Apple Finds a Sweet Spot in China, but Other American Brands...?
Is China back? That really depends on the company.
Some light may be thrown on the subject by the Q4 2012 earnings statements that are coming in bunches now from US-based companies with heavy China exposure. The preliminary message seems to be that the Chinese economy is no monolith. Some firms and industries look to be moving back into a sweet spot there. Others find the glory days still tough to recapture.
Aluminum giant Alcoa (NYSE:AA) kicked off the current earnings season on a full-throated optimistic note so far as China is concerned. Demand for its wares from the Chinese construction sector will expand by 8-10% in 2013, Alcoa predicted, while sales to Chinese auto factories will rise 7-10%. North American carmakers, by contrast, will consume 4% more metal at best, while purchases from Europe keep contracting, Alcoa prognosticated.
More upbeat news followed this week from another heavy-industry heavyweight, United Technologies (NYSE:UTX). Executives on the Q4 earnings call pointed to China as the spur for a 17% jump in orders during the quarter. Demand is mounting rapidly for the conglomerate's Otis elevator division as the politburo builds new cities of the future in the neglected western part of the country.
One marquee company doing still better in China is Apple (NASDAQ:AAPL). A good thing, too. Beleaguered CEO Tim Cook was able to brighten an otherwise dour quarterly report the other day with news that sales in the No. 2 economy jumped 67% year-on-year. Cook promised the China boom will continue: The iPhone 5 just went on sale there and will rack up new big numbers this year, and Apple may finally crack an alliance with the country's dominant cell carrier, China Mobile (NYSE:CHL).
IBM (NYSE:IBM), which could be loosely grouped with Apple as a high-tech provider, turned in less dramatic but also solid China results. The company does not break out results by country. It did report that aggregate revenue from the four BRIC nations increased by 14% (currency adjusted), which was basically all of IBM's growth globally.
Bad news on China, by contrast, is flowing out of consumer brands whose goods are no longer wrapped in an Apple-esque halo. Nike (NYSE:NKE), which idiosyncratically reports quarterly earnings in December, got the bears growling with an 11% drop in Chinese revenue for its reporting period. The ubiquitous sneaker maker attested to being "overinventoried" in its one-time growth market. Analysts also noted that increasingly mature consumers are picking local brands that feel and look about as good but cost less.
The two global giants of fast food, McDonald's (NYSE:MCD) and Yum Brands (NYSE:YUM), have also run out of Chinese growth for the moment. Yum, which has opened KFCs and Pizza Huts on enough Chinese street corners to account for half of its global business, saw revenue there sink by 6% in Q4. McDonald's experienced a 1% dip in same-store sales.
Beijing bureaucracy played a role here. Both chains were affected by official concerns, quickly withdrawn, over the level of chemicals in their chicken. But they had already been losing sales to home-grown competitors before the poultry scare.
This sampling of earnings is hardly scientific but does indicate some trends: Purveyors of commodities and heavy goods, particularly for construction, can reasonably expect a fatter Chinese order book as the state returns to building mode. Tech companies that cannot be readily knocked off locally can thrive on the expanding corporate and digital classes. Brands whose Western aura was once enough to convey cache and rope in the masses, face tougher going as consumers grow up and Chinese firms play at import substitution. And capricious government will remain an issue for everyone, with more varieties of the chicken scare surely to come.
For the next generation of growth companies in China and other emerging markets, look at pharmaceuticals. Top European drug maker Novartis (NYSE:NVS) announced this week that China sales had risen 24% in the fourth quarter, and the country became one of its top 10 global markets for the first time. China is well established as an anchor for sales of aluminum or hamburgers. As its trillions of excess wealth begins finding its way into health care spending, it will revolutionize that business, too.
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