Daily Management Review

In Second Quarter, A Sweet Spot For U.S. Companies’ Earnings Is China


Corporate America is finding China to be a reliable source of profit growth this year even as trade tensions between Washington and Beijing may be running high.
In recent weeks, many major U.S. companies have reported stronger second-quarter earnings and revenue from their Chinese operations, whether they sell construction equipment, semiconductors or coffee.
A slide in the U.S. dollar, which makes American exports more competitive and increases dollar earnings once they are translated from foreign currencies and a Chinese economy that is growing at almost 7 percent, several times the rate of U.S. expansion, a Chinese housing boom, are the two factors that the U.S. corporates are benefiting from.
Also helping American firms to sell heavy equipment and other products is Chinese President Xi Jinping’s ambitious plan to build a new Silk Road that includes many billions of dollars of new roads, bridges, railways and power plants and that will improve links between China and dozens of countries in Asia and Europe.
Thanks to China, sales in Asia-Pacific rose 25 percent in the second quarter for Caterpillar Inc, a bellwether for industrial demand in China and beyond. In the first half of the year, shipments of large excavators to Chinese customers more than doubled.
"We now expect demand in China to remain strong through the rest of the year," Brad Halverson, Caterpillar's group president and chief financial officer, told investors.
Similar strength in demand for heavy machinery was also reported by Caterpillar’s Japanese rivals Komatsu and Hitachi Construction Machinery Co. Komatsu's China sales almost doubled in the firm's April-June quarter.
“China's grown pretty well relative to the U.S. over this period and the currency's relationship has changed in favor of the U.S. companies,” said Jim Paulsen, chief investment strategist at the Leuthold Group in Minneapolis.
Even as they complain that the Chinese authorities are discriminating against them as they seek to compete against Chinese rivals and not allowing them enough access to parts of the Chinese market, American companies in China have been collectively reporting better prospects.
After Beijing backed tougher United Nations Security Council sanctions against North Korea earlier this month, the Trump administration has held off on taking action even as it has been considering punitive tariffs against a range of Chinese goods.
82 percent of U.S. companies in China expect revenues to increase this year, up from 76 percent a year ago, showed a July report by the American Chamber of Commerce in Shanghai, despite some negatives in the Sino-U.S. relationship.
“In general China is still a growth market for lots of US goods and services... the Chinese consumer is driving more and more the growth in China itself - that's a very positive shift in compositional growth for a lot of U.S. companies that do provide goods and services for consumers, as opposed to building skyscrapers,” said Joe Quinlan, head of thematic investing at Bank of America, U.S. Trust.
Thanks in part to demand from Chinese phone maker Huawei, the fiscal third-quarter revenue rose 20 percent for Skywork Solutions in the chip industry, which, according to Goldman Sachs gets about 85 percent of its sales from China. China remained a strong growth story for the company, said Qualcomm, which gets around two thirds of its revenue from China, last month.