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Breakingviews - Cox: China addiction looms as big corporate risk

福利网站ZURICH (Reuters Breakingviews) - “Nice business you have got here, it would be a shame if something happened to it.” What sounds like a bad line from a mafia television sketch is pretty much the dilemma facing Western multinationals in China.

Customers wearing face masks following the coronavirus disease (COVID-19) outbreak, line up to enter a Gucci store at the Sanya International Duty-Free Shopping Complex, in Sanya, Hainan province, China.

福利网站As the People’s Republic has mostly contained Covid-19 and returned to growth, it has become a lone bright spot for global companies from Europe and America, whose own economies remain repressed by measures to combat stubborn contagion. The risk is that they will develop a dependency on the Middle Kingdom that ultimately backfires financially – with potentially big geopolitical ramifications.

Consider the latest raft of quarterly results from businesses ranging from carmakers to food producers to condom manufacturers. For many, even while sales in developed markets flag as consumers stay home, job insecurity looms and social distancing rules crimp lifestyles, their operations in China are powering ahead.

Take Thursday’s earning action. Hermès International, the French purveyor of ties for investment bankers, said sales in the third quarter returned to growth for the first time this year. The catalyst: the “remarkable performance of mainland China,” per Executive Chairman Axel Dumas. Sales in Asia excluding Japan soared 29%, offsetting weakness in more established markets.

福利网站On the same day, Unilever reported underlying sales growth of 4.4% to 12.9 billion euros in the third quarter. That’s because emerging markets grew 5.3%, higher than the 3.1% seen in developed markets. “China grew double-digit led by beauty and personal care categories and a return to growth in food service, as the out of home eating channel returned to full capacity.” That last bit is corporate-speak for Chinese people dining out again.

福利网站The story is pretty much the same across the luxury-goods universe. By 2025, China will become the industry’s most relevant country, and its consumers will make up close to half of global sales, Bain estimates, up from about a third last year.

Car manufacturers are in a similar boat. BMW said third-quarter car sales in China rose 31% from a year earlier. German rival Daimler said Chinese demand for its Mercedes-Benz cars rose by a quarter. It’s planning to double sales of its Maybach limos in Asia. Even dowdier Ford Motor, which has been struggling in China, got a 25% pop there in the third quarter, even as U.S. sales fell 5%.

福利网站And Chinese consumers aren’t just driving more. According to Reckitt Benckiser, they’re also hooking up. The Anglo-Dutch company on Tuesday reported a spike in sales of its Durex condoms and “sexual wellbeing products”, as lockdown restrictions globally relaxed in the last quarter. The company highlighted China, where “materially improved” pandemic infection rates and the launch of its polyurethane, extra-thin, extra-smooth “Durex 001” condom boosted sales. That may be too bad for Chinese officials hoping for a birth-rate spike. But it’s a lube for Reckitt Benckiser’s bottom line.

Even when it’s bad in China, it’s relatively good. Starbucks, which will report its latest quarterly results next week, suffered across the board like everyone else in the second quarter, with global comparable sales plunging 40%. But the decline in China was half as steep.

So, what’s the problem? Shareholders should be happy their companies are minting it in China while the rest of the world slumps. And Western governments - who for years lectured Beijing to shift its economy from a mercantilist, export-led model to one based on greater domestic consumption - should be overjoyed to see Chinese driving Beamers, drinking Frappuccinos, and engaging in safe sex with British condoms, right?

Only to a point. As corporations increasingly depend on the Chinese market, they will almost certainly lobby their governments to take a less aggressive approach with the Communist Party on trade, security, human rights, and other important matters. It’s like that mafia trope, where an implicit threat follows a promise of protection. But in the case of China, it’s explicit.

On Wednesday, China’s foreign ministry made no bones about it, threatening Sweden with retaliation over its decision to ban telecommunications companies Huawei Technologies and ZTE from a planned 5G spectrum auction. “Sweden should uphold an objective and fair attitude, and correct its wrong decision, to avoid bringing a negative impact to China-Sweden economic and trade cooperation and the operations of Swedish enterprises in China,” spokesman Zhao Lijian said.

That came on the same day that Swedish telecoms-equipment group Ericsson reported a robust third quarter and its boss sounded upbeat about the outlook for 5G contracts in mainland China.

福利网站That’s a nice business you have got there, Ericsson – it would be a shame if something happened to it.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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