P&G, Nestle to gain from China’s low import tax

Bloomberg

China’s new plan to slash import taxes on a wide range of consumer goods promises to boost the prospects of multinationals in the Chinese market, with everything from the likes of Procter & Gamble Co.’s diapers to other items becoming more affordable to local consumers.
Tariffs for 187 product categories will drop from an average 17.3 percent to 7.7 percent after the cut takes effect on December 1, the Ministry of Finance said in a statement, citing the need to help consumers access quality and specialty products that aren’t widely produced locally.
The new policy follows President Xi Jinping’s call at the October Communist Party conclave to meet citizens’ demands for improved living standards and better quality products in the world’s largest consumer market. Foreign multinationals stand to benefit as middle-class shoppers seek out goods stamped with foreign brands, while the cuts also encourage consumers to spend at home rather than on trips overseas.
“It’s aimed at three things: helping boost consumption in China, reforming the Chinese economy by continuing to open it up, and sending a signal to the world and particularly to the US that it is committed to advancing global trade,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney.
Nestle Gains
Tariffs for some types of baby formula were cut to zero, triggering losses in Chinese dairy stocks. Shares climbed, meanwhile, for European food and beverage companies. The moves will help companies like Danone and Nestle SA that compete with local brands in the large market for infant formula. That industry will see sales increase about 15 percent to $18.7 billion in China by 2020, according to a Goldman Sachs Group Inc. report. Chinese parents worried about a series of food-safety scandals often favour foreign brands.
“This is very good news for
Nestle, and excellent news for its infant milk formula,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel AG. “It’s a win-win situation for both consumers and high-quality global consumer-goods companies.”
Nestle generated some 7.3 percent of revenue in the Greater China region last year, with sales of 6.5 billion francs ($6.6 billion). Nestle is the market leader in China’s $21.5 billion baby-food market with a 17 percent share, followed by Danone with a 9.3 percent share, according to Euromonitor International.

Local Production
Still, big consumer-product companies emphasized that many of the wares they sell to Chinese consumers are made in the country.
“We welcome the new measures, although imports only make up a very small portion of our business in China,” Veronica Sze, a Nestle spokeswoman, said. “Over 95 percent of all products we sell are made in China.”
Among other foreign companies poised to benefit is Procter & Gamble, which gets 8 percent of its sales from Greater China. P&G, the owner of brands such as Crest, Gillette and Tide, may get a lift from cuts to items including diapers and personal-care products. For instance, the tariff on electric toothbrushes will fall from 30 percent to 10 percent.
“While P&G products are largely designed for Chinese consumers and manufactured in China, this will allow Chinese consumers even more access to our latest global innovations where there is a strong local consumer demand and need,” P&G’s Rene Co said in an email.
“China is trying to encourage more foreign companies to sell locally and wants to give consumers more choice,” said Matthew Crabbe, Mintel International Group Ltd.’s director of Asia-Pacific research. “What it will do is help foreign products already within the market get more competitive.”
Robust consumption is an increasingly important stabiliser for the world’s second largest economy, as it shifts away from an investment- and export-led growth model. Domestic consumption contributed 64.5 percent of GDP in the first three quarters of 2017, according to the National Bureau of Statistics. China’s retail sales totalled more than $5 trillion last year.
China has faced criticism for not doing enough to bolster imports, a move that would help balance the trade surpluses that it runs with a raft of other countries. US President Donald Trump has long complained that China engages in unfair trade practices and has pledged to close the trade deficit with China, the US’ largest.