Navigating China: Engaging with Investors and 2024 Guidance

China's economic prowess has been a cornerstone of global economic discussions for decades. As the world's second-largest economy, its financial health and economic indicators have ripple effects across the globe. However, recent data emerging from China, particularly concerning deflation and declining exports, has sent tremors through the international business community. For companies with significant business exposure to China, understanding these shifts and their implications is paramount, especially as they engage with investors and begin to develop their guidance for 2024.

A Deep Dive into China's Deflation and Declining Exports

Deflationary Concerns:

Deflation, characterized by a decrease in the general price level of goods and services, is often seen as a sign of economic stagnation. While it can benefit consumers in the short term due to lower prices, sustained deflation can lead to a cycle of reduced spending, lower production, layoffs, and economic contraction.

Several factors are contributing to China's deflationary trend:

• Domestic Consumption: A slowdown in domestic consumption, partly due to uncertainties in the job market and reduced consumer confidence.
• Technological Advancements: Increased efficiency and reduced production costs that are leading to lower prices for goods and services.
• Global Commodity Prices: A decrease in global commodity prices that are reducing the cost of raw materials, leading to lower production costs and prices.

Export Challenges:

China's declining exports are a reflection of both internal and external challenges:

• Global Economic Dynamics: Economic challenges in major trading partners, including the U.S. and Europe, have dampened demand for Chinese products.
• Trade Tensions: Ongoing trade disputes, especially with the U.S., have resulted in tariffs and trade barriers, impacting export volumes.
• Supply Chain Diversification: The COVID-19 pandemic underscored the risks of over-reliance on a single supply chain, prompting companies to diversify their manufacturing bases.

Engaging with Investors: Anticipating and Addressing Concerns

International companies with material exposure to China should be prepared to address several critical questions from investors:

1. Exposure Assessment: What percentage of your revenue and EBITDA is directly tied to the Chinese market?
2. Mitigation Strategies: How are you planning to address the challenges posed by deflation and declining exports in China and how does this impact your current guidance levels?
3. Growth Projections: Given the current economic indicators, what are your growth projections for the Chinese market in 2024 and beyond? How do these impact current guidance levels?
4. Regulatory Navigation: How are you adapting to the evolving regulatory, social, economic and political landscape in China?

Setting 2024 Guidance: Factoring in China-specific Revenue and Bottom Line

As companies set their sights on 2024 guidance, China's economic indicators cannot be ignored. Here's how businesses can factor in China-specific data:

• Scenario Planning: Companies should consider multiple scenarios – from optimistic to pessimistic – based on potential economic trajectories in China and use those as key inputs to build and communicate their 2024 guidance ranges with investors. Importantly, as the conditions in China continue to evolve, scenario's are an important tool to consider a range of potential outcomes.
• Diversification: If a significant portion of revenue comes from China, consider diversifying into other markets to reduce risk and begin to communicate around this through quarterly calls, analyst days and one on ones with investors.
• Local Engagement: Engage with local partners, consumers, and stakeholders to gain a deeper understanding of market dynamics and potential shifts and how to plan for the future.
• Expand & Focus the Investor Relations Program: Update the Annual Investor Relations program to incrementally engage with investors around how China-specific challenges are being addressed and the strategies in place to navigate them.

While China's recent economic results present challenges, they also offer opportunities for reflection, adaptation, and growth. By understanding the nuances of the Chinese market, anticipating investor questions, and setting clear guidance for 2024, international companies can navigate the complexities and continue to thrive in this pivotal market and elevate their value.