As China’s economy gets the chills, some California firms catch a cold


Apple Inc. isn’t the only California company with a China problem.

From Barbie dolls to bottles of Merlot, the slowdown in China’s massive economy and the U.S.-China trade dispute are impeding sales growth for some other California companies doing business in China, serving Chinese tourists or pulling in Chinese investment. That’s sending disquieting ripples through California’s economy, which has grown more reliant on those cross-Pacific ties.

Apple was the latest to cite China’s decelerating economy, a pullback in Chinese consumer spending, shifting product preferences and the trade fight when the Cupertino company last week issued a rare cut to its sales forecast.

Although some analysts partly blamed Apple and its lofty iPhone prices for the electronics giant’s lowered projections, other companies and industries also said in recent weeks that their business in China has been hurt by the slower growth in the Chinese economy and the heightening of U.S. and Chinese tariffs on goods imported into their countries.


The dollar value of California wine exports to China, for instance, was down nearly 15%, to about $50 million, through the first 10 months of 2018, after showing gains earlier in the year, according to the Wine Institute trade group in San Francisco.

One culprit was the additional 10% tariff that China levied in September, which lifted the overall tariff on California wines to 25%. It was one in a series of retaliatory tariff increases between the United States and China on thousands of traded goods.

A range of California companies have cited China problems over the last two months:

  • Ynon Kreiz, chief executive of Barbie maker Mattel Inc., told analysts in late October, “We are seeing a slowdown in our China business.” The El Segundo toymaker expected the slowdown “to persist for the remainder of 2018.”
  • Avery Dennison Corp. reported disappointing third-quarter sales in its industrial and healthcare materials division, which makes fasteners and other products for the automotive industry, largely because of “greater-than-expected declines” in China. “We would expect a softer China automotive market in the fourth quarter as well,” Gregory Lovins, chief financial officer of the Glendale company, told analysts last fall.
  • Electric-car maker Tesla Inc. has suffered sales declines in China amid the tariff battle, and the Palo Alto company responded by reducing prices of its Model S and Model X vehicles by 12% to 26% to help offset the duties.

The Chinese “are concerned about the future and so they have cut back their spending,” said Craig Allen, president of the U.S.-China Business Council, which represents 213 U.S. companies doing business with China. A 25% plunge in the Chinese stock market last year and the strong U.S. dollar relative to the Chinese yuan also are weighing on consumer spending, Allen said.

China’s retail sales were up 8.1% in November, but that was the smallest increase in 15 years. The overall economy, which was growing at a remarkable 8% or more annually a few years ago, now has slowed to about 6.5%.

China’s rapid economic development and expansion of its middle class in recent years turned it into a key player in California’s economy. California exports to China jumped 46% from 2008 to 2017, compared with a 16% gain in the state’s exports to the rest of the world, the council said. China now ranks third among export markets for California goods, behind Mexico and Canada, with a total export value of $15.6 billion in 2017.


Bids by Chinese buyers, many of them all-cash, provided rocket fuel when Southern California home prices started surging in 2012, especially in places such as the San Gabriel Valley and Irvine.

“The foreign buyer most impacted our Orange County communities,” Douglas Yearley, chief executive of luxury home builder Toll Bros., said on a recent earnings call, referring to people from China. “It certainly had a significant impact there.”

China’s slowdown isn’t being felt across the board, however.

Manhattan Beach sneaker maker Skechers USA Inc. said it has not been hurt. “We haven’t seen anything pronounced in the consumer behavior in China,” John Vandemore, Skechers’ chief financial officer, told analysts in November. “We’re obviously cognizant of the situation and we monitor it. But right now it’s still a pretty decent time.”

One of Skechers’ big rivals, Nike Inc., said in December that its latest quarterly sales to China actually jumped 26% from a year earlier.

Guess Inc., the Los Angeles apparel maker, also said third-quarter results in China were strong. Guess Chief Executive Victor Herrero told analysts in November that the company opened 13 stores in China during the quarter and that its online business “continues to grow at terrific speed.”

Conversely, upscale jeweler Tiffany & Co., whose locations include a store on Rodeo Drive in Beverly Hills, said in late November that weaker spending by Chinese tourists contributed to disappointing overall third-quarter sales, even though sales in mainland China remained strong. Tiffany’s stock plunged 12% that day.


The pullback in Chinese consumer spending isn’t tied strictly to whether a product is relatively expensive, such as Tiffany earrings or an Apple phone, said Stanley Chao, managing director of All in Consulting in Torrance and author of the book “Selling to China: A Guide for Small and Medium-Sized Businesses.” The spending patterns also reveal “seeping anti-U.S. sentiment” in China because of the trade fight, with more Chinese opting to buy non-U.S. goods if there are comparable options available, he said.

“They’re saying that with an Apple phone, for instance, ‘I can get the equivalent functions and bells and whistles on a [Chinese] Huawei phone or some other phone,’” Chao said. “Add on that anti-U.S. sentiment, and they’re saying, ‘I don’t really want to buy American.’

“Wine is another example, you have tons of choices. The Chinese are saying, ‘Yeah, I love Napa wine, but I’m not so keen on buying something U.S.’”

Home builders and real estate agents say they are seeing fewer buyers from China these days. But the downshifting Chinese economy isn’t likely to completely shut off that stream of cash, experts say. That’s because much of the investment in California comes from China’s upper-middle class and ultra-wealthy, who have built up vast capital reserves over the years as their economy and real estate market swelled.

That cash isn’t necessarily at risk from a slowing economy and a downshift would probably give people more of an incentive to park it elsewhere, said William Yu, a UCLA economist.

The slowdown in commercial investment is more pronounced. In recent years, the Chinese government has imposed tighter controls on moving money out of the country. In 2017, Chinese investment in U.S. commercial real estate plunged 55% from a year earlier, according to a report from real estate brokerage Cushman & Wakefield. In the Los Angeles metropolitan region, acquisitions by Chinese investors fell 67%.


The slowing Chinese economy was one reason the government tightened the outflow of capital, said Clayton Dube, director of the U.S.-China Institute at USC. So a further tapering of growth could cause the Chinese government to tighten limits further, leading to more declines in U.S. investment. But Dube said the “major hit has already happened” to commercial investment.

Dube said it’s easier for individual home buyers to avoid limitations on moving money to the U.S. given the much smaller amounts needed to purchase a home. “I don’t see it falling off a cliff,” he said.

What could prove much more threatening to Chinese residential investment, he said, is if the current slowdown in Southern California home sales turns into an outright collapse.