Business

The 123-year-old Australian company that flocked to China met a sobering reality

Geopolitical tensions and a trade war between the US and China have triggered punitive tariffs on some industries. COVID-19 has disrupted the flow of goods, raising prices on almost everything and delaying shipments for months. China’s pandemic response of quarantines and lockdowns has kept customers at home and out of stores.

Almost 10 years ago, AH Beard opened its flagship store with a local partner in Shanghai. And like any high-end brand, it has launched products at incredible prices. China became the top-selling market for its $75,000 (US$107,400) premium mattress.

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Since then, the cost of shipping a container has increased sixfold. The cost of mattress materials and components such as latex and natural fibers has increased significantly. Other worrying signs have surfaced, including a property slump. (New homes often mean new mattresses.)

Pearson said he hopes the Chinese Communist Party Congress later this year will “clear the way for China” and instill more confidence in consumers. “The economy still has growth potential,” he said. “But there’s always some risk.”

After the 2008 financial crisis, as the rest of the world pulled out, China emerged as an outlier and international companies crowded in.

European luxury brands set up gleaming stores in China’s largest cities, while US food and consumer goods companies crowded supermarket shelves. German automakers opened dealerships, and South Korean and Japanese chip companies courted Chinese electronics manufacturers. A booming construction market fueled demand for iron ore from Australia and Brazil.

Chinese consumers rewarded these investments by opening their wallets. But the pandemic has shaken the confidence of many shoppers, who now have rainy days ahead.

Fang Wei, 34, said she has reduced her expenses since quitting her job in 2020. In the past, she has spent most of her salary on frequent shopping sprees for brands like Michael Kors, Coach and Valentino.

Although she is employed again and works in advertising in Beijing, she now spends a quarter of her salary on food, transportation and other living expenses. She hands the rest over to her mother, who puts the money in the bank.

“Because I’m afraid of being fired, I transfer everything to my mother every month,” Fang said. “It’s very depressing to go from enjoying life to making a living.”

In 2016, when China was the fastest growing and most profitable market, Kasper Rorsted, Adidas CEO, declared the country the “star of the company”. Adidas invested aggressively to expand its footprint. It has grown from 9,000 stores in China in 2015 to 12,000 currently, although only 500 are operated by Adidas. Then the music stopped.

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After initially forecasting sales in China would accelerate this year, Adidas scaled back expectations in May as COVID lockdowns continued to spread. The company said it now expects revenue in China to “fall significantly” and that a sudden recovery is unlikely.

For now, Adidas remains undeterred. Speaking to analysts, Rorsted said the company has no plans to cut costs or pull out of the country. Instead, it will “do everything we can to double and accelerate growth.”

Many foreign companies had counted on the rise of a Chinese middle class as a reliable source of this growth. Bain & Co., a consulting firm, expects China to be the world’s largest luxury market by 2025, driven in part by what Federica Levato, a senior partner, said is still “a big wave” of an emerging middle class.

An Adidas store in a shopping mall in Beijing. There are 12,000 Adidas stores in China, up from 9,000 in 2015, but the company expects sales in China to

An Adidas store in a shopping mall in Beijing. There are 12,000 Adidas stores in China, up from 9,000 in 2015, but the company expects sales in China to “decrease significantly” this year. Recognition:Giulia Marchi/The New York Times

But such predictions look less enticing for some foreign companies that once relied heavily on the Chinese market.

Kamps Hardwoods, a Michigan-based manufacturer of kiln-treated lumber for homes and furniture, jumped at the opportunity to expand in China—at first. At a Chinese trade show in 2015, Rob Kukowski, the company’s general manager, said a Chinese buyer stunned him with a huge offer to buy enough inventory to fill 99 shipping containers. The $2 million lumber order was four months worth of business for Kamps.

Chinese buyers at the time were so desperate for wood that they stopped by the company’s booth and refused to leave until Kukowski accepted a $1 million deal on the spot. By 2016, China accounted for 80 percent of the company’s sales.

Kamps quickly realized that it was difficult to profit from the large Chinese orders, as many buyers were not interested in quality and only wanted the lowest possible price. The company began focusing on finding customers in the United States and other overseas markets who were willing to pay more for a better product.

It was random timing. When China hiked tariffs on U.S. lumber in a trade war in 2018, Kamps was better positioned to weather the downturn. Today, China accounts for only 10 percent of Kamps sales, but still has a large indirect impact on the company. Kukowski said China is such a big buyer of U.S. lumber that if it stops spending, there will be a price war to the bottom across the industry.

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“Because their purchasing power is so strong and so much of our product gets into that market,” Kukowski said. “Our industry will face significant problems as its economy slows.”

This article originally appeared in The New York Times.

https://www.smh.com.au/business/companies/australian-company-that-flocked-to-china-hit-with-a-sobering-reality-20220729-p5b5jr.html?ref=rss&utm_medium=rss&utm_source=rss_business The 123-year-old Australian company that flocked to China met a sobering reality

Brian Lowry

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