How China's Slowdown Is Biting Into U.S. Corporate Profits

U.S. companies' long-held fears about an economic slowdown in China have become a reality. The downshift of the world's second-largest economy has turned from a boon into a liability for many public companies, and now is biting into financial results at companies such as Caterpillar Inc. (CAT), Nvidia Corp. (NVDA) PPG Industries Inc. (PPG), H.B. Fuller Co. (FUL), Stanley Black & Decker Inc. (SWK) and ON Semiconductor Corp. (ON). More companies are likely to follow the same trend as the the fourth-quarter earnings season unfolds. More important, the negative impact of China's slowdown is expected to persist long after any deal to end the U.S.-China trade war materializes.

The latest and most tangible sign was news on Monday that the China slowdown has hurt results of both chipmaker Nvidia and construction equipment giant Caterpillar. Caterpillar posted its largest quarterly miss in years as the Asian nation's slowdown hurt sales of mining and construction equipment. "Sales in Asia/Pacific declined due to lower demand in China," the company said. Caterpillar's 2019 earnings guidance also came in at the low end of estimates, according to news reports.

5 U.S. Companies Squeezed By China's Slowdown

• Caterpillar; world’s largest construction equipment manufacturer
• H.B. Fuller; adhesives manufacturing company
• Nvidia; makes chips for broad range of markets
• ON Semiconductor; semiconductor supplier
• PPG Industries; global supplier of paints, coatings, and specialty materials
• Stanley Black & Decker; maker of industrial tools and household hardware 

China Slowdown's Broad Impact

As the Chinese economy slows to its lowest growth rate since 1990, a broad range of U.S. companies are seeing their sales soften significantly after a three-year run, per a detailed story in the Wall Street Journal. “China is weaker than normal, weaker than seasonal,” said Keith Jackson, CEO of ON Semiconductor.

Adhesives manufacturer H.B. Fuller, which generates roughly 13% of its revenue from the Asian nation, indicated that lower-than-expected demand had eaten into $10 million off its profit in 2018, and will likely cut its profit by $20 million this year. “We had estimated weakness in China,” said CEO James Owens, per the Journal. “It was actually worse than we expected.”

Slowdown Just Beginning

Not all industrial companies have been hit by the recent downturn. Manufacturers that get most of their revenue from U.S. domestic market say business remains strong. According to the Bureau of Labor Statistics, U.S. factory output reached its highest point in a decade in the third quarter.

But it’s likely that the effects of the China's downshift will be long-lasting for many companies, says a column by Barron’s economics commentator Matthew Klein. “China’s long boom is over. Persistent weaknesses in productivity growth and a looming demographic catastrophe will hobble the country for decades to come,” he wrote.

Looking Ahead

Ultimately, China's economic slowdown may boost the risk of selling or operating in China, once seen as the last large and promising market. U.S. companies now face both the economic downdraft in a major world region, the risk of a stronger dollar, and accelerated trade tensions with Beijing. This may force U.S. companies to focus on other growth markets, making U.S. investors wary of any stock with too much exposure to China.