China’s slowing economic growth is expected to have a significant impact on companies with exposure to the country, such as Apple, chipmakers, and luxury retailers, as they prepare to report their quarterly results in the coming weeks. The weak economic figures from China have already affected its stock market, with the Shanghai Composite Index only showing a modest 2.6 percent gain in 2023 compared to the S&P 500’s 18 percent increase.
Analysts are anticipating a steep drop in second-quarter U.S. earnings, attributing it to U.S. inflation and weaker spending. Both U.S. and European companies with ties to China are likely to face the effects of China’s sluggish post-COVID growth momentum. The lack of broad-based consumer-facing stimulus from China is dampening sentiment and potentially impacting European and U.S. companies that rely on the Chinese market.
Some early reports are confirming the spillover effect. ABB, a Swiss engineering group, reported a 9 percent decline in orders from China in the second quarter, and Cartier-owner Richemont posted slightly lower than expected quarterly sales in Asia. Analysts at Bernstein, who participated in a call with Richemont executives, noted that uncertainties in the Chinese macroeconomy could affect high-end and aspirational consumers, resulting in a more moderate outlook for the year.
China’s struggling economy, with youth unemployment reaching a record 21 percent in June, could also impact consumer behavior. Young consumers may opt for moderately-priced products and services and delay big-ticket purchases. Tesla, for example, sold a record number of vehicles in China during the second quarter but reported lower gross margins due to increased competition from Chinese rivals NIO and Xpeng.
The upcoming earnings reports from NXP Semiconductors NV and Texas Instruments will be closely watched as indicators of chip demand. China accounted for a significant portion of both companies’ revenue last year. Analysts predict a 3.2 percent drop in quarterly revenue for NXP, while Texas Instruments’ revenue is expected to decline by 16 percent, the largest drop since 2009.
Credit Suisse Chief U.S. Equity Strategist Jonathan Golub warned that weaknesses in China that hinder U.S. growth could limit stock-market gains. Companies like Corning Inc, whose Gorilla glass is used in smartphones made by Apple and Samsung Electronics, are expected to report significant drops in net income due to anticipated recession-level demand in China. Apple itself experienced a decline in sales in China during the March quarter and is expected to see a further drop in revenue for the June quarter.
U.S. companies operating in China are also grappling with uncertainty arising from trade disputes between Washington and Beijing, especially in the semiconductor industry. Chipmakers are facing challenges from Washington’s rules imposed last October to weaken China’s chip industry, prompting some companies to consider diversifying their manufacturing base or returning to the U.S., which could increase costs and impact gross margins.
The impact of China’s economic slowdown on global companies is becoming apparent as reports indicate weakening demand and lower revenues. As companies prepare to release their quarterly results, investors are closely monitoring the effects of China’s fragile growth on their bottom lines.
