To The Media: The China Glass is Half Empty
On Wednesday, the China Automobile Manufacturers Association, a government-sanctioned industry group, announced that China’s vehicle makers sold 1.58 million cars, trucks and buses in June, a 9 percent increase from June of 2011. For the first six months of this year, China’s vehicle sales totaled 9.6 million.
Any way you look at it, these are strong numbers in any economy. Nine percent sales growth of anything these days is great, and the monthly and six-month numbers for vehicle sales work out to an annual rate of sales of from 19.0 to19.2 million vehicles, depending on which number is used. That’s more vehicles than any country has sold in any year in history. To put it in perspective, the highest annual sales of vehicles in the United States, previously the largest vehicle market in the world, was 17.3 million in 1999.
Nonetheless, the reaction on a widely listened to business news show, which I happen to like a lot except when it reports about China, was decidedly ho-hum.
Commentator 1: That’s certainly not the 20 to 30 percent increase we used to hear about.
Commentator 2: Yea,and all those buses aren’t carrying any people to those empty apartment buildings.
Commentator 1: Or to those empty sports stadiums!
Also on Wednesday, Burberry (LSE: BRBY.L), the high end retailer, released its fiscal first quarter financials, which were not a” positive ringing endorsement for high-end spending,” according to one news report. Burberry‘s overall first quarter revenue increase of 11 percent fell short of an expected 13 percent increase. The main culprit: China. Burberry said revenue from China fell to a growth rate in the “mid-teens” from about 20 percent in the second half of 2011. Burberry stock was down 7.4 percent on the day.
Later in the Day, Cummins (NYSE: CMI) announced that it was slashing sales forecasts for the year as a result of the global slowdown. Once again, China was named as one of the culprits.
“Order trends in the U.S. for trucks and power generation equipment have softened and demand in Brazil, China and India is not improving as we had previously expected,” CEO Tom Linebarger said. Cummins was down 3.89 percent on the day.
When listening to media reports and commentary about China and its economy, keep in mind the following:
First, at some point, the law of large numbers takes effect. Focus on the absolute numbers, therefore, not the percentages that are widely touted. China is now a $7 trillion economy. It’s unrealistic to expect growth rates to be anything like they were in 2000 when China’s Gross Domestic Product was $1 trillion, less than 15 percent of what it is today. Likewise with vehicles. In 2011, vehicle sales in China were 18.5 million, more than any country in the world. At that number, a 9 percent growth rate is significant and nothing to sneeze at.
Secondly, China is not immune to cyclicality. Sales of heavy duty trucks, construction equipment, and the diesel engines that power them are off this year, after several years of very high growth. The heavy machinery industry is cyclical in any country, and China is no exception. This is particularly true when China has used both monetary and fiscal policies over the past two years to slow spending on infrastructure and construction in an attempt to curb property speculation and inflation. Despite the slowdown that Cummins is experiencing this year, China is one of the company’s largest markets, and will continue to be for many years to come.
Third, a slowdown in a company’s China sales is not necessarily due to China’s overall economy, but may be due to company-specific factors. China is a very competitive market. Yesterday’s hot product may go cold today. Therefore, is Burberry’s slowdown this year due to an overall slowdown in spending on luxury goods, or to greater competition in China? Were there company specific factors at work? For example, Burberry bought back all of its franchises in China in 2010. Are the management and other changes that were undoubtedly made at the 50 Burberry stores in China as a result of the switch from franchised to company-owned and managed operations now having a negative impact on sales? These are the questions that need to be asked.
Finally, news reports about China are often reporting yesterday’s news. The comments about empty apartment buildings and stadiums were a clear reference to the property speculation that China began dealing with over two years ago. The property situation today is now substantially different as a result.
As for consumer sentiment in China, that too is changing. Last week, the MNI China Consumer Sentiment Indicator, which is published by a unit of Deutsche Boerse Group, pointed to a strong rebound in consumer confidence in June from the previous month. The survey, which is based on over 1000 interviews in 30 cities across China, indicated that confidence in China’s real estate and stock markets, as well as car-purchase decisions, strengthened in June as consumers reacted positively to China’s interest rate cut and the government’s economic stimulus measures.The index rose to 101.6 points in June from May’s 90.4, and was the highest in 22 months, according to MNI’s report. A score above 100 signals net optimism.