Getting back to the drawing board

BYD, one of the biggest carmakers in China, may stop making conventional gas-fuelled cars within two years and shift to ‘new energy’ battery models. BYD is just one of the hundreds of companies desperately going back to the drawing board to gain an edge in its business model as the need for change and upgrade draws near. In the last four years, its auto sales have slumped and net profits crumbled.

Across the spectrum, conditions in China’s construction machinery industry too will continue to be tough and complicated after a dramatic drop in sales in the past year. Already, in the first quarter, sales of major construction machinery products sank 24.4 per cent year-on-year, with sales of some equipment falling more than 45 per cent. The construction machinery industry, like several others, is in the midst of desperate de-stocking of its inventory, but it will take at least half a year to complete the process as there is no sign of renewed domestic demand.

The two very different industry sectors reflect similar problems - the challenge of coping with changing and saturated demand and very large inventories. This problem has also burdened realty developers and manufacturers. According to estimates, the combined value of inventories of Shanghai’s listed companies more than doubled from 1.94 trillion yuan in 2009 to 3.91 trillion yuan by the end of 2012. Realty developers had combined inventories of around 1.64 trillion yuan by the end of 2012, followed by manufacturing companies at 1.15 trillion yuan.

The power sector and coal demand, which are important economic indicators of the economy, are also caught in similar conundrum. China’s thermal coal demand has stalled and coal imports are set to fall this quarter. Power utilities are sitting on high coal inventories and waiting for import prices to fall almost at the level of depressed domestic market as coal supplies remain plentiful with power producers. So worrying is the demand situation that miners in major coal-producing provinces of north China have already slashed ex-mine prices by 10-20 yuan per ton due to poor sales and rising inventories. Stocks at major coal mines was up nearly 25 per cent from January.

Dreary outlook

The inventory and slothful demand situation was reflected in company performances. At the end of the first quarter, the outlook for A-share listed companies in Shanghai remained uncertain for the first half of 2013, burdened as most sectors are by these two factors. China suffered a slowdown in economic growth in the first quarter compared with the 7.9 per cent year-on-year GDP increase in the fourth quarter of 2012.

Companies in retail, machinery and construction materials posted the least positive performances and made the most conservative forecasts for the next phase. Automobile, domestic appliance and realty companies were more optimistic in their projections amid hopes that sales may recover in the second half of the year.

The market performance of most companies was surprisingly lackluster. Nearly 40 per cent of the 904 companies listed in Shanghai or Shenzhen, that had released first-quarter reports this week, fared poorer compared to the previous quarter. Ninety companies posted first-quarter losses, while the rest of the firms forecast a decline in profits in future.

Structural change

Thus, for listed companies, it is still a protracted struggle for recovery, as they try to upgrade their internal growth models to meet more sophisticated quality of demand. Analysts say that the Chinese economy is dealing with structural problems, and this slowdown is not the usual periodical cooling down phase. Not only do industrial companies face the challenge of sluggish domestic and overseas markets, they also have internal pressures of changing the country’s development model.

Proponents of sustainable growth, however, cheer at the prospect of this moderate decline and say a slowdown of growth in industrial activities will help ease the pressure on environment and resources. It will make room for the structural adjustment of the economy, taking it away from the capital-intensive, high-environment cost paradigm.

The writer is a freelance journalist based in China.