There is no shortage of economists predicting China GDP growth rates for 2017 from a top-down perspective, but what about looking at matters from a bottom-up approach? In that context, here's what leading industrial companies said about the first quarter and what to expect going forward.
China had a good first quarter
There is little doubt that China had a good quarter of growth. But since the government is aiming for 6.5% GDP growth in 2017, the first-quarter growth rate of 6.9% implied that the rate could slow for the rest of the year.
Automotives to slow?
If so, the first place to look for signs of a slowdown could be the automotive industry. The commentary and outlook from two companies with heavy auto exposure in China, Illinois Tool Works (NYSE:ITW) and BorgWarner Inc. (NYSE:BWA), suggest a very strong first quarter, which is likely not to prove sustainable. For example, BorgWarner CEO James Verrier said, "China light vehicle production was up close to 7%, which was well ahead of our expectations as we went into the quarter," and then, discussing the full-year, said, "I would say we're closely aligned with IHS' view, which is calling for about 2% growth in China." (IHS Markit is a leading market intelligence company.)
Turning to multi-industry company Illinois Tool Works, CFO Michael Larsen outlined how the company reported 29% organic growth in its automotive original equipment manufacturer (OEM) business in the first-quarter, compared to China industry automotive build growth of 7%. The company's automotive OEM segment has consistently generated growth in excess of industry growth -- the segment's organic revenue growth was 9% in the quarter compared to 6% for global car build growth -- so if China's automotive production growth slows then Illinois Tool Work's automotive OEM growth rate is likely to slow significantly too.
All told, it was a strong quarter for automotive production in China, but growth is likely to slow going forward.
Oil and gas capital spending strong
Emerson Electric Co. (NYSE:EMR), a company known for its automation solutions to the process industries, reported better-than-expected overall underlying sales growth and raised guidance for its fiscal full year. China was surely a part of the reason for the improved outlook, with CEO David Farr noting: "I continue to see improvement in China and other parts of Asia. Very strong growth in that part based on the product lines and the customer base we have there."
The company's automation solutions reported a 3% decline in sales in the quarter, but China sales were up 10%. Meanwhile, Emerson Electric's other segment, commercial and residential solutions, reported a 20% increase in China sales in the quarter driven by mid-teens sales growth in heating, ventilation, air conditioning, and refrigeration.
Moreover, a breakout of multi-industry company 3M Co (NYSE:MMM) shows how its Asia-Pacific focused electronics and energy segment reported organic local-currency sales of 17.4% with China/Hong Kong up 13%.
Healthcare and construction in growth mode
Turning to the healthcare sector: As you can see above, 3M Co had a good quarter in the region with 7% organic local currency sales growth, and healthcare focused industrial company Danaher Corporation (NYSE:DHR) reported ongoing strength in China. Here is CEO Tom Joyce on the earnings call: "Geographically, revenue in the developed markets was up low single digits. High growth markets grew at a mid-single digit rate led by continued strength in China and India." Moreover, Joyce referenced "strong momentum" in life sciences in China, and diagnostics in the country "delivered another strong quarter."
The theme of public spending-related industries, such as healthcare and infrastructure, doing well was picked up by Caterpillar Inc. (NYSE:CAT) CFO Brad Halverson on the company's last earnings call:
"Strong demand in China resulted in a reduction in Asia-Pacific dealer inventory, as demand outpaced our sales to dealers.
Strength in China has mainly been driven by a strong execution of public-private partnership projects, particularly related to infrastructure and strong housing investment."
As noted above, Emerson Electric's commercial & residential solutions segment also saw strong growth, and Honeywell International (NYSE:HON) sees ongoing growth. CFO Tom Szlosek said on the earnings call, "We continue to see momentum in the residential real-estate market in China, [and] anticipate continued infrastructure investment that will help to drive future growth."
What it all means
China's growth rate is likely to slow during the rest of the year, and based on commentary from Illinois Tool Works and BorgWarner management the automotive sector, in particular, is set to slow. Meanwhile, it seems that government spending on healthcare and infrastructure is likely to continue to stimulate the economy -- good news for Danaher, Emerson Electric, 3M Co and Caterpillar. While in the long-term it may not prove a sustainable strategy, for 2017 investors should favor areas of the economy stimulated by public infrastructural spending.
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