Growth Downturn Hits Global Firms

Health, tourism remain robust amid GDP fall

The domestic slowdown is causing concern among international firms accustomed to playing the 'China card' to boost their balance sheets but any downturn in fortunes will be sector specific, company chiefs said.

GDP growth for 2012 is estimated to be around 7.8 percent, according to Yi Gang, vice-governor of the People's Bank of China.

The official quarterly GDP data, to be released later this week, will see the economy bottoming out in the third quarter before slowly picking up through the remainder of the year, economists said.

Exports posted higher than expected growth in September and GDP growth will probably hit 7.7 percent in 2012 and 8.2 percent in 2013, according to a report from the Chinese Academy of Social Sciences on Friday.

Yet weakened demand for the whole year will almost inevitably affect countries and international corporations with a large exposure to China.

Companies that enjoyed two-digit growth rates will have to adapt to the slower pace of China's economic expansion, said Christoph Nettesheim, senior partner at Boston Consulting Group, Greater China.

"Overall, there's a significant slowdown in the Chinese economy, whether you call it a hard landing or not. That's a more fundamental thing than just a quarter-by-quarter situation."

But Nettesheim noted that the slowdown "very much depends on sectors".

Some companies "are already very worried," while others are not, he said.

Health and general medical care, tourism, education and luxury cars sales are booming while the slowdown is most noticeable in infrastructure, basic resources and materials. It also affects consumer goods, he added.

However, Nettesheim pointed out that even if China's growth slowed to 7.5 percent it is still higher than most other markets.

GDP growth was 7.6 percent in the second quarter, still leading the major emerging economies, such as 5.5 percent for India, 4 percent for Russia, and 3.2 percent for South Africa. Brazil's GDP growth was 0.4 percent from the first quarter.

Nor would a slower China exert a substantial effect on Western economies given their economic structure, said Zhang Jianping, a researcher from the Institute for International Economic Research under the National Development Reform Commission.

This is because manufacturing contributed about 15 percent to GDP in the US. About 80 percent of GDP in the US is generated from the service sector and 90 percent of that comes from its domestic market, Zhang said.

In China, by contrast, manufacturing accounted for 46.8 percent of GDP in 2011 and the sharp decline in exports not only affected China's export-oriented companies, but the whole supply chain.

"China will affect the world economy, to some degree, but it itself is more vulnerable to the fluctuations of the global economy," Zhang concluded.

Infrastructure

The heavy equipment maker Caterpillar announced a cut to its 2015 profit target in late September partly due to a slower pace of growth in China that has reduced excavator sales by as much as 30 percent to 40 percent, according to a report by Fitch Ratings.

Kevin Thieneman, China head of Caterpillar, admitted that production is slowing but is optimistic about the economy.

"We are slowing down production and capacity expansion to address customer demand, but we are not stopping, halting or reversing our plans," said Thieneman.

China's economic growth will recover later this year or early next, he said but efforts to stimulate growth, especially infrastructure projects, create business opportunities.

"China is still a key priority for Caterpillar. We remain positive on long-term industry growth in China and our strategy to grow our business here," he added.

Otis Elevator, a unit of United Technologies Corp, also saw the impact on sales due to weaker demand led by curbs on real estate. "There should be more or less some impact on elevator sales but for the long term we have seen that China's continued potential for urbanization and infrastructure development presents a great opportunity for the global elevator and escalator industry," said Tom Vining, president of Otis China.

"The elevator industry has been affected and the sales volume of elevators has decreased due to the government's macro-control (on the real estate sector)," he said.

However, there is increasing demand driven by government social housing projects and continued growth in the elevator maintenance market with an annual growth of 20 percent per year.

Otis will give priority to this market and develop it more vigorously, he said.

Also, the increasing demand for elevators in rapidly developing cities in central and western China will also bring great opportunities to Otis, he said.

IT companies

The economic slowdown has hit international IT companies, said Bryan Wang, vice-president & principal analyst at Forrester Research.

Most multinational IT vendors saw growth fall by 5 percent to 10 percent on average in the first six months this year, he said. Hardware makers, including manufacturers of computer communication equipment, suffered most.

Forrester has revised its 2012 growth forecast for China's tech market from 13 percent in January to 10 percent.

Wang predicts China's IT market will be back on track from the fourth quarter, largely due to local government stimulus plans. Customers may become more cautious but this won't affect the telecom industry too much, said Chang Gang, spokesperson for Ericsson China.

"There is still great potential for telecom companies to grow in China," said Chang.

Tech company Broadcom, is also optimistic about China's economic prospects.

China is undertaking significant technology transitions by making huge investments in upgrading existing mobile and wireless infrastructure and networking, said Dana McCarty, vice-president, Asia sales and China country manager of the company.