Can China Save the World?

More and more foreign companies are looking to China as their Saviour in a world where growth is hard to find.

By David Lake

Every day I review the latest China related news for the Shanghai Business Review web site news digest. I receive 12 to 15 news items of interest on the latest global deals, mergers, investments and marketing strategies that make headlines around the world and in the Mainland. In recent months, I have begun to notice an interesting trend in these reports. A trend that is so clear and consistent that it cannot be ignored.

The dialogue is always the same. On one hand, the reports on the China economy, currency and stock market are consistently worrying for China and the world at large. Economic growth is falling, currency policy concerns world markets and the stock market remains in the doldrums. As such, many news digest items start with lines like, “Despite the economic downturn…” or “Given the latest stock market volatility…” or “The world is concerned with…”

On the other hand, report after report speaks of renowned conglomerates and business leaders announcing new capital investment into China, expansion of activities, partnerships and a general increase in exposure across the board. Invariably, the report carries a line from the CEO that will say something like, “We are confident China can overcome its economic issues…” or “We are sure the market for our products will remain strong… or “Our view of China as a key growth market remains unchanged…”

This view is echoed by many of the business leaders at the World Economic Forum. For one, John Rice, General Electric Co.’s (GE) Vice Chairman and Head of Global Operations, believes people have predicted a hard landing for a long time, but have always been wrong. “There will be turbulence and turmoil, but there’s nothing happening in China today that causes us to alter our long-term strategy for this country,” Rice said.

In other words, the world’s leading companies, often faced with difficulties in home markets, count on China to secure their future. That is a long way from the days when they complained that, “no one ever makes money in China.” Today, executives are willing to stake bets that China is the great hope for their business and hope for the best. While China can and has delivered for many of these businesses, the question is does it have the capacity to absorb all the output that is coming onstream?

Placing Auto Bets

On this point, I provide examples from sectors that count heavily on China for wealth and health – automobiles, travel and consumer goods. Let’s look at the auto market, a group that placed stakes in China growth in almost every case. In some cases optimism is warranted, in others misguided, but clearly it is unlikely there is room for all the world’s carmakers to strike it rich.

2016 Buick Avista Concept
2016 Buick Avista Concept

Take a look at Buick, which just experienced it most successful year ever. An amazing 80% of Buicks, or nearly one million units in 2015 were sold in China. Buick hopes to use this success to rebuild its reputation in the US. This year, Buick will be the first American company to sell a Chinese-made vehicle, the Envision, in the US.

French automobile giant Renault is so confident about growing demand in China that it plans to open its first assembly plant. The US$1 billion factory in Wuhan has the potential to triple Renault’s current output of 150,000 vehicles annually. “Entering a market that sells 20 million vehicles a year is no bad thing for an automobile manufacturer,” states Jacques Daniel, Head of Renault’s joint venture with Dongfeng.

Then there is the case of German behemoth Volkswagen. VW expects its sales to rise in line with China’s auto market through its cooperation with state-owned JAC Motors. Jochem Heizmann, Head of VW China, is confident sales will match or outpace China GDP, and believes there are opportunities in lower-tier cities, “These are cities with millions of inhabitants, but in a different development stages.”

Hot on the track, General Motors (GM) just opened a US$1.2 billion plant in Shanghai to build 160,000 units of Cadillac in tandem with SAIC Motor Corp. annually. “Local production will enable us to satisfy growing demand for luxury vehicles through the introduction of Cadillac built in and for China,” claims Matt Tsien, President of GM China. GM believes China’s luxury car market has great potential and is confident its plant will increase market share.

Tesla Motors, the green carmaker, considers China as its most important market for the debut of its Model X SUV and has set place expansion plans. Elon Musk, Tesla CEO, sees tremendous opportunity and looks to build upon Tesla’s China services. In addition to the Model X SUV, Tesla plans to offer a red version of the Model X P90D.

Still, some carmakers are already feeling the pain. After releasing record earnings, Ford is concerned it may be near its peak and China’s current volatility may send revenue falling this year. Bob Shanks, Ford CFO, says China’s auto industry will grow modestly, as it is an “emerging market transitioning to more domestic consumer consumption.”

China’s luxury car market is the first to suffer. Rolls Royce announced a 54% drop in 2015 sales compared to 2014. Similarly, Bentley sold 1,615 units in 2015, down from 2,560 in 2014. However, despite this gloomy outlook, Bentley is confident about the release of a new SUV in 2016.

Perhaps the most sanguine about China is Korea’s Hyundai, which did not reach annual sales targets for the first time in 2015 due to a slump in China deliveries. Low sales sent Hyundai deliveries down 5% and if Hyundai cannot keep China sales steady, analysts predict it may face larger problems.

Airline Bonanza

Another sector driving foreign companies to distraction is the airline and travel area. It is predicted that China’s top two air carriers alone will need to spend nearly US$1 trillion to purchase 6,330 planes over the next two decades – 17% of global totals. In 2015, Chinese airlines spent over US$100 billion to order 780 planes. One of the central government’s initiatives is to encourage more air travel by building 66 new airports. This movement is promising for China’s flourishing airlines.

On the flip side, demand for business jets in China is slowing, as customers diversify from large aircraft during an economic downturn. China’s business jet fleet only grew 6% in 2015, marking its slowest growth in 10 years. In the past, customers purchased the best quality jet, but they now move to cheaper models. Luxury jet companies are not concerned about low demand, as they have “seen this time after time,” and are confident the “economy will recover”.

Then there are those that focus on tourist flows. Airbnb Inc. a US-based website for lodging, is confident its China success will continue to grow rapidly. Now the world’s largest outbound tourism market, China sent 120 million people overseas in 2015, up from 109 million in 2014. There seems to be little connection between China’s slowdown and outbound trips. The number of Chinese tourists who booked through Airbnb increased nearly 700% over the year.

Consumer Market

The retail market is driven by government policy and is considered as the key force to alter economic prospects. Still, China’s slow growth hurt global sales in Q4 2015 at Starbucks, which continues to invest heavily in its second largest market. CEO Howard Schultz believes “China will one day be larger than the US business for our company.”

SBX20150529_49276.tifProcter & Gamble (P&G), a consumer goods leader, underestimated the influence of Chinese consumers and their demand for quality goods. Dave Taylor, President and CEO of P&G, called his China business “unacceptable”, and is disappointed that he missed an opportunity to invest in the region and allowed competitors to take market share. “We looked at China too much like a developing market as opposed to the most discerning market in the world,” states Taylor. P&G’s sales in China fell by a “high single digit” percent in Q4 2015, a painful result from an important market.

The luxury goods makers have long hedged their bets on China sales, and now they too are worried. Italian luxury house Prada’s net income fell nearly 40% during August to October 2015, driven by plunging China sales. Now Prada is looking to open a boutique restaurant in China of all things to expand beyond the fashion business.

As you can see by the above analysis, the world is indeed counting more and more on China to save the day. The tables have clearly turned from the age where China counted heavily on exports to build its economy.