Multinationals Reel in the Wake of China's Devaluation

Multinational manufacturers reeled in the wake of Beijing's devaluation of its currency Tuesday--as investors scrambled to determine what the move will mean for a number of industries already suffering from flagging sales in China. China's central bank loosened its grip on the country's tightly controlled currency early Tuesday, triggering the yuan's biggest one-day loss in two decades. The yuan fell about 1.8% against the dollar. The move threatens to further recalibrate a long-standing relationship between some of the world's biggest manufacturers and exporters and what has become their most-promising customers. Many western firms had come to rely for the better part of a decade on the prospect of fast-growing Asian sales, particularly in mainland China. Chinese appetite for everything from oil and copper, to Gucci handbags and premium Scotch whisky helped bolster bottom lines amid weaker markets, particularly in the U.S. and Europe, in the wake of the global financial crisis and its uneven aftermath. In recent months, however, that growth has slowed markedly. Those industries that learned to rely most on new Chinese demand--including luxury-goods manufacturers--have also been hit hard by a Beijing-led corruption crackdown that has wilted sales. Now, many exporters into China are facing the prospect of further deteriorating revenue if their more-expensive goods strain local pocketbooks. Companies also face lower revenue after they convert their yuan sales back into home currencies. Among the most vulnerable are Europe's luxury-goods makers. In Milan, Salvatore Ferragamo SpA shares fell 2.4%, while Tod's SpA stock was off 2.1%. According to Exane BNP Paribas, Salvatore Ferragamo makes 13% of its total sales in mainland China, while Tod's makes 15%. In London, U.K. auto and aerospace-parts manufacturer GKN PLC fell 2.7%. Analysts at Berenberg say around 8% of the firm's sales are in China. GKN shares are down around 10% for 2015, a decline attributed by analysts to concern over previously slowing auto sales in China. Jan Dworsky, an analyst at Handelsbanken in Stockholm, said apart from the knee-jerk reaction from investors, the bigger question was whether Tuesday's devaluation would prove a first step in a broader change in policy. If that is the case, European importers could face a more radically altered playing field. One bellwether company to watch is Swedish telecoms giant Ericsson, Mr. Dworsky said. The depreciation could alter its rivalry with Huawei Technology Co., based in China. Further yuan weakness would help Huawei's competitiveness against Ericsson, Mr. Dworsky said. Ericsson shares were down 1.6% in morning trade. European auto makers also took big hits, though analysts said long-term pain wasn't certain. Daimler AG, Volkswagen AG and Bayerische Motoren Werke AG shares were all down between 3%and 4% in early trading. China is the largest market for German car makers. BMW sold 21% of its cars in China in the first half of the year; Daimler's Mercedes-Benz cars division 18%; and Volkswagen, which also owns the Porsche, Audi and Skoda brands, 37%. Still, analysts said the hit might not be as large as investors fear. A significant part of the cars these manufacturers sell in China are made locally, which mitigates the impact of currency-rate changes. Many sales are also hedged against changing rates. "We expect the impact in 2015 to effectively be zero given the Germans are fully hedged," said Evercore ISI analyst, Arndt Ellinghorst, in a note to clients, and "looking to 2016, we see the impact as immaterial." A 1.9% devaluation of the yuan, should it last, would shave off about EUR135 million ($148.5 million), or 1.2%, of BMW's earnings before interest and tax next year, Mr. Ellinghorst estimates. At Volkswagen and Daimler, EBIT would be reduced by 0.7% and 0.9%, respectively. Potential winners from the devaluation of the yuan include manufacturers who source supplies in China, have factories in the country, or are liable for other manufacturing costs there. Retailing giant Hennes & Mauritz could see benefits given that China is its biggest sourcing hub, said analysts at Banco Espírito Santo de Investimento. The analysts said lower buying costs should, over time, outweigh the negative short-term effect the weakened yuan will have on the Swedish company's performance via translation effects. The depreciation of the yuan is also likely to rebalance the price differentials on luxury goods items such as handbags and clothes. The pricing mismatches hit record levels in recent months following the weakening of the euro. The difference in luxury goods' prices between Europe and China has been growing to the point that it is now often more appealing for Chinese to travel to Europe for their luxury shopping rather than buying in China. That has impacted manufacturers' margins recently. According to consultants Bain & Co., Chinese consumers account for about 30% of total spending in the luxury goods sector globally. This includes both domestic and international spending. With the yuan devaluation, the Chinese could go back to shopping in China rather than traveling abroad, Exane BNP Paribas said.