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US companies are still betting on Chinese consumers, despite coronavirus impact

An wage-earner works next to shoes on display inside the flagship store of sporting-goods giant Nike in Shanghai on March 16, 2017.

Johannes Eisele | AFP | Getty Metaphors

American companies in China are still betting on the local consumer, even if business disruptions from the coronavirus are shamble down revenues. 

A survey of 119 companies from March 13 to 18 by the Beijing-based American Chamber of Traffic in China found that the proportion of respondents saying they are experiencing significant revenue declines increased to 50% — that’s up from 28% remain month. 

“The consumer sector as we see in this survey has been particularly hard hit,” Alan Beebe, AmCham China president, answered on a call with reporters Wednesday morning. “(It’s) the sector that had one of the largest revenue disruptions.”

“On the other jointly, it’s the sector, along with technology, where investment plans really haven’t changed,” he said. “The way I interpret that is, while they’re fascinating a hit short term, there’s no fundamental change in outlook.”

Officially called COVID-19, the highly contagious bug that emerged in late December in the Chinese city of Wuhan, has spread rapidly across the globe in the last few weeks. As of Wednesday, the virus has bumped more than 16,000 people worldwide, with China accounting for over 3,200 of those deaths. Managements in countries from Italy to the United States have called for people to stay at home and for non-essential businesses to conclude. 

The shutdowns have spurred fears of a global recession, sending financial markets worldwide churning.

Operating earnings per due for the S&P 500 are expected to grow just 0.2% this year, with that of consumer discretionary falling 1.3%, according to a Tread 20 note from Sam Stovall, chief investment strategist at CFRA. 

Many companies, especially those in the consumer discretionary sector — which stock up nonessential goods and services such as cars, apparel and entertainment — have mentioned “coronavirus” or “COVID-19” on their quarterly earnings awakens, according to analysis from FactSet, published March 20.

The report by Senior Earnings Analyst John Butters thought that for the 213 companies in the S&P 500 that discussed those two terms, their average revenue exposure to China is 6%.

When the coronavirus gold medal broke out in China, businesses were most concerned about disruptions to global supply chains and growth in the globe’s second-largest economy. The acceleration of the outbreak overseas has shifted worries to global growth, even as China and its hundreds of millions of consumers get rough to work.

“Now that we’re in a global pandemic situation, demand for our member companies’ products and services has changed significantly, a bit for reasons of supply chain, but others, really just consumer demand,” Greg Gilligan, AmCham chairman, required on CNBC’s “Squawk Box Asia” Wednesday.

He said members are planning to cut costs, revise budgets and change projections for the year, but cause not yet adjusted or reduced staff. 

An increased proportion of respondents in March said demand for their products fell — 39% of limited companies versus 22% in February.

On the supply chain side, AmCham members were less affected by the relatively tamer resumption of work for small and medium-sized firms. The survey found that nearly two-thirds of respondents said these shorter businesses accounted for no more than a quarter of their supply chain, while only 11% have a glaring reliance.

Consumer businesses still planning to invest

The chamber’s annual business conditions survey late newest year found the consumer sector was one of the industries more optimistic about their market opportunity in China for 2020, conceded the country’s large and growing middle class. 

In last week’s flash survey of members, the consumer, as well as resources and industrial applications, were the most pessimistic about the virus’ impact on market growth this year, with 38% of resolves in both industries expecting a decrease of at least 50%.

But the consumer sector had the highest proportion of businesses saying they inclination maintain previously planned investments — at 46%, while 8% said they would increase planned investments, the appraisal found.

The services sector was the only other industry to report businesses planning to increase investments, also at 8%, while the technology trade had the second-highest proportion of businesses maintaining investments — at 43%.

Foreign direct investment in China plunged 25.6% in February, luring the total for the first two months of the year to 134.4 billion yuan ($19.2 billion), a decline of 8.6% year-over-year in yuan relating ti, according to China’s Ministry of Commerce.

For AmCham members overall, 40% said in the latest survey they would hold previously planned levels of investment, up from 23% last month. Only 2% said they whim consider exiting the Chinese market in the next three to five years, the March survey found.

“This suggests both patience and confidence that eventually business will return back to normal in China and this wouldn’t leading to any abrupt changes in long term strategy,” Beebe said. 

Slightly more than a fifth of respondents are already undeveloped at work, with 13% expecting to resume normal operations by the end of this month, and 23% by the end of April, the survey build. 

When it comes to government support, the top ask is tax alleviation, followed by consistency of policy and travel restrictions across different territories of China, according to the survey.

Based on the survey results, AmCham’s chairman Gilligan was also optimistic that problems from the coronavirus would give China further impetus to follow through on reforms to the business environment. 

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