From Apple to Starbucks, Western firms’ China dreams are dying

Editor’s note (December 9th 2024): This article has been updated to incorporate news of China’s investigation of Nvidia.

Things have never looked rosier for foreign firms in China—at least according to the country’s Council for the Promotion of International Trade. The body, which is controlled by the commerce ministry, claims that 90% of foreign companies rate their experience in China as satisfactory or better. According to a recent survey by the council, foreign firms say the economy is strong, local markets are attractive and their outlook is bright. Following years of isolation during the covid-19 pandemic, China’s government insists that the country is open again for business, and that reforms have made life easier for foreign companies.

Executives of those companies scoff at all this. Many say they now struggle to justify investing in the country and talk instead of cutting staff. In a recent survey by the American Chamber of Commerce in Shanghai, less than half of respondents said they were optimistic about the prospects for their business in China over the next five years—a record low. On December 4th General Motors (GM), an American carmaker, said it would write down the value of its once-thriving joint ventures in the country and close some of its factories there. On December 9th it was reported that China’s government was opening a competition probe into Nvidia, America’s AI chip champion.

In recent decades Western bosses looked to China not just as a place to make things cheaply, but as a vast and growing market for their wares. According to our analysis, the sales in China of listed American and European companies that disclose them peaked at $670bn in 2021, accounting for 15% of those firms’ total revenue. Things have gone south since. Last year sales were down to $650bn; their share of total revenue slipped to 14%. This year has shown no sign of improvement. Of those firms in our dataset that report quarterly sales in China, almost half saw these decline, year on year, in the most recent reporting period.

Companies confronting shrinking sales in the country range from Apple, a tech giant, and Volkswagen, a carmaker, to Starbucks, a coffee chain, and LVMH, a luxury conglomerate. “At this point we should have turned a corner,” complains the regional boss of a global firm. Another foreign executive laments that the days of feverish growth in China for his business have passed. Although some Western companies, such as Eli Lilly, a drugmaker, and Walmart, a retail behemoth, continue to grow in the country, their ranks are steadily thinning.

One reason for this is China’s economic stagnation. A housing crisis has sent property prices across the country plummeting and caused consumers to tighten their belts. The central government signalled in September that it would do what it takes to reflate the economy, and on December 9th the politburo announced that China would shift to a “moderately loose” monetary policy for the first time in over a decade. But expectations remain low. Property sales are still falling, compared with last year, and will probably continue doing so well into 2025. Despite the government’s promises to stimulate consumption, gauges of demand are down.

Deflationary pressure is hurting all companies in China, not just foreign ones, notes Bo Zhengyuan of Plenum, a consultancy in Beijing. Fully 27% of Chinese industrial firms were making losses at the end of October. Oversupply in various industries, from electric vehicles (EVs) to building materials, has led to ferocious price wars. Mary Barra, GM’s boss, has blamed a “race to the bottom” for the firm’s difficulties making money in the country.

Yet Western companies are also being outcompeted by Chinese rivals. Starbucks has ceded market share to Luckin Coffee, a cheaper local competitor that in September had 21,000 stores in the country, about three times as many as the American chain and up from 13,000 a year before. Brian Niccol, the newish boss of Starbucks, told investors in October that it faces “extreme” competition in China. It is said to be considering selling a stake in its business there to a local partner.

In many industries Western firms no longer enjoy the technological edge they once did over Chinese rivals. Chinese manufacturers of industrial robots now supply almost half the local market, up from less than a third in 2020. Apple’s troubles in the country have been compounded by flashy new smartphones from Huawei, including the Mate 70 range it unveiled on November 26th. The EVs produced by BYD, NIO and other Chinese carmakers are not only much cheaper than Western ones, but packed full of the clever tech that local consumers desire. When the Chinese market was still expanding briskly, Western firms were able to increase their sales there even as they lost share. They no longer have that luxury.

If all that were not bad enough, Western companies are also becoming collateral damage in the rivalry between their governments and China’s. On December 2nd America introduced new restrictions on the sale of chipmaking tools to certain Chinese companies, as well as of high-bandwidth-memory chips. That will hurt American manufacturers of semiconductor equipment such as Applied Materials, Lam Research and KLA, as well as ASML, a Dutch maker of advanced lithography tools. Other Western chip businesses may also suffer as a result. After the announcement, four Chinese industry associations responded with a call to reduce purchases of American chips. The timing of China’s Nvidia probe suggests it too may be an act of retaliation for America’s restrictions.

Companies in sensitive industries such as chipmaking are familiar with the risk attached to their sales in China. The list of firms exposed to geopolitical ructions, however, is lengthening. The shares of European brandy-makers, including Rémy Cointreau and Pernod Ricard, slumped in October after China said it would impose anti-dumping measures on the spirit, seemingly in retaliation for tariffs levied on Chinese EVs by the EU. Last month the founder of Uniqlo, a Japanese clothing retailer, incurred the wrath of Chinese netizens when he said that the company did not use cotton from Xinjiang, a region of China mired in allegations of forced labour. China’s commerce ministry may soon slap restrictions on the local operations of pvh, the American owner of Tommy Hilfiger and Calvin Klein, for complying with an American law that bans the use of cotton from the region.

If Donald Trump follows through with his threat to raise tariffs on Chinese goods, Xi Jinping may respond by making life harder still for American companies. Foreign firms in China are trapped in the middle of a dangerous geopolitical struggle, writes Andrew Polk of Trivium China, another consultancy. Their troubles will not ease soon. ■

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