U.S. Firms Get Another Boost From China -- Update

11/06/2020 | 09:19am

By Trefor Moss, Sharon Terlep and Jennifer Maloney

China is bolstering American firms grappling with a surge in Covid-19 cases that is tempering demand in the U.S. and Europe.

Companies including Coca-Cola Co., General Motors Co. and Estée Lauder Cos. said they got a lift in the September quarter from Chinese consumers who spent big on soda, perfume, SUVs and other products.

The latest results extend a trend that began earlier in the year as China recovered from the virus. But the Asian country's return to business as usual has taken on added importance for American firms now that new cases are soaring elsewhere. The U.S. recorded more than 102,800 new cases Wednesday. And Germany, France and the U.K. all issued new restrictions to help curb surging infections.

"This was another extraordinary quarter for Chinese consumer consumption, " Estee Lauder Chief Executive Fabrizio Freda said on the company's quarterly earnings call on Monday. While the cosmetics giant's global sales fell 9% from the same period a year ago, its China sales increased 28% to 30%, Mr. Freda said.

Business and consumer activity inside China has returned to pre-pandemic patterns in many ways. Cities are bustling with crowds of office workers and traffic on streets. Restaurants, shopping malls and gyms are packed. Movie theaters are open. Domestic air travel in August inched closer to levels not seen since before the pandemic.

Chinese retail sales grew in August for the first time in 2020, increasing 0.5% year-over-year, according to the National Bureau of Statistics. The recovery accelerated in September, with retail sales up 3.3% year-over-year. Almost all of China's main consumer segments are now growing again, with the exception of petroleum products and catering.

Coca-Cola said it expects to see growth this year in China, even as its global sales continue to decline because of the closures of restaurants, bars, movie theaters and sports stadiums elsewhere around the world.

Chinese consumers are "more or less back to where they were" before the pandemic started, though away-from-home sales aren't quite back to where they were, Coke's finance chief, John Murphy, said in an interview in October. "They have managed from March through June to contain and pretty much eliminate the pandemic."

Coke reported revenue of $8.65 billion in the third quarter, a decline of 9% from a year earlier. The company's case volume fell in the quarter by 6% in North America and 4% globally. Coke didn't disclose sales numbers for China but said its case volume of carbonated soft drinks there rose by a mid single-digit percentage.

Estee Lauder said Chinese shoppers ramped up spending in stores and online, snapping up pricey skin creams, perfumes and other high-end beauty products. They also returned in big numbers to domestic travel, which fueled sales of Estee Lauder products at airports. Before the pandemic, travel-retail sales had been a major growth driver for Estee Lauder and other makers of luxury products, compensating for the decline of U.S. shopping malls. Those sales ground to a halt this spring.

The company saw "tremendous growth" in the southern island province of Hainan, Mr. Freda said. The region is aided by relaxed duty-free rules. In June, authorities more than tripled the annual limit on duty-free purchases there and widened the program to include more products such as electronics.

L'Oreal SA reported a similar surge in demand: Its China sales increased 28% in the third quarter year-over-year, although its global sales fell 2%.

China also rode to the struggling automotive sector's rescue.

Cummins Inc. of Columbus, Ind., which makes truck engines, said its China revenue surged 46% year-over-year in the third quarter, whereas its global revenue dropped 11%. Chinese "demand has been at record levels for the last six months," said Chief Financial Officer Mark Smith, as local governments fund heavy-equipment purchases as part of infrastructure programs being rolled out nationally to stimulate the economy.

With the recovery in premium-car sales outpacing that of the broader auto market in China, Daimler AG reported 24% yearly sales growth, and record unit sales, for Mercedes-Benz in the September quarter. That compared with an 8% decline globally.

GM reported a 12% yearly increase in China sales in the September quarter, compared with a 10% decline in U.S. sales. At Ford Motor Co., China sales increased 22% year-over-year but declined 5% globally.

Japanese auto makers also have gotten a lift from China in recent months. On Friday, both Toyota Motor Corp. and Honda Motor Co. more than doubled their profit forecasts for the year ending March 2021, saying rising demand in China is helping offset weaker results globally.

Pharmacy giant Walgreens Boots Alliance Inc., with the most of its business in the U.S. and Europe, got a boost from China. As the company accelerates store closings in the U.S., a two-year-old joint venture in China is growing fast, executives said last month.

Walgreens in 2018 acquired a 40% majority stake of Chinese pharmacy chain Sinopharm Holding GuoDa Drugstores Co. The chain has grown to 7,500 stores from 3,600 in that time and continues to expand amid the pandemic.

China is also buying more U.S. grain, meat and other farm goods, which is helping to revive the fortunes of American agricultural companies. Archer Daniels Midland Co. and Bunge Ltd. both said higher commodities exports helped fuel rising profits during their most recent quarters. "China has come roaring back from the pandemic," said Juan Luciano, chief executive of ADM, on a conference call last week. "Their recovery has surprised everybody."

American companies' increasing reliance on growth in China brings risks, particularly in light of acrimony between the two nations and the potential for Beijing to assert its influence on business operations in the country. This week, Chinese regulators halted financial-technology firm Ant Group Co.'s plans to go public in what would have been the world's largest listing.

Some American firms hope the outcome of the U.S. presidential election will restore stability to the U.S.-China relationship after more than two years of tensions, ensuring that growth doesn't fall victim to geopolitics.

"The business community is looking for certainty and predictability," said Matthew Margulies, vice president at the U.S.-China Business Council in Beijing, a quarter of whose members postponed planned investments in China over the past year, mainly because of the pandemic and worsening U.S.-China relations. "There's been a lot of volatility in the bilateral relationship, which makes long-term planning difficult."

U.S.-China trade tensions will persist whoever secures the presidency, said Bala Ramasamy, professor of economics at the China Europe International Business School in Shanghai. "The U.S. will continue to demand that China opens up its market to American goods and services as well as a more level playing field for American companies," he said.

Write to Trefor Moss at Trefor.Moss@wsj.com, Sharon Terlep at sharon.terlep@wsj.com and Jennifer Maloney at jennifer.maloney@wsj.com

(END) Dow Jones Newswires

11-06-20 0851ET

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