Slower China economy a worry for Western firms

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As China's economy cools, some big U.S. and European companies are losing what had been one of their surest growth bets.

Caterpillar Inc, 3M Co, United Technologies Corp and ABB Ltd are among the manufacturers that have reported weak performances in China in the first quarter, as economic growth slowed to a near three-year-low.

That is making investors nervous, though some Western chief executives predict a return to rapid growth in China, fueled by the government's easing monetary policy and expansion into faster-growing cities inland.

Caterpillar's sales in China fell by $250 million to $300 million in the first quarter, forcing the world's largest maker of earth-moving equipment to export about 20 percent of its China-made equipment to other countries this year.

"We are introducing programs inside China to work with dealers to get some of that inventory in the hands of customers," Caterpillar Chief Executive Doug Oberhelman said.

Concerns about China overshadowed better-than-expected earnings at the Peoria, Illinois-based company and led investors to push the stock down 5 percent on Wednesday. They traded near flat on Thursday.

Swiss engineering group ABB, a maker of power equipment, this week reported profit that was shy of analysts' expectations due to weak Chinese demand.

"It was a very slow start to the year for China. China in January was extremely weak," ABB Chief Financial Officer Michel Demare said on Wednesday. To be sure, not every Western company is suffering in China.

Apple Inc, for example, reported a five-fold gain in sales of iPhones in China, Hong Kong and Taiwan, helping quarterly profit shoot past market expectations.

But Chinese government measures to cool an overheated housing market have weighed on consumer and industrial demand in recent months, prompting Western executives to replace the superlatives they usually employ to describe China with less-rosy terms like 'tough' and 'mediocre'.

"Our business in China is off to a slow start," said Greg Hayes, chief financial officer of United Technologies Corp, whose Otis arm is the world's biggest maker of elevators. The unit's Chinese sales dropped 9 per cent in the first quarter.

"The ongoing government effort to bring housing prices down has negatively impacted the higher end of the residential sector, which represents about half of Otis' China sales."

Beijing in March cut its official forecast for 2012 economic growth to an eight-year low of 7.5 per cent, a move analysts said signaled authorities would be more focused on economic reforms than stimulus.

Finnish escalator maker Kone Oyj said growth in its Chinese markets would slow from 10 per cent in the first quarter to between zero and 5 per cent in the second.

Truck maker Volvo AB on Thursday cut its forecast for the Chinese construction equipment market this year to a fall of between 15 to 25 per cent from a previous outlook for a flat market.

NOT BACKING DOWN
Most executives are still optimistic in the long-term growth prospects for China and see nothing more than a blip in the rise of the world's second-largest economy.

One way companies are planning to boost growth is to focus on secondary cities in the Chinese interior, where the clamp-down on the housing market is not as tight.

German fashion house Hugo Boss said it would open its own stores and expand into smaller cities to boost its business in China.

"Despite China's slowdown and structural adjustment toward a consumption-driven economy, its inland provinces are experiencing and will experience double-digit growth over the next decade," Cynthia Carroll, CEO of miner Anglo American, told investors at the miner's annual general meeting last week.

However, analysts and executives acknowledge there are challenges. Schneider Electric noted that part of the slowdown in its business in China was due to weaker demand from companies that rely on exports to Europe, which have been hit by the continent's debt crisis.

Even when China's growth picks up, it may never return to the heady days of the past decade, some executives said.

In the automotive sector, for instance, Chinese car sales surged 46 per cent in 2009, a rate unlikely to return, with executives and analysts looking to an eventual annual growth rate of 7 per cent to 8 per cent more likely in the coming years.

The sustainability of China's growth has become a bigger concern for investors as Europe's economy has soured, leaving companies more dependent on emerging market demand.

But even a slower-growing China offers opportunity for big U.S. companies, said Wayne Titche, chief investment officer at AMBS Investment Counsel, whose stock holdings include General Electric Co, 3M and Parker-Hannifin Corp.

"People are always nervous about China," Titche said. "So far they've been able to keep things going. They're still expecting 8 per cent growth instead of 10 per cent growth."

The CEO of Ingersoll Rand Plc, a manufacturer of air conditioners, locks and other products used in buildings, agreed with that assessment.

"Weaker China, I think, will be a short-lived phenomenon," Ingersoll CEO Mike Lamach said in an interview. "I do think you'll see recovery there in coming quarters."

The fact is that even at more modest growth rates, China compares well with prospects in Western, and particularly European, markets. Chinese economic growth slowed to 8.1 per cent in the first quarter, from 8.9 per cent in the fourth, but that was still more than triple the estimated 2.5 per cent first-quarter growth of the U.S. economy.

"Seven percent or 8 per cent for me still looks like a great opportunity," said Keith Nichols, chief financial Officer of Netherlands-based AkzoNobel NV, the world's largest paints maker.