box saying made in China Copyright Feng Li, Getty Images

China Market Losing Luster for Foreign Firms as Sales Droop

Rising costs for labor and more competitive markets as domestic brands gain stature have troubled foreign companies in recent years, as well as a series of anti-monopoly probes which appeared to target overseas firms.

BEIJING - The once irresistible allure of the Chinese market to foreign multinationals is losing some of its luster as slowing growth in the world's second-largest economy hits their sales.

The latest figures from firms reporting during the current results season in Europe, the United States and Japan paint a picture of overseas firms facing a worsening of operating conditions in China.

Volkswagen (IW 1000/6), which has invested heavily in China and has just displaced Toyota (IW 1000/8) as the world's leading car manufacturer, saw sales in the country -- which it describes as its "second home market" -- fall 3.9% in the first half, its first drop in a decade.

"We are keeping a very close watch on global macroeconomic trends," Chief Executive Martin Winterkorn said in a statement, "especially where there are uncertainties such as in the Chinese, Brazilian and Russian markets."

Volkswagen sales in China dropped in the first half, the automaker's first decline in a decade. (Getty Images)

The appeal of nearly 1.4 billion consumers and an economy regularly growing in double digits has brought more than $1.5 trillion of foreign investment to China over the last three decades.

But the economic expansion is slowing -- gross domestic product grew 7% year-on-year in April-June, matching the worst quarterly result since the first three months of 2009 during the global financial crisis.

Some investors have long seen China as a high risk destination.

Rising costs for labor and more competitive markets as domestic brands gain stature have troubled foreign companies in recent years, as well as a series of anti-monopoly probes which appeared to target overseas firms.

"The industrial competitiveness of Chinese enterprises has improved, making it harder for foreign companies to compete," Li Daxiao, an analyst at Yingda Securities, told AFP.

United Technologies: "A Slowing China"

Such challenges have been compounded by the country's slowing economy.

Japan's second-biggest steelmaker JFE Holdings (IW 1000/130) lowered its annual profit forecast in late July because of "the economic slowdown in China and the overproduction of steel" in the country, the world's largest consumer of the metal. 

In the United States, industrial giant United Technologies (IW 500/19), the maker of Otis elevators, revised down its earnings forecast for 2015 partly on the back of what it described as "a slowing China."

As well as elevators, the firm makes heating and cooling systems for buildings, leaving it exposed to a broad slowdown in the real estate sector, which its CEO Gregory Hayes described as "worse than we had expected."

Retail Sales in China Still Sparkle

Retail sales are still growing in China -- they were up 10.6% year-on-year in June, according to the government -- but some foreign firms are struggling to maintain their slice of the cake.

Apple's (IW 500/3) iPhone sales surged 85% in greater China -- which includes Hong Kong and Taiwan -- with revenue from the region more than doubling to $13 billion for the latest quarter ended June 27, according to the company.

But independent analysts Canalys said this week it had been pushed into third place in the quarter by local manufacturers Xiaomi and Huawei, which produce cheaper products, while South Korea's Samsung was relegated to fourth.

Compared with the past, China's economy is slowing down. But compared with other countries, it's still growing quite fast."

— analyst Li Daxiao, Yingda Securities

Sales of luxury watches and spirits have already been battered by an extended austerity and anti-corruption campaign under President Xi Jinping.

International financial markets have been spooked by a recent rout on China's stock market, which continues to be volatile despite direct intervention by Beijing.

Analysts say that the impact on the real economy has been limited so far, despite reports the auto and property sectors have both taken a hit.

Suspicions grew that the economic slowdown could be more pronounced than official statistics suggest, after second quarter growth exactly met the government's full-year target of around 7%, despite a series of disappointing indicators during the period.

But Chinese analysts believe the country still holds a draw for foreign companies.

"Compared with the past, China's economy is slowing down. But compared with other countries, it's still growing quite fast," said Li of Yingda Securities.

"You can't find another economy like China."

Copyright Agence France-Presse, 2015

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