China is back, bringing profit and perplexity for Western companies

Xi Jinping’s China is recovering and making proposals to western business. While it breathes new life into the main lines of multinationals, it also creates a new dilemma: whether to invest in the world’s second-largest economy as geopolitical tensions intensify over the fate of Taiwan.

Since Beijing lifted all Covid-19 restrictions in December, pent-up demand in the retail sector has skyrocketed. faster recovery than expected. China’s 4.5 percent economic expansion in the first quarter has worked its way into earnings for Western brands, especially at the higher end of the consumer spectrum.

Take Porsche, for example, which posted a record 18 percent increase in sales driven by China, the German luxury carmaker’s biggest market. Or LVMH, similarly buoyed by dynamism in the world’s largest luxury goods market, which the French group said had fueled a 17 percent increase in first quarter sales just as growth stalled in the United States. Meanwhile, its Paris-based rival Hermès hailed “a very good Chinese New Year” as it revealed a 23 per cent rise in revenue across Asia. In these upper spheres, consumers can be charged 30 percent more for luxury items in China than in Europe, according to Morgan Stanley.

But there is an “elephant in the room,” as UniCredit economist Erik Nielsen noted in a briefing after the IMF’s spring meetings: Rising geopolitical tensions between China and the West are bringing about “the most profound change in a generation in economic policy thinking, and political priorities”.

“In America,” he wrote, “it’s about containing China. In Europe, it’s partly a milder version of the same thing. This means that if (or when?) US-China relations deteriorate further in this tit-for-tat, leading to more protectionist measures, including export bans and sanctions, companies will most likely European Unions are caught between the two parties”.

Businesses have been cognizant of this risk ever since former US President Donald Trump imposed a series of economic sanctions on Chinese companies, marking a more adversarial shift toward Beijing that has continued under his Democratic successor Joe Biden. For supply chains, this stance, coupled with massive business disruptions during the Covid pandemic, has led companies to abandon the notion of “just in time” for “just in case,” with groups from Intel to Apple reviewing its reliance on China and trying to move parts of its production elsewhere, to countries like India and Vietnam.

But such is the interdependence with China built over the past two decades that it is no easy task, as evidenced by Apple’s difficulties in India. And if there’s one lesson from the much smaller decoupling between Russia and the West after the invasion of Ukraine, it’s that the process is painful for Western brands, and entered only reluctantly.

China’s economic recovery will only make these plans to diversify supply chains more difficult to implement, especially for publicly traded groups. With increasing shareholder pressure and pay incentives that are tied to stock price performance, the temptation to minimize or even ignore geopolitical risks will be greater (a US general recently predicted that Washington and Beijing would likely go to war over Taiwan). in 2025).

Sure enough, the German automaker Volkswagen, owner of Porsche, this week announced a plan invest one billion euros to build an innovation center in China. This came after a decision last year to spend €2.4bn on a venture with Chinese chip designer Horizon Robotics. Not exactly a sign of prudence in a country that more and more politicians see as the biggest threat to the West.

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