Home » China’s Slow Economy Takes 9% Off Global Manufacturers’ Profits
Business China Economy Featured News

China’s Slow Economy Takes 9% Off Global Manufacturers’ Profits

China’s economic slowdown is dragging down the performance of the global manufacturing industry. In addition to the slump in smartphones, semiconductors and other electronics, demand for machinery has also been sluggish due to weak capital investment.

The net incomes of roughly 13,000 major listed companies in the U.S., China, Europe, Japan and other economies for the July-September period totaled about $1.1 trillion, up 3% compared to the same period a year ago, according to a Nikkei analysis of QUICK-FactSet data. However, manufacturing profits fell 9%, the fourth consecutive quarterly decline.

Nikkei compiled and analyzed earnings results as of Wednesday, using data from QUICK and FactSet. For companies that have yet to announce their financial results, market forecasts were used. The 13,000 companies included in the tally account for roughly 90% of all listed companies in terms of market capitalization.

Nine of 16 major industries, mainly in the manufacturing sector, reported a decrease in profits.

The chemical industry was hardest hit as profits decreased by 43%. The electronics sector suffered a 12% decline. The machinery sector endured its first profit decline in five quarters, 10%.

While profits in the nonmanufacturing sector increased 16%, China’s slowdown weighed heavily on manufacturers. The net income of about 240 non-Chinese manufacturers whose ratio of Chinese sales to total sales is estimated at 30% or more, decreased by 30%, the data shows.

Their underperformance is even more pronounced when compared to companies with less reliance on China. The net income decrease was 1% for companies that depend on China for 10% to 30% of their sales. For those that get no more than 10% of their sales from China, net income grew 7%.

With “the world’s factory” demanding less automation equipment and its workers buying fewer smartphones and other products, a wide range of industries is feeling the impact. U.S. semiconductor giant Texas Instruments and Taiwan Semiconductor Manufacturing Co. (TSMC) reported profit declines of more than 20%.

TSMC CEO C.C. Wei told participants on an earnings call on Oct. 19 that his company’s customers remain cautious “due to the persistent weaker overall macroeconomic conditions and slow demand recovery in China.”

Makers of chemicals, the foundation of a range of industries, are also on the decline. At Dow, profits tumbled 59%. At DuPont, another American chemical giant, the decrease was 13%.

As capital investment in China slowed, so too did sales of factory automation equipment such as numerical control devices. The shock wave was felt in Japan, where Fanuc posted a 20% decline in profit. Orders, a leading indicator of the industrial robot maker’s earnings, fell 35% in China.

Despite hopes for economic stimulus measures by the Chinese government, consumption in the region is also slowing down. For example, the U.S. cosmetics company Estee Lauder reported a profit decline of over 90% due to the slump in the Chinese market, its mainstay.

In sharp contrast to the sluggish manufacturing sector, the financial sector is flying high and its profit growth was the highest of all industries. Wells Fargo and JPMorgan Chase, which mainly engage in commercial banking, posted strong net income growth of 61% and 35%, respectively. As U.S. interest rates have been rising since the summer, interest margins have widened.

The performance of U.S. tech giants is recovering. The total profits of six companies, including Apple and Microsoft, increased 41%. They reduced costs with measures such as staff reductions, and at the same time internet advertising recovered as U.S. economic growth accelerated. Toyota Motor and other automakers also did well, posting a 55% increase in profits.

The outlook for the October-December period, based on aggregate market forecasts from QUICK and FactSet, is a 7% increase in the manufacturing sector and a 21% increase overall.

However, in addition to the slowing Chinese economy, there are concerns that prolonged U.S. monetary tightening could lead the world’s largest economy to slow down too. Higher interest rates could lead to a decline in demand for loans and could also provoke defaults, which would be a headwind for strong financial performance.

Some financial institutions are accumulating costs in disposing of bad loans. Charles Scharf, Wells Fargo’s CEO, said, “We have continued to take some credit tightening actions.”

The U.S. economy, which had been firm, shows signs of slowing. The nonmanufacturing business sentiment index in October was at its lowest level in five months, according to the U.S.-based Institute for Supply Management. If the U.S. economy sinks, a wide range of industries could be affected.

Source: Nikkei Asia