Western multinational corporations such as Volkswagen, AB InBev, and L’Oréal have all sounded the alarm about the sluggish domestic demand in China. They have expressed concerns that their performance in the first half of this year has been significantly impacted by the low consumer confidence in China.
In its recent financial report, WPP Group, a London-listed advertising giant, noted that the outlook for China is bleak. In the past three months, sales in China have dropped by almost a quarter, with signs indicating consumers are being cautious.
Mark Read, CEO of WPP, stated, “People had expected a significant improvement in China’s consumption after the COVID-19 pandemic.”
L’Oréal, the company selling luxury and beauty products in China, estimated that sales growth in China in the first half of this year had declined by about 2% to 3%. Porsche, a subsidiary of Volkswagen, also mentioned that sales in China for the six months ending in June had dropped by a third compared to the same period last year.
Analysts at Fitch Ratings pointed out that the growth in China’s catering industry had slowed to below 8% in the first half of this year, a threshold not seen since 2010, excluding the period during the pandemic.
They stated, “Uncertainty about disposable income prospects, coupled with declining property prices leading to further reduction of household wealth, has resulted in decreased non-essential spending or a shift towards value-for-money products.”
They further added that this trend had extended beyond the catering industry to other consumer categories, including clothing, cosmetics, and jewelry.
Nicolas Hieronimus, CEO of L’Oréal Group, remarked, “In the whole world, consumer confidence is low only in China.”
He mentioned that in China, the “job market is not healthy, with many Chinese having invested their savings in real estate, but the value of real estate has plummeted significantly.”
Last Wednesday, Beiersdorf, the manufacturer of Nivea, also indicated that the slowdown in the luxury goods market in China had affected the sales of its La Prairie brand, resulting in the company’s half-year operating profit falling below expectations.
Oliver Blume, CEO of Porsche and Volkswagen, expressed uncertainty about whether there would be a revival in demand for electric sports cars like the Porsche Taycan.
“We don’t know yet,” he added, stating that currently, there is still no “market for luxury electric cars” in China.
Mercedes-Benz has shifted its focus to more expensive car models in recent years, and its automobile sales in China in the first half of this year decreased by 9% compared to the same period last year. CEO Ola Källenius mentioned that the luxury goods market in China is cooling off, partly attributing it to the real estate crisis in China.
“We don’t know how long it will take for Chinese consumers to regain confidence,” he said.
AB InBev, the beverage group, reported a 15% decline in sales in China in the second quarter, attributing it to weak consumer demand and adverse weather conditions in certain regions of China.
On Sunday, senior economic editor Larry Elliott of The Guardian warned in a column article that for the global financial markets, one of the real threats is the Chinese economy.
Elliott stated that despite discussions in the market last week on whether the US economy might be heading towards a recession, in reality, the US is “far from a recession” and a soft landing for the US economy seems to be the most reasonable outcome.
“The growth prospects in China have deteriorated,” Elliott pointed out, adding that “China’s problems are structural… For decades, China’s economic growth model has been reliant on a large amount of state investment and industry capacity built on cheap credit. The concentration of manufacturing has led to relatively weak consumer spending and a rapid expansion of the real estate bubble.”
However, China’s capacity far exceeds the needs of its own or foreign markets. The result may be China’s economy facing a vicious cycle of falling prices, bankruptcies, factory closures, and rising unemployment rates.
He also mentioned that unlike when China had just become the world’s factory, China’s overcapacity issue has exacerbated. Furthermore, Western governments are no longer willing to stand idly by while their industries are being eliminated.
“The tension between the West and the CCP is more likely to escalate than ease,” Elliott concluded.