Grim Future for Walmart, McDonald's, Others in China

The real trouble for U.S. companies that operate abroad is supposedly sales in the European Union. Legions of public corporations with significant portions of their revenue from the region will report that a slow economy has undermined their prospects. Many of these firms will post drops in earnings because of the weakness. But for huge U.S. companies like McDonald’s Corp. (NYSE: MCD), Wal-Mart Stores Inc. (NYSE: WMT) and scores of others, China will hurt earnings as much as anything else.

McDonald’s and Walmart do not sell anything to China, but sell billions of dollars of products within the borders of the People’s Republic. A year ago, the world’s largest fast-food company said it would open a store a day through 2013, as it presses toward a goal of increasing total outlets to 2,000. McDonald”s most aggressive competitor in the market, among American-based companies at least, is Yum! Brands Inc.’s (NYSE: YUM) KFC franchise. The exposure of that franchise to a slowdown in China is keen. Yum! Brands has made so much progress in China recently that its breaks out its sales and profits there when it reports quarterly numbers.

Walmart International sales were $32 billion in the most recently reported quarter, against total worldwide revenue of $114 billion. Walmart had 370 locations in China, based on an analysis of store count at the end of last year. Only Mexico and the United States are home to more. A crippling of activity in the People’s Republic would knock Walmart earnings progress off track.

The list of very large American public companies that actually build and sell a large number of their products in China is not long. But it does include some of the largest and most well-known U.S. firms. General Motors Co. (NYSE: GM) is among them. It is in first place in terms of market share in the world’s largest car market. Sales of passenger cars and light trucks in the People’s Republic have flattened in the past year after a long period of rapid growth. It is not terribly hard to imagine that sales actually could fall year-over-year next year, as is currently the case in Europe and was in the United States during the recession. That trend would hurt Ford Motor Co. (NYSE: F) as well, because it has begun to muscle its way into the country.

The extremely fast slowdown of China’s economic growth has caught U.S. companies that do business there flat-footed, probably, because so few expected what many economists did not expect either. China’s GDP trouble has become like that of the rest of the world.

Douglas A. McIntyre