They flocked to China for Boom Times. Now they are thinking twice.

AH Beard, a 123-year-old luxury mattress maker based in Australia, began eyeing China around 2010. At the time, the family business faced looming competition from cheap mattresses made overseas in its domestic market. China, with its 1.4 billion consumers and a growing middle class with a taste for high-end brands, seemed like a good place to expand.

The choice paid off.

AH Beard opened its first store there in 2013. Before the coronavirus pandemic, sales in the country were growing at more than 30% annually. There are now 50 AH Beard stores across China, with plans to open 50 more. But like most foreign companies operating in China today, AH Beard has begun to think more carefully about its strategy.

Beijing’s strict Covid-19 policy has taken a heavy toll on businesses. The company’s exports to China are no longer increasing.

This month, Chinese officials announced that the economy had grown at its slowest pace since the early days of the pandemic. Unemployment is high, the housing market is in crisis and nervous consumers – living under the constant threat of lockdowns and mass testing – are not spending.

Today, China’s once-resilient economy looks fragile, and businesses that have flocked to the country to take advantage of boom times are facing a sobering reality: stagnant growth of what was once seen as a reliable economic opportunity.

“I certainly don’t see China returning to the growth rates we’ve seen before,” said Tony Pearson, chief executive of AH Beard.

So far, most companies are staying the course, but there’s a constant whiff of caution that wasn’t there just a few years ago.

Geopolitical tensions and a trade war between the United States and China have triggered punitive tariffs for certain industries. Covid-19 rumbled the flow of goods, raising prices for almost everything and delaying shipments by months. China’s pandemic response to quarantines and lockdowns has kept customers home and out of stores.

AH Beard opened its flagship store with a local partner in Shanghai almost 10 years ago. And like any high-end brand, it has rolled out products at prices that defy belief. China has become the top-selling market for its $75,000 high-end mattress.

Since then, the cost of shipping a container has increased sixfold. The cost of mattress materials and components, such as latex and natural fibers, has increased dramatically. Other worrying signs appeared, in particular a real estate crisis. (New homes often mean new mattresses.)

Mr Pearson said he hoped the Chinese Communist Party Congress later this year would clarify “China’s trajectory” and give consumers more confidence. “The economy still has potential for growth,” he said. “But there is always a degree of risk.”

After the 2008 financial crisis, when the rest of the world retreated, China emerged as an exception and international companies rushed in.

European luxury brands erected gleaming stores in China’s biggest cities, while American food and consumer goods companies jostled for supermarket shelf space. German automakers opened dealerships, and South Korean and Japanese chipmakers courted Chinese electronics makers. A booming construction market fueled demand for iron ore from Australia and Brazil.

Chinese consumers have rewarded these investments by opening their wallets. But the pandemic has shaken the confidence of many shoppers who now see rainy days ahead.

Fang Wei, 34, said she has cut spending since quitting her job in 2020. In the past, she spent most of her salary on brands like Michael Kors, Coach and Valentino when frequent shopping trips.

Although she is employed again, working in advertising in Beijing, she now spends a quarter of her salary on food, transportation and other living expenses. She gives the rest to her mother, who puts the money in the bank.

“Because I’m afraid of being fired, I transfer everything to my mother every month,” Ms. Fang said. “It’s very depressing to go from zest for life to subsistence.”

A more frugal Chinese consumer is a concern for foreign companies, many of which offer products that are not the low-cost option but a premium alternative. An Jun-Min, managing director of Ginseng by Pharm, a South Korean producer of ginseng products, said he too has noticed that “Chinese wallets have become thinner”.

Mr An said sales of the company’s main product, a 2-ounce bottle of a ginseng drink that sells for $18, had peaked before the pandemic. The company shipped 600,000 bottles to China and Hong Kong in 2019.

Sales plummeted in 2020 as it was difficult to get products into the country during the Covid lockdowns. Business has mostly rebounded, although it is still down 10-20% from the peak.

While Mr An expressed concern over the economic downturn, he remains optimistic that China’s health products market and a familiarity with ginseng – an aromatic root believed to have health benefits – will continue. to benefit sales. To hedge his bets, however, he is also seeking regulatory approval to sell in Europe.

We are far from the unbridled optimism of the past.

Back in 2016, when China was its fastest growing and most profitable market, Kasper Rorsted, chief executive of Adidas, said the country was “the star of the business”. Adidas has invested aggressively to expand its presence. It has grown from 9,000 stores in China in 2015 to 12,000 currently, although only 500 are operated by Adidas. Then the music stopped.

After initially expecting sales in China to pick up pace this year, Adidas lowered expectations in May as Covid lockdowns continued to spread. The company said it now expects revenue from China to “decline significantly” and a sudden rebound is unlikely.

So far, Adidas is undeterred. Mr Rorsted said on a call with analysts that the company did not plan to cut costs or pull out of the country. Instead, it will “do everything we can to double down and accelerate growth.”

Many foreign companies had bet on the rise of a Chinese middle class as a reliable source of this growth. Bain & Company, a consulting firm, said it expects China to be the world’s largest luxury market by 2025, fueled in part by what Federica Levato, a senior partner, has said to still be “a big wave” of a rising middle class.

But that kind of forecast looks less appealing to some foreign companies that once relied heavily on the Chinese market.

Kamps Hardwoods, a Michigan-based maker of kiln-treated wood used for homes and furniture, seized the opportunity to expand in China — initially. At a Chinese trade show in 2015, Rob Kukowski, the company’s chief executive, said a Chinese buyer stunned him with a huge offer to buy enough stock to fill 99 shipping containers. The $2 million lumber order represented four months of business for Kamps.

Chinese buyers were so desperate for the wood at the time that they visited the company’s stand and refused to leave until Mr Kukowski accepted a million dollar contract on the spot. In 2016, China accounted for 80% of the company’s sales.

Kamps soon realized that it was difficult to take advantage of large Chinese orders because many buyers were not interested in quality and only wanted the cheapest possible price. The company began to focus its efforts on finding customers in the United States and other overseas markets who were willing to pay more for a better product.

It was a fortuitous moment. When China raised tariffs on U.S. lumber in 2018 as part of a trade war, Kamps was better positioned to weather the downturn. Today, China only accounts for 10% of Kamps’ sales, but it still has a significant indirect impact on the business. Mr. Kukowski said China is such a big buyer of U.S. lumber that a downward price war ensues across the industry when it stops spending.

“With their buying power so strong and a lot of our products in that market,” Kukowski said. “Our industry is going to run into significant problems if its economy slows down.”

Jin Yu Young contributed report. Claire Crazy contributed to the research.

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