* S&P companies' exposure to China has jumped over the years
* More than half of revenue for Yum Brands, AMD comes from
* Analysts say companies should target China's middle class
By Angela Moon
NEW YORK, July 19 It's official. China's
slowdown is starting to hurt corporate America.
As the world's second-largest economy - and still growing -
China is seen as a primary source of revenue growth by the
largest U.S. companies. But a country that once boasted
double-digit growth is now growing at a more modest 7.5 percent
rate, its credit markets are overheated and fears of a housing
The slowing has occurred as major U.S. names garner more
revenue from Asia. Among 18 S&P companies with large exposure to
China, 12 of them were underperforming the broader S&P 500
index year-to-date, including Yum Brands Inc and
Intel, which noted the slower growth in China as a
"The China impact is becoming more and more significant
because the (U.S.) companies' exposure has grown so much over
the years," said Robbert van Batenburg, director of market
strategy at Newedge in New York.
Those concerns have caused investors to reduce their global
emerging-markets equity exposure to its lowest in 12 years,
according to a Merrill Lynch survey.
Industrials, luxury goods makers and companies in the
commodities and consumer businesses have built up huge exposure
On Wednesday, hedge fund guru Jim Chanos said he was
shorting Caterpillar, sending shares down nearly 2
percent. Chanos has long argued that China's economy is headed
for a crash, saying the company is "tied to the wrong products
at the wrong part of the cycle." About 25 percent of
Caterpillar's revenue comes from the Asia/Pacific region, though
it does not break out revenues by country.
A Merrill Lynch fund manager survey from June pegs China's
problems as the most worrisome factor.
The survey said the prospect of a hard landing in China
stands out as a major tail risk identified by fund managers,
with 56 percent ranking it first on this measure, compared with
just one-third of respondents giving it that ranking a month
"China has gone from a very difficult transition as they try
to spur internal consumption. That has produced inflation and a
big credit crunch," said Omar Aguilar, chief investment officer
for equities at Charles Schwab Corp in San Francisco.
"I think a lot of people underestimated the effect of China
and Brazil. (Going forward) they will probably be very
conservative on their estimates. They're going to scale down,"
Yum Brands, the operator of the KFC and Taco Bell chains,
reported a 15 percent drop in quarterly earnings last week as
KFC sales in China, a crucial market for Yum, have been falling
since December. Nearly 51 percent of Yum's revenue is from
China, up from just 34 percent two years ago.
Intel, which has about 16 percent of its revenue from China,
also cut its full-year revenue forecast and said it is scaling
back capital spending as it adjusts to a painful contraction of
personal computer sales and economic weakness in China.
Chipmaker Advanced Micro Devices derives 58 percent
of its revenue from China, up from 45 percent in 2010. The
company's quarterly loss was 9 cents a share, ahead of the
forecast for a 12-cent loss. It did not mention China in its
Analysts content that without the People's Bank of China
injecting liquidity into its financial system, growth will keep
declining. Societe Generale now projects GDP growth in the
world's second-largest economy at as low as four to five percent
by the end of this decade.
TARGET THE MIDDLE CLASS
Some analysts say companies can withstand China's slowdown
by shifting their focus to programs funded by the central
government, which are designed to lift the middle class segment
of the population to 45 percent or more later this decade from
about 40 to 41 percent currently.
If the companies target the middle class, they can enjoy
steady growth in their sales in China, but if they continue to
focus on export-oriented projects funded by cash-strapped local
governments, they will be disappointed, according to Nicholas
Heymann, analyst at William Blair & Co in New York.
He noted that United Technologies' Otis elevator
unit has been successfully growing in China as demand for
elevators outpaces supply in the country.
Beverage companies also are counting on a growing middle
class to boost sales. Coca Cola CEO Muhtar Kent said
earlier this week that China is a great consumer market with a
very robust new middle class.
"We're very bullish on the long-term prospects in China,"
Kent told reporters.
Still, the slowdown in China comes at an especially bad time
for U.S. industrials, given persistent weakness in the Eurozone
and the lackluster recovery in the U.S.
"China affects all of the industrials, some more than
others. Machinery names tend to be more economically sensitive,
more volatile, more leveraged," said Brian Langenberg, founder
of research firm Langenberg & Co in Chicago.
"Caterpillar would say inventories are coming back into
line. But your outlook on a stock depends on what implicit
growth rate you are expecting from China," he said.
Caterpillar's revised outlook for 2013, which it may update
next week when it reports earnings, reflects an expected 50
percent decline in sales of its traditional mining trucks and
loaders as well as a 15 percent decline in sales of draglines
made by Bucyrus, the Milwaukee-based company it bought in 2010.
"Some of the companies that have been hit, a lot of it was
in infrastructure, the Caterpillars of the world, Joy Global and
some others. Is there likely to be some spillover? There could
be. This probably will be the quarter where it will rear its
head," said Perry Adams, vice president at Northwestern Bank in
Traverse City, Michigan.