Are China Based Profits Headed Down?

Tuesday, July 31, 2012 9:03
Posted in category The Big Picture
Comments Off on Are China Based Profits Headed Down?

Back in 2008/ 9 China made its transition inside many a board room. From manufacturing base to profit center.

It was a time that lead to many increasing their investments in Chian, increasing the speed by which they established sales/ retail offices, and according to every American chamber of Commerce survey since it worked. firms were generally happy with their investments, and while market access is a topic that remains a discussion, many firms have maintained that they see profitso in the coming years.

However, if the recent NBC news piece Corporate earnings return to the bad old days is a sign of things to come, then perhaps we are in for a rocky period:

Dow Chemical has a good window into the world’s economies because its materials are used in televisions, paint and agricultural products. CEO Andrew N. Liveris, for example, has visited China four times in the last four months.

“Every single visit, to customers and to governments, they were seeing a decline and the decline was the domino effect of Europe,” he said on Dow’s earnings conference call on Thursday. Dow has scrapped its prediction for an economic upturn in the second half of the year, and Liveris said it’s now unlikely that the world’s economy will have broad positive developments this year. Dow’s quarterly profit missed analyst estimates, and revenue fell 10 percent.

Where this warning is a bit different for me than with the one from GE a while back, is that GE has a significant amount of sales wrapped up into infrastructure products, whereas Dow feeds into a large number of products that are consumer and industrial based.

It is another sign that 7.6% in China is slow, even that is light speed for other economies, and unfortunately I am beginning to think that sub 7% is not too far out of the picture unless someone works out a way to drive an economy that is not infrastructure based, does not require massive amounts of debt at the local government level, and is more sustainable than 3 months of white good rebates.

Update: I was just reminded by a friend of mine, that while luxury sales in China have been THE HOTTEST STORY EVER in China, the last 6 months have been pretty brutal. Some are seeing 30-40% decline locally. Some of which is due to Chinese demand dropping off, some of which is believed to be from travel. Either way, brands are now beginning to reevaluate how much more they expand into China’s 2nd and 3rd tier cities as the fear is that they will cannibalize sales in their Beijing/ Shanghai flagships. Probably worth a post at some point.

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