A villager walks past an Alibaba rural service centre in Yuzhao Village, Tonglu, Zhejiang province, China, July 20, 2015. (Reuters Photo/Aly Song)
Western Companies Look Hard at China as Growth Slows
BY :TOM BERGIN
AUGUST 03, 2015
London. The Chinese slowdown is forcing many Western companies to take a hard look at their businesses there, leading many to reduce investments, costs and product lines and to tackle increasing bad debts.
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, 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.
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, 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 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 Hayllar, partner with OC&C Strategy Consultants, 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 towards 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 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 eye wear manufacturing Luxottica, are trying to attract increasingly cautious Chinese consumers with price cuts.
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.
The deteriorating Chinese environment is also forcing companies to think harder about credit risks.
Swedish lock maker Assa Abloy'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, 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.