Sunday, November 10, 2024

Analysis-Some companies change tack in China with no recovery in sight


By Bernadette Hogg, Ananya Mariam Rajesh and Helen Reid

GDANSK/BENGALURU/LONDON (Reuters) – Companies around the world are starting to cut prices and costs and scale back activity in China, as the world’s second-biggest economy continues to flag despite Beijing’s efforts to turn things around.

Big names including Hermes, L’Oreal, Coca-Cola, United Airlines, Unilever and Mercedes said Chinese customers are curbing spending as a property crisis drags on and youth unemployment stays high.

Some are already shifting their China strategies.

French carbon graphite maker Mersen said last week it would close a factory making power transmission products in China because it cannot compete with local rivals.

International food companies such as Danone and Nestle have meanwhile deepened price cuts or are seeking to boost online shopping volumes.

Coca-Cola CEO James Quincey said on an Oct. 23 earning call that the operating environment in China remained challenging.

“The economy is kind of not taking off,” he told investors.

The Chinese government has promised more help, but the scope and timing of further stimulus is uncertain, and investors are so far not convinced that its efforts will spur the $18.6 trillion economy.

Some companies are still investing despite the downturn.

Birkin handbag maker Hermes is compensating for lower traffic in China with higher average basket values, selling jewellery, leather goods and ready-to-wear for men and women.

After opening a store in Shenzhen last week, Hermes plans a second opening in Shenyang in December and a flagship outlet in Beijing next year.

But for others, business in China has changed for the long term.

“We used to fly, I think, roughly 10 flights a day to China, and I think those days are gone,” United Airlines CEO Scott Kirby said.

The company now has up to three flights a day from Los Angeles to Shanghai, and does not expect that to change soon.

“It’s just a completely different world,” Kirby added.

THIRD-QUARTER GLOOM

The third-quarter earnings season, now in full swing, has seen a string of company executives describe a troubled Chinese business environment.

Ermenegildo Zegna, chairman and CEO of the Italian luxury group of the same name, said he expects “challenging” times in China to continue into at least early 2025.

The luxury goods sector has borne the brunt of the downturn, as economic uncertainty weighs on middle-class shoppers and makes even China’s wealthy more reluctant to spend.

LVMH, whose Chinese sales helped make it Europe’s biggest company by market capitalisation until last year, said consumer confidence in the country was at an all-time low.



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