China proves bright spot in US companies' results

US companies are slashing costs, eliminating staff and reporting some of their gloomiest earnings in years, but there is one salve to all the pain - China.

While consumers and businesses in much of the world are cutting back on spending, there are signs that the Chinese economy is pulling out of a short dip in growth and companies that expanded there in recent years are reaping the dividends.

Optimism about China stretches across a wide range of American industry, from mining and construction equipment maker Caterpillar Inc to KFC-chain operator Yum Brands Inc.

They say its insatiable appetite for everything from heavy machinery to fast food - due in part to an $585 billion Chinese government stimulus package - is stabilizing the market and providing a growth outlet just when they need it most.

"China has been the gold standard on the stimulus package. It was early, large, and well-designed and it's already gotten very substantial results," said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics.

China's gross domestic product growth in the first quarter was only 6.1 percent, the weakest since quarterly figures were first available in 1992, but scorching when compared with the 5 percent contraction expected by economists for the US economy in a recent Reuters poll.

Signs that the Chinese economy is heading back to much higher growth rates over the rest of the year have resounded through the earnings season.

Coca-Cola Co CEO Muhtar Kent said that first-quarter soft-drink sales rose 10 percent by volume in China, its third largest market, but fell in Europe.

"Very healthy," Kent said, adding that the world's largest soft-drink maker has a $2 billion investment program in China over the next three years.

China, which is the world's third largest economy behind the United States and Japan, is expected to be the first major economy to recover from a global economic downturn that has decimated business worldwide.

In addition to easing interest rates to jump-start lending and developing infrastructure for high speed rail, telecommunications and power grid distribution, China is aggressively trying to spur consumer demand, for instance, by improving health care and pension payments.

Ambitious Western companies such as fast-food giant Yum are determined to profit. Calling China the "largest restaurant opportunity of the 21st century", CEO David Novak said the company will invest more than $1 billion in new capital in China in the next three years.

Yum - the parent of the KFC and Pizza Hut chains - and its rival McDonald's have long battled it out in the country, spending aggressively on marketing and vying to compete with discount options and by offering Chinese items on their menus.

"Trust me, as long as we continue to expect this type of return, we will continue to rapidly expand in China," Yum's Chief Financial Officer Richard Carucci said.

But Yum's China results - with same-store sales up only 2 percent - were weaker than analysts expected, and McDonald's, which has a much smaller China operation, said it would open fewer stores than planned because Chinese diners were trading down to lower-priced options.

"Economic weakness in China has impacted our sales and margins, especially in southern China where manufacturers have closed," McDonald's CEO Jim Skinner said.

Still, underlying business in China remains strong and McDonald's will lower lunch prices to compete with Chinese fast food that sells for 30 percent to 40 percent less, President and COO Ralph Alvarez added.

"It's dilutive to margins, obviously, and to average check, but this is a long-term gain," he said.

The best opportunities in China may be for companies that can tap into the infrastructure build-out that is part of the stimulus plan, Haas School of Business senior lecturer Paul Tiffany said.

Sandy Cutler, CEO of US diversified manufacturer Eaton Corp, said he has seen increased orders in Eaton's hydraulics business coming from China, in what he calls the country's stimulus-driven "heartbeat".

Caterpillar Inc CFO Dave Burritt agreed that China's stimulus package was also a driver for his company's better-than-expected sales.

Programmable chipmakers Altera Corp and Xilinx Inc are also pegging their hopes on China.

China is spending $42 billion on its 3G network over two years, versus the US earmark of $7.2 billion for rural broadband in the next 18 months - which makes the Asian country key, said Altera CEO John Daane.

"China is spending money at a greater rate than Obama is," Global Crown Capital analyst David Wu said in reference to Barack Obama's US economic stimulus package.

Reuters

(China Daily 05/04/2009 page8)