AH Beard, a 123-year-old luxury mattress manufacturer based in Australia, started looking at China around 2010. At the time, the family business faced looming competition from cheap, foreign-made mattresses in its home market. China, with its 1.4 billion consumers and a growing middle class with a penchant for premium brands, seemed like a good place to expand.
The choice paid off.
AH Beard opened his first store there in 2013. Before the coronavirus outbreak, sales in the country grew more than 30 percent a year. There are now 50 AH Beard stores across China, with plans to open 50 more. But like most foreign companies operating in China today, AH Beard has begun to rethink its strategy.
Beijing’s strict Covid-19 policies have taken a heavy toll on business. The company’s exports to China are no longer increasing.
This month, Chinese officials announced that the economy was growing at the slowest pace since the early days of the pandemic. Unemployment is high, the housing market is in crisis and nervous consumers – living under the constant threat of lockdowns and massive testing – are not spending.
Now China’s once-resilient economy looks shaky, and the companies flocking to the country to participate in boom times are facing a sobering reality: flat growth in what was once seen as a reliable economic opportunity.
“I certainly don’t see China returning to the growth rates we had seen before,” said Tony Pearson, CEO of AH Beard.
So far, most companies stay on track, but there’s a steady dash of caution that didn’t exist a few years ago.
Geopolitical tensions and a trade war between the US and China have unleashed punitive tariffs on some industries. Covid-19 has snapped the flow of goods, raise the prices of almost everything and delay shipments by months. China’s pandemic response quarantines and lockdowns have 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 rolled out products with prices that defy belief. China became the best-selling market for its $75,000 mattress topper.
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 risen significantly. Other worrying signs have emerged, including a housing crisis. (New homes often mean new mattresses.)
Pearson said he hopes the Chinese Communist Party Congress will “clarify the trajectory for China” later this year and give consumers more confidence. “The economy still has growth potential,” he said. “But there’s always some degree of risk.”
After the financial crisis of 2008, when the rest of the world pulled back, China emerged as an outlier and international companies burst in.
European luxury brands set up gleaming stores in China’s largest cities, as US food and consumer goods companies scrambled for supermarket shelf space. German automakers opened dealerships and South Korean and Japanese chip makers sought the court of Chinese electronics manufacturers. A 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 eroded the confidence of many shoppers who now see rainy days ahead.
Fang Wei, 34, said she has scaled back her spending since she retired from work in 2020. In the past, she spent most of her paycheck on brands like Michael Kors, Coach and Valentino on frequent shopping trips.
Although she is back in employment and working in the advertising industry in Beijing, she now spends a quarter of her salary on food, transportation and other living expenses. She gives the rest to her mother, who puts the money in the bank.
“Because I’m afraid of being fired, I hand everything over to my mother every month,” said Ms. Fang. “It’s very depressing to go from enjoying life to living.”
A more frugal Chinese consumer is a concern for foreign companies, many of which offer products that are not the cheap option, but a premium alternative. A Jun-Min, chief executive of Ginseng by Pharm, a South Korean producer of ginseng products, also said he has noticed that Chinese “wallets have become thinner”.
Mr An said sales for the company’s flagship product, a 2-ounce bottle of a ginseng drink selling for $18, peaked before the pandemic. The company shipped 600,000 bottles to China and Hong Kong in 2019.
Sales plummeted in 2020 as it was difficult to get products into the country during Covid lockdowns. Things have largely recovered, although it is still 10 to 20 percent below its peak.
While Mr An said he is concerned about the economic slowdown, he remains optimistic that the health product market in China, and a familiarity with ginseng – an aromatic root said to have health benefits – will continue to boost sales. . However, to hedge his bets, he is also seeking regulatory approval to sell in Europe.
That is a far cry from the unbridled optimism of the past.
In 2016, when China was the fastest growing and most profitable market, Adidas CEO Kasper Rorsted said, explained that the country was “the star of the company”. Adidas invested aggressively to expand its position. It went from 9,000 stores in China in 2015 to the current 12,000, although only 500 are operated by Adidas. Then the music stopped.
After initially forecasting sales in China to accelerate this year, Adidas lowered expectations in May as the Covid lockdowns continued to spread. The company said it now expects China sales fall “significantly” and that a sudden rebound is unlikely.
For now, Adidas remains undaunted. During a meeting with analysts, Mr Rorsted said the company has no plans to cut costs or withdraw from the country. Instead, it will “do everything we can to double down and accelerate growth.”
Many foreign companies had bet on the emergence of a Chinese middle class as a reliable source of that growth. Bain & Company, a consulting firm, said it expects China to be the world’s largest luxury market by 2025, fueled in part by what Federica Levato, a senior partner, said is still “a big wave” of an emerging middle class.
But those kinds of forecasts look less appealing to some foreign companies that once relied heavily on the Chinese market.
Kamps Hardwoods, a Michigan-based manufacturer of kiln-treated wood used for homes and furniture, jumped at the opportunity to expand in China — initially. At a 2015 Chinese trade show, 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 order for wood was good for four months worth of business for Kamps.
Chinese buyers at the time were so desperate for wood that they would visit the company’s booth and refused to leave until Mr. Kukowski accepted a million-dollar deal on the spot. In 2016, China accounted for 80 percent of the company’s revenue.
Kamps soon realized that it was difficult to make a profit from the large Chinese orders because many buyers were not interested in quality and only wanted the lowest possible price. The company began focusing its efforts on finding customers in the United States and other overseas markets willing to pay more for a better product.
It was a coincidental timing. When China increased tariffs on US timber in 2018 as part of a trade war, Kamps was better positioned to weather the downturn. Today, China accounts for only 10 percent of Kamps’ revenue, but it still has a large indirect impact on the business. Mr Kukowski said China is such a big buyer of US timber that a downward price war will ensue across the industry when it stops spending.
“Because their purchasing power is so strong and so much of our product ends up in that market,” said Mr. Kukowski. “Our industry will be in big trouble if their economy slows down.”
Jin Yu Young reporting contributed. Claire Fu research contributed.