The slowdown in the Chinese economy is already having an effect on the prospects of many listed companies. The Asian giant’s economic growth forecasts are between 4.5% and 5%, in the best of cases. Before Covid, the country was used to growing at levels close to 7%. Now, with the real estate crisis and lower economic dynamism, many companies with interests in the region are having to cut their high forecasts.
Siemens is one of the last to have suffered this situation firsthand, having to pull the scissors out of its estimates for the current year. As published by Yahoo Finance! New business for the unit that makes factory automation products has been slower than expected in China, due to “its slow recovery.”
China’s economic stimulus “does not immediately translate into new orders at the moment,” said Ralf Thomas, CFO of the German firm, in a presentation to investors in recent days. Overall, the industrial sector is grappling with weaker demand in the Asian country, where consumers and businesses have cut spending amid rising inflation and interest rates.
Siemens, which has many European clients that export to China, expects the Asian country’s economy to recover in the second half with Beijing’s push for high-tech manufacturing. However, until then you will have to take out your umbrella and wait for the storm to pass.
Siemens’ margin in the fiscal second quarter could fall short of the initial forecast of 20-23% in 2024 due to low capacity utilization, software dilution and product mix headwinds. They have nothing left but to be patient.
This is the similar case of Kering SA, a luxury sector firm owned by the Pinault family, which had to warn about the downward revision of its future profits (what is known as a ‘profit warning’), as a consequence of lower-than-expected sales in China. Especially, derived from Gucci, one of the group’s brands.
“This behavior mainly reflects a steeper decline in sales at Gucci, especially in the Asia-Pacific region. Gucci’s comparable revenue in the first quarter is expected to decrease by almost 20% year-on-year,” the company commented in a note to investors, after announcing this reduction in its forecasts.
Common denominator and carryover effect
Publishing figures below what was projected seems to be the common denominator of many companies not only with interests in Asia’s main power, but also for the Chinese listed companies themselves. Tencent Holdings, likewise, reported a quarterly revenue increase of 7% in the fiscal fourth quarter, but that was also below analyst expectations.
The world’s largest video game company and operator of the WeChat messaging platform posted revenue of 155.19 billion yuan ($21.56 billion) in the three months ended December 31, compared with the average of 157.2 billion yuan in consensus estimates. Another bucket of cold water that is directly related to the contraction of the country’s economy.
Likewise, this knock-on effect could claim a victim whose impact would leave part of Europe in suspense: the automotive sector. Germany’s strong economic exposure to China carries significant risks for Europe’s largest economy, according to Union Investment, one of the fund managers with the most exposure to the automotive sector in Germany.
According to the manager, it is striking that German companies are also increasingly relocating their analysis and development activities to China, while others do the opposite for security reasons. “This strategy is risky on several levels: Germany suffers as a business location, as areas with significant value creation are moving abroad, while the source industry is losing orders,” she explains. Union Investment has stakes in virtually all major German companies, including the German vehicle manufacturers Volkswagen, BMW and Daimler.
Figures from the German Automobile Industry Association show that one in five cars sold in China carries a German brand. According to EY data, the exposure of German car companies to the Chinese market, in terms of percentage of their global sales, is close to 40%. Therefore, any slowdown in sales can lead to a significant penalty. The European Union and Germany are extremely attentive to the economic evolution of the country.
