China’s slowdown tests hopes of U.S.-based multinational firms

BEIJING — As China’s economy slackens to its slowest pace in years, many U.S.-based multinationals are more dependent than ever on the country.

General Motors sells more cars in China than in any other country. Three years ago, Apple counted on China for just 2 percent of its revenue; in the most recent quarter, it was 16 percent. Starbucks thinks that China will be its second-biggest market by 2014.

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Those companies are counting on the world’s second-biggest economy to pick up the slack from slowdowns in the United States and Europe. But China’s economy could be weakening just as some U.S. corporations ramp up operations there.

Data released Thursday showed China’s economy grew 7.4 percent in the three months ending September, lowest in more than three years, but retail sales showed a slight improvement, rising at 14.4 percent over the first half of the year.

For many years, the prospect of selling to hundreds of millions of newly middle-class Chinese citizens has elevated the Chinese consumer to near-mythical status. But that buying power has not been fully unleashed. As a percentage of gross domestic product, domestic consumption in China is still far lower than in developed economies. And although shipments to China from the United States have grown fivefold since 2000, they made up 7 percent of this country’s total exports last year.

China’s situation presents a test for U.S. multinationals: What happens to your growth when the fastest-growing major economy in the world slows down?

For GM, the breakneck pace of sales has begun to level off. The company recently reported its weakest sales in China in eight months. Buick sales dipped 1.8 percent in September after growing 2.8 percent in August. Sales of Cadillacs fell 8.3 percent.

At a Buick dealership in Beijing recently, a number of salespeople were idling by the door, waiting for customers to come in.

Huang Ke, a sales manager at the dealership, said that he is still seeing a strong appetite for cars but that customers are bargaining harder. European luxury brands, such as BMW and Audi, are slashing prices, causing Buick — which is more popular in China than it is in the United States — to cut some of its prices, too.

“This year is really a test year for the dealers,” Huang said.

In addition to the slowing economy, automakers are up against increasing restrictions on vehicle ownership in China’s cities to curb pollution and traffic.

But Kevin Wale, president and managing director for GM’s China operation, said there is immense room to expand in China. “The market is growing,” Wale said. “It’s just not growing as quickly as it has in the past.”

Wale said that car ownership remains low in China and that GM is counting on growth in cities in central China — away from the more-established cities on or near the coast, such as Beijing and Shanghai.

“The diversity of China is so big that it helps to soften the blow,” he said.

Some analysts say the slowdown presents a chance for the government to shift the underpinnings of Chinese economic growth away from exports and investment and toward domestic consumption, a move that could be good for some U.S. companies.

Patrick Chovanec, associate professor at Tsinghua University’s School of Economics and Management in Beijing, said slower growth in China doesn’t necessarily spell doom for U.S. companies that hope to gain a foothold in the country selling to consumers.

“A correction can be good for companies with a longer-term perspective,” Chovanec said.

But a few U.S. companies have already been hurt by China’s slowdown. Caterpillar, the world’s biggest maker of construction and mining equipment, had much lower sales in the second quarter this year compared with last year.

The company benefited from China’s infrastructure boom after a 2009 stimulus program, but now the building and mining industries have slowed. This year, Caterpillar is trying to reduce its inventory in China and export machines to other parts of the world, spokesman Jim Dugan said.

In 2010, China’s sales represented 6 percent of Caterpillar’s business. Last year, that fell to under 3.5 percent.

“If you’ve been riding the investment boom, then you’re in trouble,” Chovanec said. “If you haven’t, which is most of the U.S. economy, you won’t get hit that badly.”

Many companies, however, continue to pursue ambitious expansion plans. Marriott International, which is headquartered in Bethesda, counts China as its second-biggest market after the United States. The company plans to double the number of its hotels in China by 2014.

Simon Cooper, Marriott’s president and managing director for Asia Pacific, said the company still views China as a booming market, especially the second- and third-tier cities. “If you look at buying patterns in China, consumers are still consuming at the rate they were consuming,” Cooper said. “So the Chinese consumer is still out there, still using their wallet, be it for international travel or domestic consumption.”

Ford, which entered the market relatively late, wants to double the number of dealerships in China by 2015. GM is rolling out 600 dealerships this year, increasing the total by 20 percent,

Starbucks, which opened its 600th store in mainland China in the third quarter, counts Asia as its fastest-growing region.

“As you can see from our results, the growth story in China and Asia Pacific is becoming a meaningful component of the Starbucks growth story,” John Culver, the company’s president of China and Asia Pacific, said during an earnings call in July. The region accounted for 9 percent of Starbucks’ profits two years ago. This year, that figure has reached 13 percent.

But for U.S. companies, there’s no guarantee of success in China.

This month, Home Depot closed its seven remaining stores in the country, saying it was pulling the plug after facing years of losses. Best Buy backed out last year. Analysts say neither company figured out how to cater to Chinese consumers.

Liu Liu contributed to this report.

 
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