AH Beard, a 123-year-old luxury mattress maker based in Australia, began tracking China around 2010. At the time, the family-owned company faced competition from low-cost, foreign-made mattresses in its home market. China, with its 1.4 billion consumers and a growing middle class with a taste for premium brands, seemed like a good place to expand.
AH Beard opened its first store there in 2013. Before the coronavirus pandemic, sales in the country were growing by more than 30 percent annually. There are now 50 AH Beard stores across China, with plans to open 50 more. But today, like most foreign companies operating in China, AH Beard has begun to think more carefully about its strategy.
Beijing’s strict COVID-19 policy has taken a toll on business. The company’s exports to China are no longer increasing.
This month, Chinese officials announced that the economy had grown at its slowest pace since the early days of the pandemic. Unemployment is high, the housing market is in crisis and panicked consumers – living under the constant threat of lockdown and mass testing – are not spending.
Now, the once resilient Chinese economy looks shaky, and companies that flock to the country to participate in boom times are facing a grim reality: what was once seen as a credible economic opportunity. Flat development.
“I certainly don’t see China returning to the rate of growth we saw earlier,” said Tony Pearson, chief executive officer of AH Beard.
So far, most companies have remained in this direction, but there is a constant cautionary tale of caution that didn’t exist a few years ago.
Geopolitical tensions and the US-China trade war have led to the imposition of punitive tariffs for some industries. COVID-19 has halted the flow of goods, raised prices of almost everything and delayed shipments for months. China’s pandemic response to quarantines and lockdowns has kept customers at home and out of stores.
AH Beard opened its flagship store in Shanghai with a local partner about 10 years ago. And like any high-end brand, it offered products with prices that defy trust. China became the best-selling market for its top-of-the-line $75,000 mattress.
Since then, the cost of shipping a container has increased six times. The cost of mattress materials and components, such as latex and natural fibers, has increased significantly. There have been other worrying signs, including a housing slowdown. (New homes often mean new mattresses.)
Mr Pearson said he is hopeful the Chinese Communist Party Congress later this year will clarify the “trajectory for China” and fill consumers with more confidence. “The economy still has potential for growth,” he said. “But there’s always a degree of risk.”
When the rest of the world laid off after the 2008 financial crisis, China emerged as an outsider and international business boomed.
European luxury brands built gleaming stores in China’s biggest cities, while American food and consumer goods companies cheered for supermarket shelf space. German car makers opened dealerships, and South Korean and Japanese chip firms attracted Chinese electronics makers. The booming construction market fueled the demand for iron ore from Australia and Brazil.
Chinese consumers rewarded those investments by opening their wallets. But the pandemic has shaken the confidence of many shopkeepers who are now looking forward to rainy days.
Fang Wei, 34, said he has reduced his spending since leaving the job in 2020. In the past, he spent most of his salary during frequent shopping trips on brands such as Michael Kors, Coach and Valentino.
Even though she is re-employed, working in advertising in Beijing, she now allocates a quarter of her salary to food, transportation and other living costs. She hands the rest to her mother, who puts the money in the bank.
“Since I am worried about being fired, I transfer everything to my mother every month,” Ms. Fang said. “It is very frustrating to go from enjoying life to subsistence.”
A more frugal Chinese consumer is a concern for foreign businesses, many of which offer products that are not a low-cost option but a premium option. An Joon-min, chief executive of Ginseng By Pharm, a South Korean manufacturer of ginseng products, said he also noticed that the Chinese “have become wallet thin.”
Mr Ann said sales of the company’s main product, a 2-ounce bottle of the ginseng drink, which sells for $18, peaked before the pandemic. The company shipped 600,000 bottles to China and Hong Kong in 2019.
Sales declined in 2020 as it was difficult to get products in the country during the COVID lockdown. The trade has mostly bounced, although it is still 10 to 20 percent below the peak.
While Mr Ann said he is concerned about an economic slowdown, he remains optimistic that the market for health products in China, and an acquaintance with ginseng – an aromatic root said to have health benefits – could benefit sales. Will continue However, to hedge his bets, he is also seeking regulatory approval to sell in Europe.
This is a far cry from the unbridled optimism of the past.
In 2016, when China was the fastest growing and most profitable market, Adidas chief executive Casper Rorsted declared that the country was the “star of the company”. Adidas invested aggressively to find its footing. It went from 9,000 stores in China to its current 12,000 in 2015, although only 500 are operated by Adidas. Then the music stopped.
After initially speculating that sales would pick up in China this year, Adidas dashed expectations in May as the Covid lockdown continued to spread. The company said it now expects a “significant drop” in China’s revenue and a sudden rebound is unlikely.
For now, Adidas remains adamant. Mr Rorstedt said on a call with analysts that the company does not plan to cut costs or pull back from the country. Instead, it will “do whatever it can to double and accelerate growth.”
Many foreign companies bet on the rise of a Chinese middle class as a reliable source of that growth. Consulting firm, Bain & Co., said it expects China to become the world’s largest luxury market by 2025, which, said Federica Levato, a senior partner, is still “a big wave” of a growing middle class. .
But these kinds of predictions seem less attractive to some foreign companies that once relied heavily on the Chinese market.
Kemps Hardwoods, a Michigan-based manufacturer of kiln-treated lumber used for homes and furniture, seized the opportunity to expand into China — the first. At a Chinese trade show in 2015, the company’s general manager Rob Kukowski said that a Chinese buyer surprised him with a huge offer to buy enough stock to fill 99 shipping containers. The $2 million order for lumber accounted for four months of business for Kamps.
Chinese buyers were so desperate for the wood that they went to the company’s booth and refused to leave until Mr. Kukowski accepted a million-dollar deal on the spot. As of 2016, China accounted for 80 percent of the company’s sales.
Kamps soon realized that it was difficult to profit from large Chinese orders as many buyers were not interested in quality and only wanted the cheapest possible price. The company began to focus its attention on finding customers in the United States and other overseas markets who were willing to pay more for a better product.
It was an accidental time. When China raised tariffs on US lumber in 2018 as part of a trade war, Kamps was in a better position to weather the recession. Today, China accounts for only 10 percent of Comps’ sales, but it still has a major indirect impact on the company. Mr Kukowski said China is such a big buyer of American lumber that when it stops spending, a downward war erupts throughout the industry.
“With their purchasing power being so strong and so much of our product going into that market,” Kukowski said. “Our industry is going to run into significant problems if their economy slows down.”
jin yu young Contributed to reporting. Claire Fu Contributed to research.