China’s economy is slowing down. Tesla, 3M, and other stocks that will take a hit.

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The economic data coming out of China is not very good. And that doesn’t bode well for US companies that do a lot of business in the country, including

3M
,

Tesla, and many other manufacturers.

China’s industrial output grew 3.8 percent year-on-year in July, compared to 4.3 percent forecast by economists. Industrial production growth this year is 3.5% compared to 2021. During July last year, industrial production was up by 14.4% as compared to the comparable period in 2020.

July retail sales increased 2.7% year over year, again missing estimates. Economists forecast a growth of 4.9%. Retail sales in China are lower this year than in 2021.

Retail sales figures potentially problematic for auto makers including

Tesla

(ticker: TSLA) and

General Motors

(GM). Tesla generated about 26% of its sales in 2021 from China. GM generated about 11%. Tesla is more indexed by China than other US auto makers, as China is the world’s largest market for EVs.

Decline in industrial growth potentially hurts US firms including: Automation providers

cognex

(CGNX) and

Emerson Electric

(EMR), as well as group

3M

(mmm) and

Illinois Tool Works

(ITW). Those four generate approximately 20%, 12%, 11% and 9% of total sales from China respectively.

Not every company gives details about Chinese sales. Many report sales in Asia. machinery giant

Kamla

(CAT) & Auto Parts Manufacturer

optive

(APTV) generates north of 20% and north of 30% of sales in Asia respectively.

China’s listed shares lost an average of about 0.7% in afternoon trading on Monday.

S&P 500
0.2% off.

Dow Jones Industrial Average
increased by 0.2%.

Illinois Tool Works

The stock is the weakest, down about 1.5%, injured by the downgrade. Deutsche Bank analyst Nicole DeBlas lowered her rating on the shares Monday to sell from hold but set a price target of $188 below the market. Shares of Illinois Tool Works are trading at about $214 on Monday afternoon.

China did not weigh in on the downgrade decision. Deblase thinks Illinois Tool Works stock is too expensive relative to the group. He is also more concerned about exposure to Europe. Illinois Tool Works generates approximately 27% of its sales in the Europe, Middle East and Africa region. Europe has an average exposure of about 21% in Deblace’s coverage list.

For China, the average risk for industrial companies doing business outside the US is about 10%. Of course, there are many big industrialists who do not do business abroad.

union pacific

For example, the market capitalization of (UNP) is approximately $150 billion. This is more than twice the limit of ITW.

union pacific

Generates all its sales in North America.

Of the group affected by China, only Tesla’s stock is up. Investors may be looking forward to the upcoming stock split or EV tax credit. The stock market’s reaction to Monday’s data from China is, frankly, a bit confusing.

With economic numbers, Chinese EV maker

lee auto

(LI) provided distribution guidance for the third quarter, well below Wall Street estimates. The company is now planning to ship around 28,000 vehicles in the third quarter. Analysts had expected around 39,000 vehicles. Lee American Depository Receipts fell nearly 8% to start the day. Now the ADR is up about 2%.

Investors seem to be interpreting Lee’s guidance as an issue related to accelerating sales of its new SUV, the L9, which could be a sales steal from the company’s first product, the Li One.

Investors were relieved by that explanation for the weak guidance. Investors will get further relief if the Chinese economy picks up in the second half of 2022.

Write to Al Root at [email protected]