Tariffs, tariffs, tariffs. Now in its second year, the Trump administration's ongoing trade war with China seems no closer to ending than it was in April 2018.
With all the focus on tariffs, it's easy for investors to assume that if the trade war were to end, it would be an all-clear signal for U.S. companies doing business in China. But that isn't the case: The Chinese market is much more than a set of trade policies, and there are substantial risks beyond tariffs that would still affect U.S. companies even if the trade war ended tomorrow.
Here are three other big problems that U.S. companies are running into in China, and why investors should care.
Tariffs are a big problem for companies doing business in China. But they aren't the only problem. Image source: Getty Images.
Saving your bacon
One major news story you probably haven't heard of from China is a major outbreak of African swine fever. Thankfully, the disease doesn't affect humans, but it is wreaking havoc on China's domestic pig population. The epidemic is so widespread, in fact, that it's expected to wipe out one-fifth of China's swine herds.
While a 20% reduction in China's swine population might be good news for U.S. pork producers, it's likely to be bad for other U.S. industries. That's because a major ingredient in Chinese swine feed is soybeans. Fewer swine means less global demand for soy, which means that soybean prices are likely to drop. And while the 4.4 billion pounds of annual U.S. pork exports are big business, that business is dwarfed by the 270 billion pounds of soy produced annually in the U.S.
U.S. soybean farmers are already reeling from the impact of tariffs on their businesses, and this could compound the problem. After all, why pay more for U.S. soybeans that have tariffs slapped on them when there's a global glut of super cheap soy available from other countries? Even without tariffs, lower soy prices still mean less revenue for soy farmers.
This is already having an impact on farm equipment manufacturer Deere (DE 1.96%), which is seeing slowing sales as cash-crunched farmers put off big equipment purchases. It could also be problematic for companies that sell soybean seeds like DuPont agricultural spinoff Corteva (CTVA 0.20%) or BASF (BASFY +0.09%), which recently purchased the former Monsanto's seed business from Bayer. Unfortunately, this epidemic is showing no signs of being resolved quickly.
Slow traffic ahead
China's auto market is in the midst of a slowdown that doesn't seem to be tariff-related, considering that domestic auto sales as well as those from foreign companies outside the U.S. are all experiencing declines. In May the China Association of Auto Manufacturers (CAAM) reported a year-over-year sales decline of 16.4%, a record. The current slump is the first time automotive sales have contracted in China since the 1990s, which has been unnerving manufacturers.
A CAAM spokesperson blamed the May decline on some Chinese provinces' implementation of new "China VI" vehicle emission standards well ahead of Beijing's 2020 deadline, a move that caused uncertainty among manufacturers and supply chain disruptions.
But the slump was already well under way. In the fourth quarter of 2018, General Motors (GM 1.46%) reported its China sales were off by 25.4%. And it's not just auto brands that have been hit by the slowdown. Electrical component maker Littelfuse (LFUS +0.72%) reported a rare quarterly organic revenue decline in the first quarter of 2019 thanks to the Chinese auto manufacturing slowdown.
Unfortunately for the affected companies, there's little they can do but try to ride out the weakness. But there are signs that the weakness may be more than temporary.
Across the economy
China is experiencing a broad economic downturn, possibly exacerbated by the ongoing trade war. But there's no guarantee that a swift end to the trade war will end the weakness. And that's having an effect on many U.S. companies that have high sales in China.
Considering how large the Chinese economy is, it should come as no surprise that the affected companies are diverse in size and sector. For example, water heater manufacturer A.O. Smith (AOS 2.41%), which counts on China for 34% of its overall revenue, saw Q1 2019 revenue fall 21% year-over-year in its rest-of-world segment, primarily due to weak sales in China. In January, Apple (AAPL +3.26%) slashed its revenue forecast thanks to slowing iPhone sales in -- you guessed it -- China. High-end jeweler Tiffany & Co. (TIF +0.00%) has blamed recent revenue misses and lowered forecasts on diminished sales to Chinese tourists.
Water heaters, iPhones, and jewelry -- not to mention trips to the U.S. to buy said jewelry -- are major purchases, the kind that are likely to be deferred or forgone entirely when times are tight. That bodes poorly for other makers of expensive or luxury goods.
Tariffs aren't the end
That's not to say that an end to the trade war wouldn't be a good thing for many if not most U.S. companies -- it would. But it's far from the only issue facing China and the U.S. companies that do business there.
So if a breakthrough in trade talks is announced, markets may react with exuberance, pushing shares higher. Savvy investors, though, should keep in mind that there's a lot more to China than just tariffs, and proceed with caution.
