By BOB DAVIS
BEIJINGâ€"Foreign companies are learning that they can no longer count on China for earnings growth. As companies report first-quarter results, big-equipment makers like Caterpillar Inc. and ABB Ltd. see slowing demand, while consumer-focused Apple Inc. and Starbucks Corp. surge ahead.
The mixed signals could be an early sign of big change in Chinese economic growth that emphasizes consumer spending, economists say. If sustained, the trend could lead to stable growth in the years ahead, though not at the double-digit pace that the country has averaged for the past 30 years.
Caterpillar, the Peoria, Ill., construction- and mining-equipment company, last week bragged about first-quarter growth in the U.S., which Chief Executive Doug Oberhelman said "more than offset slowing in China and Brazil."
Ditto for Swiss engineering company ABB. Chinese sales are having "some difficulties," said Chief Executive Joel Hogan, while demand is growing in North America for its power equipment.
Others reporting slowing China demand during the first quarter included miner Vale SA and United Technologies Corp., which said new Chinese orders fell 21% at its Otis Elevator unit.
Meanwhile, Apple reported that sales in greater China, which includes Hong Kong and Taiwan, more than tripled to $7.9 billion in the quarter ended March 31, driven in large part by Chinese consumers like Wang Hong. The 24-year-old saleswoman on Friday bought a new iPhone 4S from an Apple Store in Beijing for about 5,000 yuan, or nearly $800. That is about 1,000 yuan more than she makes in a month, but she said she wanted the phone to keep up with her friendsâ€"one of the marks of an increasingly consumer-oriented society. Her friends have iPhones, "so I think I should own one, too," she said.
China's economy is slowing from the torrid growth rates of the past 30 years. In the first quarter, China's economy grew 8.1%, the slowest rate of growth since the first quarter of 2009. While growth in gross domestic product is expected to pick up somewhat in the rest of the year, senior government officials have warned that they aren't aiming for the growth rates of the past.
Caterpillar, the Peoria, Ill., construction- and mining-equipment company, last week bragged about first-quarter growth in the U.S., which CEO Doug Oberhelman said "more than offset slowing in China and Brazil."
At the same time, China also appears to be in the early stages of shifting its economy so it relies more on consumer spending and less on investment, real estate and exports. Weaker sales by foreign companies reliant on the Chinese real-estate and infrastructure markets, and stronger sales by those depending on consumers, indicate that the so-called rebalancing is occurring.
Rebalancing, long urged by Western and Chinese economists, "would give China a better shot at maintaining a reasonable rate of growth" over the long term, said Nicholas Lardy a China expert at the Peterson Institute for International Economics in Washington, D.C. That is because consumer spending is widely considered a far sturdier foundation of growth than fickle export markets or an overheated real-estate sector.
Another clue: Disposable income for China's urban households grew more rapidly than GDP in the first quarter for the first time since the global financial crisis, giving a boost to consumer spending.
Still, definitive data on rebalancing is lacking, and consumer growth would have to continue for a long period before it would become the major driver of China's economy. Steady growth in disposable income is far from assured. If Beijing mishandles policies meant to slow the property and construction sectors, the economy could crash land, undermining consumer confidence and income.
In March, new apartment prices in China's cities posted their first year-on-year decline since Beijing began cracking down on the housing market two years ago. That has depressed sales of producers of commodities that go to build apartment houses, including iron-ore company Vale of Brazil. Iron ore is the main ingredient in steel. Vale Chief Executive Murilo Ferreira said that the slowdown in China will soon come to an end.
"Overall the construction market is slowing" in China, said Kalai Pillay, an Asia credit analyst at Fitch Ratings Service. The downturn is made worse, he said, because many of the Chinese firms, which import from the West, "are having a lot of difficulty getting credit."
While some consumer companies reported pullbacks in discretionary spending, Starbucks contended otherwise. "We continue to see strong traffic growth in China," Starbucks Chief Financial Officer Troy Alstead said. "We haven't seen any of the slowness that I've heard others talk about."
Infant-formula maker Mead Johnson Nutrition Co., in Glenview, Ill., said sales surged in China, which helped make up for a downturn in sales in the U.S., where the company is trying to recover from publicity over the death of a child late last year who was fed formula. The company was cleared of fault, but formula sales have declined.
Appealing to a much older consumer, France's Pernod Ricard SA of Paris said it saw "very dynamic growth" in China, driven by sales of Martell cognac and Scotch whiskies.
McDonald's Corp. said its sales of snacks and desserts are declining in China. But that may have to do as much with competition from Starbucks and other outlets for Western snacks as with tight Chinese wallets.
In Beijing 40-year-old Zhu Jiang, who makes 20,000 yuan a monthâ€"a handsome salary hereâ€"said he knows that China's economy is losing steam but doesn't think it will affect him much. He has a job at an information-technology company whose products are in hot demand, he said. He just bought himself a MacBook Air.
â€"Olivia Geng, Annie Gasparro and Laurie Burkitt contributed to this article.Write to Bob Davis at bob.davis@wsj.com
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