China’s success among western firms will depend on the desirability of the brand
Not a week goes by when there isn’t a data print-out of China posting the weakest number since… well pick a year.
Last Friday, for example, the Caixin manufacturing survey posted a second consecutive month of contraction and the lowest reading since 2016.
The slowdown has triggered a set of 2019 growth downgrades from the analyst community, with consensus growth forecasts hovering at around 6.3 per cent for the year, down from 6.6 per cent in 2018. That is the weakest growth in almost 30 years.
This is why this earnings season has been so interesting to watch.
You would assume that, with the China slowdown and two thirds of growth coming from consumption, goods companies with exposure to China would also be feeling the downturn.
Surprisingly it has been a lot more nuanced than that. Take LVMH earnings last week, for example. The world’s largest luxury group saw its net profit jump 18 per cent for the year, driven by solid demand for fashion and leather goods. The company also posted a 15 per cent jump in sales in Asia for the last quarter.
According to Bernard Arnault, chairman and chief executive of LVMH, one of the factors that “made a difference” was the “desirability of the brand”.
This ties in with a November 2018 study conducted by Singaporean research firm Agility that surveyed 1,000 affluent Chinese consumers, including 300 millionaires. Half said that they expect to spend more on luxury items in 2019, with 47 per cent looking to buy from more expensive brands, showing the desirability factor at work again.
Compare that to the fortunes of US chipmaker Nvidia and industrial giant Caterpillar, which both cited slowing demand out of China in earnings calls last week.
In early January, Apple warned that the demand for its smartphones was dwindling, which sent its share price tumbling that day. But perhaps there is a bigger issue of perception.
Ed Park, deputy chief investment officer of Brooks Macdonald, told CNBC last week that Chinese public feeling toward US products has started to turn more negative in light of the trade war, as well as the ongoing Huawei intellectual property case.
According to tech research firm Canalys, local brand Huawei has expanded its smartphone market by 16 per cent in China in 2018, while Apple’s share dropped by 13 per cent.
Coincidental or not, the data certainly does illustrate a preference for the local carrier.
There are also some warning signs for the middle-income consumer. Last week, e-commerce giant Alibaba reported its slowest growth in three years, citing an uptick of only 41 per cent for the last quarter. The company was hit by slowing sales of durable goods and consumer electronics.
You have to wonder how long demand for desirable expensive foreign goods and experiences can hold up for, especially when paired with a weakening local currency. For the time being, however, China demand for luxury seems to be mighty resistant.