Global brands set too much store in China recovery

China’s Covid-19 “new normal” will challenge Western multinationals’ hopes for a quick rebound in the world’s second largest economy.
Big groups from Apple results to General Electric suffered a hit to revenue in the first quarter as renewed lockdowns paralysed factories and distribution networks and dented retail sales. Many companies are downplaying the impact as temporary. That’s overly optimistic.

Estée Lauder Chief Financial Officer Tracey Travis is probably not alone in making a bold call that China could reopen domestically in mid-May, and that pent-up demand would help it recover recent lost sales. The American cosmetics group’s revenue in Asia declined for the first time in two years in the three months to March. That was mainly due to China, where the company generates 36% of total sales, Jefferies analysts estimate. Remy Cointreau insists its growth potential for the year remains unchanged, even though the French premium liquor maker’s revenue fell in the quarter ended in March, driven by a double-digit percentage drop in China.

The thinking is based on past experience. Foreign firms in China benefitted from the country’s rapid recovery from the pandemic’s early wave. Authorities also minimised economic damage by adopting targeted restrictions, especially in the key production and logistics hub of Shanghai. Both the American and European Chambers of Commerce in China said most of their member firms remained profitable in 2020 and 2021.

But the Omicron outbreak that crippled Shanghai in March triggered a profound change in Beijing’s approach. Authorities have introduced regular mass testing in nearly a dozen of the country’s top cities by GDP, even if no new cases are reported. Residents have to show a negative test result as frequently as every two days to enter public venues. Cheap testing kits will enable more cities to adopt the same approach.

In theory, this pre-empts another Shanghai-style flare-up. But it also makes reopening much tougher. The harsh treatment of those who catch the virus may discourage people from travelling and spending.

China’s 400 million middle-class consumers make the country a key growth market for companies like Italian luxury goods maker Salvatore Ferragamo, which on Tuesday said it expects its sales to double in four to five years from 2021. One option is to expand online sales and invest more in marketing, but even then Covid-19 restrictions may interfere with deliveries. The alternative is to cultivate new consumers in other countries. For now, however, companies are setting too much store in China’s rapid recovery.
Source: Reuters (Editing by Peter Thal Larsen, Katrina Hamlin and Oliver Taslic)