China success for Western firms will be down to the 'desirability of the brand'

A man passes a Louis Vuitton store in Macau, China, on Friday, Dec. 10, 2010.
Daniel J. Groshong | Bloomberg | Getty Images
A man passes a Louis Vuitton store in Macau, China, on Friday, Dec. 10, 2010.

Not a week goes by where there isn't a data print out of China posting the weakest number since ... well pick a year.

On Friday for example, the Caixin manufacturing survey posted a second-consecutive month of contraction and the lowest reading since 2016.

The slowdown has triggered a set of 2019 growth downgrades out of the analyst community with consensus growth forecasts hovering at around 6.3 percent for the year from 6.6 percent in 2018, the weakest growth in almost thirty years.

This is why this earnings season has been so interesting to watch. One would assume that with the China slowdown and with two thirds of growth coming from consumption, that goods companies with exposure to China would also be feeling the downturn. Surprisingly it has been a lot more nuanced than that.

Take LVMH earnings last week for instance. The world's largest luxury group saw its net profit jump 18 percent for the year driven by solid demand for fashion and leather goods and a 15 percent jump in sales in Asia for the last quarter.

Bernard Arnault, chairman and CEO of LVMH, commented that one of the factors that "made a difference" was the "desirability of the brand."

This ties in with a November 2018 study conducted by Singaporean research firm Agility that surveyed 1,000 affluent Chinese consumers including 300 millionaires. Fifty percent said they expect to spend more on luxury items in 2019, with 47 percent in particular looking to buy from more expensive brands: the desirability factor again.

Compare that to the fortunes of U.S. chipmaker Nvidia and industrial giant Caterpillar which both cited slowing demand out of China in earnings calls last week. In early January, Apple warned the market that demand for its smartphones was dwindling (which sent its share price tumbling that day).

But perhaps there is a bigger issue of perception. Ed Park, the deputy chief investment officer of Brooks Macdonald, told CNBC last week that Chinese public feeling toward U.S. products has started to turn more negative in light of the trade war, as well as the ongoing Huawei intellectual property case.

Furthermore, data from tech research firm Canalys show that local brand Huawei has expanded its smartphone market by 16 percent in China in 2018 while Apple's share dropped by 13 percent. Coincidental or not, the data certainly does illustrate a preference for the local carrier.

There are also some warning signs for the middle-income consumer. Last week, e-commerce giant Alibaba reported its "slowest" growth in 3 years citing an uptick of only 41 percent for the last quarter. The company was impacted by slowing sales of durable goods and consumer electronics.

One has to wonder how long demand for desirable expensive foreign goods and experiences can hold up for, especially when paired with a weakening local currency. For the time being however, China demand for luxury seems to be mighty resistant.