Xi Jinping’s China has bounced back and is embarking on Western business. While breathing new life into the top lines of multinational corporations, it also poses a new challenge: whether to invest in the world’s second-largest economy as geopolitical tensions rise over Taiwan’s fate.
Sluggish demand in the retail sector has spurred a faster-than-expected recovery since Beijing rolled back all Covid-19 restrictions in December. China’s 4.5% economic expansion in the first quarter is hurting earnings for Western brands, especially at the upper end of the consumer spectrum.
Take Porsche, for example, which posted a record 18% increase in sales, driven by China, the largest market for German luxury car makers. Or LVMH, similarly buoyed by its buoyancy in the world’s biggest luxury market, the French group saw its first-quarter sales fall just as US growth plateaued. said it surged 17%. Meanwhile, Paris-based rival Hermès hailed a “very good Chinese New Year,” revealing a 23% increase in sales across Asia. In these higher territories, a Chinese consumer could be charged 30% more of his luxury goods than in Europe, according to Morgan Stanley.
But, as UniCredit economist Eric Nielsen pointed out in his post-IMF Spring Meetings briefing, “there are elephants in the room.” Policy Priority”.
“In the US, it’s all about containing China. If (or when?) it leads to esoteric action, it means that European companies are most likely to be caught between the two parties.”
Businesses have been aware of this risk since former President Donald Trump imposed numerous sanctions on Chinese companies. This stance on supply chains, coupled with massive trade disruptions during the Covid pandemic, has prompted companies to abandon the concept of “just in time” “just in case.” Groups from Intel to Apple are rethinking their dependence on China and moving some of their production to countries like India and Vietnam.
But as Apple’s troubles in India show, the interdependence with China built over the past two decades is no easy task. And if there’s one lesson to be learned from the much smaller distance between Russia and the West after the invasion of Ukraine, it’s that the process was painful for Western brands and they only entered reluctantly. That’s it.
China’s economic recovery will only make it more difficult to implement these plans to diversify supply chains, especially for listed companies. Increased pressure from shareholders and the payment of incentives linked to stock price performance will increase the temptation to downplay or ignore geopolitical risks (U.S. generals recently and predicted that Beijing would probably start a war over Taiwan (2025).
Sure enough, Volkswagen, the German automaker that owns Porsche, announced this week plans to invest €1 billion to build an innovation center in China. This follows last year’s decision to invest €2.4 billion in a venture with Chinese chip designer Horizon Robotics. We are not showing caution about what a growing number of policy makers see as the greatest threat to the West.
