Memories of the London Olympics are already beginning to fade. Li Ning, a Chinese sportswear maker, had better hope that they last a while longer.
Like thousands of Chinese companies from property developers to car manufacturers, Li Ning is sitting on a mountain of unsold products. Whether they can whittle down these bulging inventories is the single most important question facing corporate China and arguably the economy as a whole.
Many are struggling, but Li Ning at least got timely help from the Olympics when the coolest of the athletes that it sponsored – the hirsute Spanish men’s basketball team and bad-boy badminton champion Lin Dan of China – performed exceptionally well. The hope, of course, is that the boost to its brand image will now translate into stronger sales.
Li Ning’s woes are a good parable for the Chinese corporate sector as a whole.
Just a few years ago, Li Ning could do no wrong. For investors looking to get a piece of that most enticing of trends, the rise in Chinese consumption, what better than a home-grown sportswear maker that catered to middle-class urbanites discovering the joys of sweating on a treadmill? Or, for those investors keen to play China’s transformation from workshop of the world to creator of big-name brands, what better than a company that deliberately set out to dethrone Adidas and Nike?
It was a fine story, and Li Ning did indeed soar. In the stock market, that is. Its share price more than tripled from early 2009 to late 2010.
But reality caught up. The Chinese sportswear market was so compelling that Li Ning was far from alone in pursuing it. Aside from the global players, there was a clutch of domestic challengers: Peak, Anta and Xtep, to name just three.
The predictable result was massive oversupply. Li Ning’s shares have tumbled 85 per cent from their peak. TPG, the private equity group, and GIC, Singapore’s sovereign wealth fund, came to the rescue earlier this year, buying convertible bonds.
Li Ning is belatedly focused on improving inventory management. Previously, it pumped out its shoes and shirts, paying little attention to whether they were actually selling. A new system is now being rolled out so that every time a customer buys something, computers at Li Ning’s headquarters will register the transaction. The idea is that it will know in real time the true state of inventories. But it still has a long way to go.
The problems of Li Ning and the sportswear industry are just the tip of the iceberg in China. Across virtually all corporate sectors, inventories are excessive.
The stock of unsold homes is the most worrying, because property plays such a dominant role in the economy. Vanke, the country’s biggest developer, estimates that it would take about 10 months to absorb all the unsold homes in China, which is reasonably quick. The snag is that this figure doesn’t count the millions of homes that have been sold but are sitting empty.
Then there is the auto sector. Car sales have been remarkably resilient despite the economic slowdown. But manufacturers have been more bullish than consumers. The inventory index (inventories divided by sales) was 1.98 at the end of June, according to industry data. More than 1.5 is seen as critically high.
The unsold mountains of electronics and white goods are also looking Himalayan in scale. Over the past week, the country’s main retailers descended into a price war. It began when online retailer 360buy.com vowed that it would sell home appliances at a zero profit margin.
The commodities sector is also dealing with a huge inventory overhang, most graphically in the piles of coal that have built up at ports across the country.
The picture is not entirely grim. Across most of these sectors, there are signs inventories have peaked. This is one big reason why Chinese retail sales have remained strong but industrial production has slowed in recent months – companies are now running down their inventories.
But how long it will take them to complete the process? And will they have to slash prices to get there?
There is cause for pessimism on both counts.
Destocking is a simple fact of downturns in the business cycle anywhere in the world. What’s different in China is that its downturn is looking structural, not just cyclical: it is very quickly moving from a norm of 10 per cent growth in gross domestic product to less than 8 per cent.
Companies had targeted a warp-speed future. It will take them that much longer to adjust to the more sedate reality.
Simon Rabinovitch is the FT’s Beijing correspondent
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