebound.”

The concern for China’s government is that there might also be longer-lasting factors at work.

China’s leaders have trumpeted the need to rebalance the economy toward consumer spending from a historic reliance on fickle export markets and high levels of investment. So far that shift has been slow to materialize. Consumption contributed 45% to GDP growth in the first half of the year, down from 60% in the first half of 2012.

Adjusted for inflation, urban household income rose 6.5% in the first half compared with a year earlier, down from 9.7% growth in the same period of 2012. Policy shifts aimed at boosting consumption by reducing the need for saving—for example, by strengthening public health and pension systems— have been slow to arrive. Slower income growth combined with still-high savings could put a long-term damper on consumer spending.

Not all problems are due to a slowing economy. Stiff competition has put the squeeze on individual companies. A price war between two instant-noodle makers, Tingyi (Cayman Islands) Holding Corp. 0322.HK -1.71% and Uni-President Enterprises Corp., has been painful for each. After its first-half profit missed analysts’ forecasts, Uni-President blamed a slowing economy and cutthroat competition within the industry. And electronics stores such as Suning Appliance Co., whose profit fell 58% in the first half, have suffered as spending shifts online. Alibaba Group Holding Ltd., which owns online marketplace Taobao, said its first-quarter revenue increased 71% year-to-year.

“The pie continues to grow, but your slice of it might not,” said Paul French, chief China strategist at Mintel, a market-research firm. “The amount of competition in pretty much every sector makes it very hard to build your market share.”

Other factors are also at work. Luxury goods, from designer watches to high-end liquor, are feeling the pinch from an official crackdown on corruption and official excess. More than half of Chinese companies have cut spending on corporate entertainment in the past six months, according to Data Driven Marketing Asia, a market-research firm. Major foreign vendors such as Yum Brands Inc., YUM -0.56%owner of the KFC restaurant chain, have posted sales declines after close scrutiny from state media.

Looking at slowing wage growth and weaker housing sales, Thomas Gatley, a consumer-sector analyst at Beijing-based research firm GK Dragonomics, sees little prospect of stronger consumption. “I’m not feeling optimistic at all,” he said.

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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