For U.S. Companies, China Poses New Challenges (and Opportunities)

With double-digit annual GDP growth and the world's largest population, China until recently looked like the long-term answer for U.S. companies seeking never-ending growth. With its slowdown and concurrent stock-market turmoil, China is posing fresh challenges, says Anil Gupta, the Michael D. Dingman Chair in Strategy, Globalization and Entrepreneurship at the University of Maryland's Robert H. Smith School of Business. Growing uncertainty in China, moreover, may lead some companies to move more aggressively into India, whose economic strides were overshadowed by the Chinese growth machine — until recently.

"The days of China growing at 10 percent annually, or higher, are gone for good," says Gupta. "The days of the rising tide lifting all boats are over. The China story is becoming much more complex." For 2015, China's official growth figure is in the 6.5 to 7 percent range, although some analysts think that this number is inflated.

"There are, indeed, still high-growth sectors in China — or higher-growth sectors — and companies that are positioned in the higher growth sectors may not feel the slowdown," Gupta says. "But for companies in the slower-growth sectors, China means trouble."

Broadly speaking, Gupta suggests, most consumer goods and services are on the higher-growth side, and most sectors that are connected to infrastructure and construction fall on the slower growth side.

Caterpillar, for example, predicts that it will sell fewer than one-quarter of the hydraulic excavators in 2015 that it sold in 2010.

On the other hand, Apple's sales in China in the fiscal year that recently ended surged 84 percent over last year's, and its margins rose from 35 percent to 39 percent. (In advance of the release of its third-quarter numbers, analysts had been so worried that Apple would be hit hard by China's economic woes that CEO Tim Cook felt compelled to issue a statement insisting that Chinese consumers were snapping up the new iPhone.) Nike is also doing well, posting a 23 percent jump in quarterly profits, with "particularly strong sales gains in China," according to The Wall Street Journal.

To be sure, not all consumer-focused businesses have been thriving in China: That's part of the new complexity that Gupta is describing. Yum, whose brands include KFC and Pizza Hut, reported a disappointing 3 percent growth last quarter, and blamed it on poor performance in China, which generates more than half of the company's global profits. But to blame Yum's problems on the slowdown is to oversimplify, Gupta says. While hyper-growth may have delayed the reckoning that Yum now faces, the maturing of the fast-food market is a separate and more important factor. "Fast food is no longer a novelty in China," Gupta says. "It's not only not a novelty in Tier One cities; it's not a novelty in Tier Four cities."

Apple, too, has to be alert to the maturing of the market in China for high-end smartphones, Gupta says. Up to now, Apple has been able to find plenty of first-time Chinese buyers for its products. "But if you look ahead 18 months, to 2017, China looks like it will be very close to a replacement market for iPhones," he says. "Growth will have to come from eating up somebody else's market share. The competitive battle will get more intense, and naturally your margins will become smaller."

That's one reason Apple has made India more of a priority. Though it has yet to open a retail store in India (China has 25), Apple included the country for the first time among its top-tier markets — the ones that get new iPhones first — and launched a major advertising campaign. One analyst has predicted that the number of iPhones sold in India will double this year, albeit to only two million units. For context, Apple is projected to sell 78 million or so iPhones worldwide in the fourth quarter of 2015 alone.