Industrials face turbulence from cooling China

Buoyant Chinese demand has been a wonderful palliative for western industrial companies in recent years that helped to offset anaemic European and US sales.

However, comments from leading industrial companies last week suggest Chinese demand for a host of western-produced capital goods ranging from earthmoving equipment to automation technology is – at least temporarily – starting to slow.

China’s efforts to cool a real estate boom and engineer a soft landing come as its manufacturers hold back fixed-asset investments due to tighter credit, overcapacity and slower demand from the debt-encumbered eurozone.

Volvo, the commercial vehicles group, warned as early as last summer of an impending slowdown in Chinese demand for construction equipment, which it described as temporary.

In October ABB, the Swiss electrical engineering group, also observed weaker demand for its power systems and process automation technology in China, where overall orders declined by 5 per cent in the third quarter.

Now, as European and US industrials have begun reporting their latest quarterly figures, more companies have expressed caution on the short-term outlook in China.

Siemens, the German industrial bellwether that makes everything from trains to gas turbines and medical diagnostic equipment, warned last week that Chinese orders had declined by 16 per cent to €1.4bn in its fiscal first quarter, due primarily to weakness in industrial automation – a technology that is typically one of the first to register a slowdown due to short lead times.

Joe Kaeser, chief financial officer, said: “The whole world was worried to death about a hard landing [in China] . . . We have reason to hope this is a soft landing in progress, and after that there will be a journey to new heights.” The company, he added, expects a return to growth in China in the fourth quarter.

Sandvik, the Swedish tool and mining equipment maker that cut 500 jobs this month, said “financing uncertainty” in China had “reduced the willingness of companies and private individuals to invest”.

In the US, Caterpillar, the manufacturer of construction and mining equipment, said it had also seen a drop in sales of new machines in China last year, although it had gained market share.

Different companies have experienced the slowdown at different points. United Technologies, the manufacturer of Otis elevators, was hit only in the fourth quarter of 2011, when order growth slowed to 7 per cent from a 20 per cent average for the year. Greg Hayes, United Technologies’ chief financial officer, said the slowdown was “directly due to the actions of the government to try to slow down housing”.

Other western companies have not yet suffered a slowdown at all. Growth in Chinese car sales slowed last year after the government withdrew tax incentives for small-engine cars. But premium carmakers such as BMW and Volkswagen’s Audi were among foreign companies that continued to enjoy record sales, boosting suppliers.

Honeywell, the US industrial group, highlighted sales of truck components such as turbochargers as a particular area of strength. Controls for mining and other process industries had also had strong growth in orders, it said.

Meanwhile, retail sales have remained robust. Apple said Chinese demand was “staggering” and “off the charts”.

The Chinese economy grew at an annual rate of 8.9 per cent in the fourth quarter of last year, the weakest in 2½ years, but still a handsome pace by western standards, and economists still expect gross domestic product to expand by about 8 per cent this year.

Analysts believe western industrials should have few troubles withstanding a couple of quarters of slower growth, and with an average of about 10 per cent of Chinese sales, exposure remains limited.

Investment is likely to pick up this year if China, as expected, eases monetary policy further to support the economy. However, some economists believe the dynamics of the Chinese economy might change, meaning foreign industrials that profit from the country’s growth will have to change too. China’s property boom, for example, may become a thing of the past.

“China has no choice but to switch from an investment-driven to a consumption-driven economy. Infrastructure, construction and mining-related industries should see their growth rates wane accordingly,” analysts at Société Générale told clients.

Wage inflation will instead encourage greater industrial automation in China, while China’s growing ranks of elderly will require spending on medical equipment, its report noted.

In addition, US and European companies will also face increasing competition on their own turf.

Bernd Laux at Cheuvreux said. “The more the Chinese economy slows, the more Chinese vendors will try to sell their wares abroad.”

From: FT ChineseBy Chris Bryant,Ed Crooks in Frankfurt, in New York

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