In late May, Chinese officials said they would lower import and luxury taxes on many imported and high-end consumer goods starting in June to help spur demand and economic activity within their slowing economy. Not all goods make the list, but the ones that do could help boost earnings for the companies that make those products. Here's how Nike (NYSE:NKE), Estee Lauder (NYSE:EL), and Procter & Gamble (NYSE:PG) are set to win on this news.
Nike falls into the "Western-style clothing" and "sports shoes" groups, and import tariffs on these products have been cut roughly in half, from 14%-23% to just 7%-10% for clothing and to 12% for shoes, according to an article in the South China Morning Post. While much of Nike's gear is actually produced in China, a growing portion is being made elsewhere, such as in Vietnam, which means lower luxury taxes will help to make Nike items cheaper for customers in China, which could lead to growing sales and market share.
International sales haven't looked as good for Nike recently as they have in the past, not because the growth isn't there, but because of the strong dollar that makes international sales look less valuable on Nike's U.S. earnings report. China makes up 22% of Nike's international earnings, so China's decision to cut tariffs and taxes on its goods will help give a needed boost to Nike's international segment if, as planned, it prompts customers in China to buy more in that country.
The disposable-diaper revolution
Two companies compete for world dominance in the diaper industry: Kimberly-Clark (NYSE:KMB), which sells Huggies, and Procter & Gamble, which sells Pampers. In the U.S., diaper brand market share between these two has remained close for the last five years, but in China, P&G dominates: It had 42% of the market there in 2014, compared to around 11% for Kimberly-Clark.
Tariffs on diapers have been cut from 7.5% to just 2% in China's new system. Cloth diapers were a staple for Chinese consumers with less discretionary income for luxury items like disposable diapers, but as China's middle class continues to explode, millions more consumers every year are now target buyers for disposable diapers. P&G brought the diaper revolution to China in the early 2000s with affordable diapers, and these tax cuts will help the company gain even more on its market-dominating position there.
The world's largest skin care market
Tariffs on skin care products are dropping to 2% from 5%. This relatively small drop may not seem like a big deal, but when you are talking about one of the largest skin care markets in the world, those three percentage points could make a big difference.
French company L'Oreal (NASDAQOTH:LRLCY) is estimated to be the biggest beauty brand in China. However, the best bet now on a growing Chinese skin care market may be Estee Lauder. Most Western and luxury skin care companies are focused on the wealthiest buyers in the largest few cities. Estee Lauder is making a much bigger push into China with physical stores in 90 cities around China.
China is now the world's largest market for men's skin care products, too, representing nearly two-thirds of worldwide sales, and growing. Estee Lauder is jumping on this trend with its own designated men's skin care line, with heavy emphasis on its Chinese market. Estee Lauder is already intriguing with its continued Chinese growth in more than just the top echelon of Chinese women, and this tariff decrease makes the company look even more promising.
Why China will keep booming
Even though China's economic growth slowed to an estimated 6%-7% in 2015, it's still one of the fastest-growing economies in the world. Also, the number of people moving into the middle class each year in China is mind-boggling. McKinsey analysts predict that by 2022, China's middle class will be about 680 million people, more than double the entire current U.S. population. With China's continually booming middle class, and now lower taxes, these three companies could see major benefits in China.