Luxury brands feel the heat

For companies from LVMH Moet Hennessy Louis Vuitton SE to BMW AG to Yum! Brands Inc, China is delivering a one-two punch.

Years of surging economic growth that has spurred sales of luxury goods - Louis Vuitton handbags, Tiffany rings, BMW 5-Series cars - as well as mundane items like KFC chicken and Kone elevators, has given way to the deepest slowdown since 1990. Chinese policymakers on Tuesday added to the pain for international companies by devaluing the yuan by the most in two decades, sending shares of European and the United States' automakers, luxury manufacturers and industrial companies slumping.

The policy shift reduces the value of their sales in China and makes the nation's producers more competitive. While the devaluation may help revive growth in China, for now it shows how concerned the authorities are about the slowdown, and that there may be further pain ahead for companies operating there.

"China is clearly becoming a growing risk that materializes day after day," said Anne d'Anselme, a money manager at Cogefi Gestion, which oversees 600 million euros ($662 million) in Paris. The firm cut back its ownership of luxury and auto stocks a month ago.

At both LMVH and Tiffany, sales in Asia excluding Japan accounted for more than a quarter of sales in their latest quarters and were trending lower. Louis Vuitton sales in the Chinese mainland, Macao and Hong Kong fell about 10 percent in the second quarter, Paris-based LVMH, which also owns Moet champagne and Hennessy cognac, said last month.

One bright spot for luxury-goods companies has been that, even as sales in the Chinese mainland and Hong Kong suffered, Chinese travelers continued to spend when visiting Paris, New York and other cities. The devaluation of the yuan means their purchasing power outside China will be hurt, said Alessandro Migliorini, an analyst at Mirabaud Securities LLP.

"What really counts is what lies beneath the decision to devalue the yuan," Migliorini said. "The most significant worry is the big picture, that China's economy is weakening."

Foreign automakers and parts companies working in China had enjoyed a long boom until the nation's new-car market contracted in June for the first time in more than two years, including a 0.1 percent drop for BMW sales. The devaluation may add another hit to earnings when those companies bring profits back home, Bloomberg Intelligence analyst Kevin Tynan said in an interview.

Delphi, BorgWarner Inc and Lear Corp are among the most exposed partsmakers to China and Tynan said they could face problems if the currency stays devalued for long. "The longer it goes, the worse it is," he said.

As for BMW, its executives are remaining optimistic.

"Current business developments in China present us and other automobile manufacturers with challenges we foresaw a long time ago," BMW said in a statement on Tuesday. China's low rates of car ownership and a growing middle-class mean prospects for mid-to long-term growth are unchanged, it said.

Previous Page 1 2 Next Page

Previous Page 1 2 Next Page