China’s deflation impacts global manufacturers’ profits

The worldwide manufacturing sector is being impacted by China’s economic downturn, as evidenced by the decline in semiconductors, smartphones, and other electronics. Weak capital investment has also resulted in a slow demand for machinery.

According to a Nikkei analysis of QUICK-FactSet data, the net incomes of about 13,000 major listed companies in the U.S., China, Europe, Japan, and other economies for the July–September period totaled about $1.1 trillion, up 3% from the same period last year.

On the other hand, manufacturing profits dropped 9% for the fourth straight quarter. The hardest hit sector was the chemical industry, where profits fell by 43%.

The machinery sector saw its first profit decline in five quarters, while the electronics sector saw a decline of 12%. Although the nonmanufacturing sector saw a 16% increase in profits, the slowdown in China had a negative impact on manufacturers. Approximately 240 non-Chinese manufacturers, whose proportion of Chinese sales to total sales is estimated to be 30% or higher, saw a 30% decrease in net income.

Numerous industries are being affected; Taiwan Semiconductor Manufacturing Co. (TSMC) and Texas Instruments, two of the largest semiconductor companies in the United States, have reported profit declines exceeding 20%. Numerical control device sales and other factory automation equipment fell along with a slowdown in capital investment in China.

Japan was hit hard by the shock wave, as Fanuc reported a 20% drop in profit. In China, orders, a key measure of the industrial robot manufacturer’s profitability, dropped by 35%.

Consumption in the area is also declining, despite expectations that the Chinese government will implement economic stimulus plans. For instance, the collapse in the Chinese market resulted in a profit decline of more than 90% for the American cosmetics company Estee Lauder.

On the other hand, the financial industry is booming, as evidenced by the impressive net income growth of 61% and 35% reported by Wells Fargo and JPMorgan Chase, respectively. The performance of the major American tech companies is improving; the combined profits of six businesses—including Apple and Microsoft—have increased by 41%. Toyota Motor and other automakers reported a 55% increase in profits, indicating their success as well.

The outlook for the October-December period is a 7% increase in the manufacturing sector and a 21% increase overall.