Beijing has repeatedly made it clear that it's more than willing to accept the short-term costs of a growth sacrifice to keep its development strategy on track. As the world’s second-largest economy transforms from an export- and investment-led economic growth model to consumption-driven growth, foreign industrial companies are rethinking their China strategies, the Wall Street Journal reports.
China's economy grew 7.8 percent in 2012 from a year earlier, its slowest pace since 1999. Over roughly the past 30 years, total investment as a percent of gross domestic product declined from more than 50 percent to 46 percent last year.
As investment-led economic growth slows in China, foreign companies are finding it harder to make profits off big-ticket capital projects such as highways and airports.
For years, Dover Corp. (NYSE:DOV) made big earnings selling products such as heavy-duty hydraulic vehicle lifts and pumps to big Chinese industrial and construction companies. Last year, the Downers Grove, Ill.-based company posted sales growth in the "low double digits" in China, according to the report, compared with growth of more than 20 percent on a compound average basis between 2005 and 2012. China sales account for about $1 billion of Dover's roughly $8 billion in global revenue.
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Dover isn't alone.
ABB Ltd. (VTX:ABBN), of Switzerland, said its orders in China fell 10 percent last year, while German chemical producer BASF SE (ETR:BAS) said sales growth to customers in Greater China -- which includes Hong Kong and Taiwan -- slowed to around two percent last year, compared with 13 percent in 2011.
China's placing its fast-growing consumer class at centerstage, and foreign companies are racing to reshuffle their product portfolio.
Last year saw China overtake the U.S. as the world’s largest food and grocery market. This year, China is expected to surpass Japan as the world’s largest luxury goods market, and by 2016 it's expected to overtake the U.S. to become the world’s largest retail market, according to the Economist Intelligence Unit.
By 2022, China's expected to account for around one-quarter of the global retail sales generated by the 60 largest markets, twice as much as the U.S.
In 2012, around half of the country's 1.3 billion people were city dwellers. That could jump to two-thirds by 2030, or by around 13 million every year, according to the World Bank. Analysts expect China's increasingly urbanized consumers to seek better lifestyles.
Dover told the Wall Street Journal that the company is now putting greater focus on areas that touch consumers, such as food-labeling and packaging technology, which helps companies give shoppers nutritional information and helps fight counterfeit goods. "Chinese consumers will increasingly want to know what they are buying is safe," Michael Zhang, Dover's Asia president, told the Wall Street Journal.
More than 40 percent of growth in the global market for marking and coding, which includes equipment for printing bar codes, for example, is expected to come from China between now and 2015, Dover said, citing data from research company Euromonitor International.
Many Western companies are pivoting to follow. United Technologies Corporation’s (NYSE:UTX) Otis Elevator unit is making more compact elevators, better suited to lower-cost, high-rise accommodations, to capitalize on a government push to provide more Chinese with affordable housing, the report said.
Demand for robotics is also expected to grow as Chinese manufacturers pursue increased productivity and workers seek better working conditions. ABB is setting up a research-and-development facility in Shanghai, followed by a plant to produce robots designed in China, for China.
According to BASF, Chinese cars have only half the plastic content of a European car, presenting opportunities for substituting plastic for metal. As auto sales continue to rise in China, BASF is hoping the surge in demand will help boost plastic-materials sales in the country as well.