Global Companies Reevaluate Strategies in China as Economic Slump Persists
Companies worldwide are reevaluating their operations in China as the country’s economic struggles persist despite government intervention. Major brands like Hermes, L’Oreal, Coca-Cola, United Airlines, Unilever, and Mercedes report decreased spending by Chinese consumers, pressured by a prolonged property crisis and high youth unemployment.
Some businesses are already adjusting their strategies. French carbon graphite maker Mersen recently announced the closure of a Chinese factory due to tough competition with local manufacturers. Similarly, international food giants like Danone and Nestle are implementing price cuts and boosting online sales in an effort to stabilize revenue.
Coca-Cola CEO James Quincey described China’s economic environment as “challenging” on an October 23 earnings call, saying, “The economy is kind of not taking off.” Beijing has pledged further economic support, though details and timing remain unclear, leaving investors unconvinced about an imminent turnaround.
Some companies, however, continue to invest in China. Luxury brand Hermes is countering lower store traffic with increased spending per customer, expanding its offerings in jewelry, leather goods, and ready-to-wear apparel. The brand recently opened a store in Shenzhen, with another planned for Shenyang in December and a flagship location in Beijing next year.
Long-Term Shift in Business for Others
For other companies, the business landscape in China has fundamentally changed. United Airlines, for example, has reduced flights to China, reflecting a long-term shift in demand. “We used to fly roughly 10 flights a day to China, and I think those days are gone,” United CEO Scott Kirby commented.
The outlook from companies reporting third-quarter results reflects a continued downturn. Italian luxury brand Ermenegildo Zegna expects challenges in China to extend into early 2025. The luxury sector has been heavily impacted, with LVMH noting consumer confidence at record lows, even among China’s wealthy. As China’s annual Singles’ Day shopping event unfolds, many vendors anticipate minimal sales growth, citing a widespread lack of consumer optimism.
Heavy industry is also feeling the strain. Silvio Napoli, CEO of Swiss elevator maker Schindler, reported no signs of recovery, noting that China accounted for 15% of the company’s revenue last year. After a recent visit to China, Napoli described the government’s current stimulus measures as insufficient, although he expects further insights by February.
A Waiting Game for the Stimulus Effect
With only a fraction of companies on the pan-European STOXX 600 and U.S. S&P 500 indices having reported earnings, expectations for those with exposure to China remain low. Gillian Diesen of Pictet Asset Management noted that companies are viewing the downturn as cyclical rather than structural, awaiting stronger government stimulus to restore consumer confidence.
Ultimately, this will depend on whether government efforts translate into household spending. Eric Clark of the Rational Dynamic Brands Fund compared China’s response to “putting a few band-aids on catastrophic wounds,” indicating skepticism about the long-term impact of current policies.
Additional Headwinds
In addition to domestic issues, European and U.S. companies face increased competition from Chinese manufacturers. European carmakers and home appliance brands like Electrolux are losing market share to Chinese rivals who can produce goods more affordably. Meanwhile, former U.S. President Donald Trump has proposed a 60% tariff on Chinese imports if he wins the upcoming election, potentially further stressing China’s industrial sector.
This week, the European Union is set to impose duties of up to 35.3% on China-made electric vehicles, a move that escalates the ongoing trade tensions with Beijing, which has already initiated retaliatory measures.
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