Businesses with exposure to China’s economy are on edge due to its sluggish growth

As the reporting season for the second quarter approaches, businesses with exposure to China’s economy are feeling anxious about its sluggish growth. Prominent companies like Apple, chip manufacturers, and luxury shops may experience the impact of China’s economic situation when disclosing their quarterly results in the coming weeks.

The uncertainty extends beyond firms directly tied to China’s market, as Wall Street is also preparing for a steep drop in second-quarter U.S. earnings, affecting tech giants, luxury retailers, and chip makers alike. European companies are also facing headwinds stemming from China’s post-COVID momentum, adding to the overall concerns among investors and analysts.

The sluggish performance of China’s economy is evident in its stock market, with the Shanghai Composite Index showing a meager 2.6 percent gain in 2023, in stark contrast to the impressive 18 percent rise of the S&P 500.

Renowned Swiss engineering giant Asea Brown Boveri Ltd. reported a nine percent decline in orders within China during the second quarter. Similarly, Cartier-owner Richemont saw slightly lower-than-expected quarterly revenues in the Asian market.

The outlook for companies like Richemont is now showing signs of being somewhat tempered due to uncertainties in China’s macroeconomy. This turbulence is affecting both high-end and aspirational consumers, creating challenges for businesses operating in the region.

The tech industry is also bracing for potential repercussions, exemplified by Tesla’s recent developments. The electric vehicle giant achieved a remarkable feat by selling a record 247,217 Chinese-made vehicles in the second quarter. However, the company also announced reduced gross margins, attributing it to an ongoing price war with its Chinese rivals, particularly NIO and Xpeng.

Reports from Next eXperience (NXP) Semiconductors NV on July 24 and Texas Instruments on July 25 will serve as significant indicators for chip demand in the upcoming weeks. Last year, China accounted for a substantial portion of NXP’s sales (36 percent) and half of Texas Instruments’ revenue. There are concerns that these chipmakers might experience significant drops in quarterly revenue if chip demand is impacted.

Trade disputes between Washington and Beijing have introduced an air of uncertainty, leading companies to reconsider their manufacturing operations in China. Tech giant Apple experienced a 2.9 percent decline in sales within the Chinese market during the March quarter, surpassing the overall revenue reduction of 2.5 percent. Analysts expect a further slip in Apple’s sales by 1.7 percent to $81.6 billion in the June quarter, marking the lowest figure in two years.

With a significant number of firms centered in China for production, there is a growing trend towards diversifying manufacturing locations or even considering “re-shoring” back to the United States. However, such moves are likely to incur higher costs, putting strain on gross margins.

Companies based in the United States with significant business ties to China are also facing uncertainty due to ongoing trade tensions between the two economic powerhouses. The semiconductor industry, in particular, is feeling the impact of Washington’s comprehensive measures enacted in October to curb China’s semiconductor sector.