China Weakness Spreads Far and Wide, From Caterpillar to Nvidia

(Bloomberg) -- Caterpillar Inc. manufactures huge yellow bulldozers. Nvidia Corp. makes minuscule computer chips. Their products have little in common, but their earnings on Monday pointed to the same direction: demand in China is slowing down for a widening range of goods.

The world’s second-largest economy, which contributes about a third of global growth, has been weakening for years after averaging more than 10 percent growth for three decades through 2010. The pace of expansion cooled to 6.6 percent last year, the slowest since 1990, while retail sales grew 9 percent, the least since 2003.

Since Apple Inc. shook investors in early January with a warning, a picture is starting to emerge on where the tempering of the $12.2 trillion economy will hurt in the coming year. It includes Stanley Black & Decker Inc.’s tools, PPG Industries Inc.’s automotive coatings, Intel Corp.’s processors and Trinseo SA’s synthetic rubber tires.

Nvidia and Caterpillar are the latest examples of this anecdotal evidence. Here’s a rundown of what we’ve heard so far from U.S., European and Asian businesses:

Industrials

Caterpillar, an industry bellwether, sent a gloomy signal on Monday when it posted its biggest quarterly profit shortfall in a decade, and provided a 2019 forecast that trailed some of Wall Street’s estimates. Sales of excavators will be flat year-over-year in China, the Deerfield, Illinois-based company said.

What Our Analysts Say...

Caterpillar’s 4Q earnings fell short, making it the first miss in almost two years, with the construction segment’s weakness in part due to an unexpected decline in China a worrisome development. 

--Karen Ubelhart and Christina Constantino, Bloomberg Intelligence analysts

For more, read the reaction note

Shares of Japanese rivals Komatsu Ltd. and Hitachi Construction Machinery Co. each lost more than 4 percent in Tokyo on Tuesday. In China, Sany Heavy Industry Co. and other heavy equipment makers fell.

Stanley Black & Decker Chief Executive Officer Jim Loree wasn’t shy about raising the alarm bells on China last week, saying it was facing slowing economic growth there, along with most of the rest of the world. The previous week, paint maker PPG talked about “sluggish industrial activity in China” among pressures that the company will hit the first half of 2019.

Technology

Santa Clara, California-based Intel Corp., whose processors are the main component in most of the world’s personal computers and servers, cited softness in China among the reasons for its lower-than-expected full-year forecast last week. Nvidia, the biggest maker of chips for computer graphics cards, echoed those comments on Monday, saying that “deteriorating macroeconomic conditions, particularly in China, impacted consumer demand” for its products.

Nidec Corp., a Japanese maker of precision motors used in computer drives, cut its profit outlook by 26 percent for the year ending March 31, blaming it on the U.S.-China trade war. It reported a 43 percent drop in operating profit for the quarter through December.

Samsung Electronics Co.’s quarterly profit and revenue missed estimates on sputtering demand for memory chips during the last three months of 2018, the same period Apple saw anemic sales in China. The South Korean company has been losing share for its smartphones for years in China, but the slowdown there is now threatening to hurt its crucial chips business.

On Tuesday in Japan, Alps Alpine Co., a supplier of electronic parts to automakers and Apple, cut its operating profit forecast for the year by 24 percent, blaming the U.S.-China trade war and Brexit.

Cars

Car sales in China fell last year for the first time in more than 20 years.

“China is under threat, for sure,” Volkswagen AG CEO Herbert Diess said in a Bloomberg TV interview in Davos, Switzerland, last week. “This year will be challenging.”

Ford Motor Co. posted a fourth-quarter loss of $534 million in China last quarter. Wholesales by the carmaker’s China joint ventures -- a measure of how many vehicles are shipped to dealers -- plunged 57 percent during the period. By the end of last year, only about a third of the company’s dealers were profitable, Jim Farley, Ford’s president of global markets, said on a Jan. 23 earnings call.

U.S. auto-parts supplier Lear Corp. offered more color on China. Lear, whose biggest customer is Ford, said it expected orders for parts like seating systems to fall more than 10 percent this year.

“They confirmed auto weakness in China,” Douglas Rothacker, an analyst for Bloomberg Intelligence, said in an interview. “Lear offers a good read across the industry for expectations in 2019.”

Continental AG, Europe’s second-largest car parts maker, warned earlier this month that Chinese auto production might stagnate at best this year, leading to a muted earnings forecast for 2019.

Hyundai Motor Co., the world’s fifth-largest maker together with affiliate Kia Motors Corp., said last week it’s losing workers and reviewing its production plans in China during the Lunar New Year holidays after reporting a surprise loss for the quarter through December, the first in at least eight years. “We internally see China is the most difficult market,” Joo Woo-jeong, chief financial officer at Kia, said last week.

Bright Spot: Retail

So far, luxury and consumer goods have been mostly spared. Jeweler Tiffany & Co. enjoyed strong growth in China in the final two months of the year.

“The holiday period has actually been very positive -- China is a big area of focus,” Tiffany CEO Alessandro Bogliolo said in an interview on Jan. 18. He said a boost in marketing spending there about a year ago has started to pay off. “We have seen an acceleration in mainland China.”

Starbucks Corp. is opening a new store every 15 hours in the country. Executives at consumer giant Procter & Gamble Co. said last week that they haven’t seen any sign of a slowdown in the country, although “things in China can change quickly.” Investors will scrutinize the financial results of Paris-based luxury giant LVMH Moet Hennessy Louis Vuitton, due Tuesday, for any hint of the outlook for luxury in the country.

Fast Retailing Co., Asia’s largest retailer that signed up Roger Federer as an ambassador for its Uniqlo brand last year, reported Uniqlo’s operating profit in its mainland China business grew by double digits for the three months ended Nov. 30. China is the Japanese company’s biggest foreign market and a key pillar of its strategy to counter weakness at home.

Swiss watches seem to be running counter to the strength found elsewhere in Chinese luxury retail. In December, shipments to China fell 10 percent, according to a statement from the Federation of the Swiss Watch Industry released Tuesday. That was enough to drive global Swiss-watch exports down 2.8 percent in the month. The news hurt shares of watchmakers Swatch Group AG and Richemont.

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