The 123-year-old Australian company that flocked to China hit with a sobering reality

Geopolitical tensions and a US-China trade war have unleashed punishing tariffs for some industries. COVID-19 has snarled the flow of goods, lifting the prices of almost everything and delaying shipments by months. China’s pandemic response of quarantines and lockdowns has kept customers at home and out of stores.

A.H. Beard opened its flagship store with a local partner in Shanghai almost 10 years ago. And like any high-end brand, it rolled out products with prices that defy belief. China became the best-selling market for its top-of-the-line $US75,000 ($107,400) mattress.

Since then, the cost of shipping a container has jumped sixfold. The cost of mattress materials and components, such as latex and natural fibres, have increased significantly. Other worrying signs have emerged, including a housing slump. (New homes often mean new mattresses.)

Pearson said he is hoping that the Chinese Communist Party congress later this year will clarify “the trajectory for China” and imbue consumers with more confidence. “The economy still has growth potential,” he said. “But there’s always a degree of risk.”

After the 2008 financial crisis when the rest of the world retrenched, China emerged as an outlier and international businesses rushed in.

European luxury brands erected gleaming stores in China’s biggest cities, while US food and consumer goods companies jostled for supermarket shelf space. German car manufacturers opened dealerships, and South Korean and Japanese chip firms courted Chinese electronics makers. A booming construction market fuelled demand for iron ore from Australia and Brazil.

Chinese consumers rewarded those investments by opening their wallets. But the pandemic has rattled the confidence of many shoppers who now see rainy days ahead.

Fang Wei, 34, said she has scaled back her spending since she left a job in 2020. In the past, she spent most of her salary on brands like Michael Kors, Coach and Valentino during frequent shopping trips.

Even though she is employed again, working in advertising in Beijing, she now allocates a quarter of her salary on food, transportation and other living costs. She hands the rest to her mother, who puts the money in the bank.

“Because I’m worried about being laid off, I transfer everything to my mother every month,” Fang said. “It’s very depressing to go from enjoying life to subsistence.”

In 2016, when China was its fastest growing and most profitable market, Kasper Rorsted, the chief executive at Adidas, declared that the country was “the star of the company.” Adidas invested aggressively to expand its foothold. It went from 9,000 stores in China in 2015 to its current 12,000, though only 500 are operated by Adidas. Then the music stopped.

Loading

After initially projecting that sales in China would accelerate this year, Adidas ratcheted down expectations in May as COVID lockdowns continued to spread. The company said it now expects China revenue to “decline significantly” and that a sudden rebound is unlikely.

For now, Adidas remains undeterred. Rorsted said on a call with analysts that the company is not planning to slash costs or pull back from the country. Instead, it will “do whatever we can to double down and accelerate the growth.”

Many foreign companies had bet on the rise of a Chinese middle class as a dependable source of that growth. Bain & Co., a consulting firm, said it expects China to be the world’s largest luxury market by 2025, fuelled in part by what Federica Levato, a senior partner, said is still “a big wave” of a rising middle class.

But those kinds of predictions look less enticing for some foreign companies that once relied heavily on the Chinese market.

Kamps Hardwoods, a Michigan-based manufacturer of kiln-treated lumber used for homes and furniture, seized on the opportunity to expand in China — at first. At a Chinese trade show in 2015, Rob Kukowski, the company’s general manager, said a Chinese buyer stunned him with a huge offer to buy enough stock to fill 99 shipping containers. The $US2 million order of lumber accounted for four months’ worth of business for Kamps.

Chinese buyers were so desperate for lumber back then that they would visit the company’s booth and refuse to leave until Kukowski accepted a $US1 million deal on the spot. By 2016, China accounted for 80 per cent of the company’s sales.

Kamps soon realised that it was hard to make a profit from the large Chinese orders because many buyers were not interested in quality and only wanted the cheapest possible price. The company started to focus its effort on finding customers in the United States and other overseas markets who were willing to pay more for a better product.

Loading

It was fortuitous timing. When China raised tariffs on US lumber in 2018 as part of a trade war, Kamps was better positioned to weather the downturn. Today, China accounts for only 10 per cent of Kamps’ sales, but it still has a large indirect impact on the company. Kukowski said China is such a big buyer of US lumber that a downward price war ensues throughout the industry when it stops spending.

“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.”

This article originally appeared in The New York Times.