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Western firms look hard at China as growth slows

Western firms look hard at China as growth slows

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 NV, 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 Hallyer, partner with Strategy Consultants OC&C, 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 AB 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 eyewear 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, commoditised market, to a joint venture partner to allow it focus on marketing its international brands which offer the potential for higher margins.

Published in Dawn, August 1st, 2015

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