China’s Economy Is Slowing. Tesla, 3M, and Other Stocks That’ll Take a Hit.

Tesla generates about a quarter of its sales in China.


Patrick T. Fallon/AFP via Getty Images

The economic data out coming out of China isn’t great. And that isn’t good for U.S. companies that do a lot of business in the country, including



3M
,

Tesla, and many other manufacturers.

China had an industrial production growth for July of 3.8% year over year, while economists had projected 4.3%. Industrial production growth is 3.5% this year, compared with 2021. Through July of last year, industrial production was 14.4% higher than the comparable period in 2020.

July retail sales came in up 2.7% year over year, again missing estimates. Economists projected growth of 4.9%. Retail sales in China are down this year, compared with 2021.

The retail-sales statistic is potentially problematic for auto makers including



Tesla

(ticker: TSLA) and



General Motors

(GM). Tesla generated roughly 26% of its sales from China in 2021. GM generated about 11%. Tesla is over-indexed to China, compared with other U.S. auto makers, because China is the world’s largest market for EVs.

The industrial growth deceleration potentially hurts U.S. firms including: automation providers



Cognex

(CGNX) and



Emerson Electric

(EMR), as well as conglomerates



3M

(MMM) and



Illinois Tool Works

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

Not every company give details about Chinese sales. Many report sales in Asia. Machinery giant



Caterpillar

(CAT) and auto parts maker



Aptiv

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

MORE CHINA MUST-READS

The stocks impacted by China listed are down an average of about 0.7% in midday trading Monday. The


S&P 500

is off 0.2%. The


Dow Jones Industrial Average

has gained 0.2%.



Illinois Tool Works

stock is the weakest, down about 1.5%, wounded by a downgrade. Deutsche Bank analyst Nicole Deblase lowered her rating on the shares to Sell from Hold Monday, but kept a below-market $188 price target. Illinois Tool Works shares are trading at around $214 Monday afternoon.

China didn’t weigh heavily in the downgrade decision. Deblase thinks Illinois Tool Works stock is too expensive relative to the group. She is also worried more about exposure to Europe. Illinois Tool Works generates about 27% of its sales in the Europe, Middle East and Africa region. The median exposure to Europe in Deblase’s coverage list is about 21%.

For China, the median exposure for industrial companies that do business outside of the U.S. is about 10%. There are, of course, many large industrials that don’t do business overseas.



Union Pacific

(UNP), for instance, has a market capitalization of almost $150 billion. That’s more than double ITW’s cap.



Union Pacific

generates all of its sales in North America.

Of the group impacted by China, only Tesla stock is up. Investors must be thinking about a coming stock split or EV tax credits. The stock-market reaction to the data coming out of China Monday is, frankly, a little confusing.

Along with the economic numbers, Chinese EV maker



Li Auto

(LI) provided delivery guidance for the third quarter well below Wall Street estimates. The company now plans to ship roughly 28,000 vehicles in the third quarter. Analysts had expected closer to 39,000 vehicles. Li American depositary receipts fell about 8% to start the day. Now ADRs are up about 2%.

Investors seem to be interpreting Li’s guidance as an issue related to ramping up sales of its new SUV, the L9, which may be stealing sales from the company’s first product, the Li ONE.

Investors seemed relieved by that explanation for weak guidance. Investors would be more relieved if the Chinese economy accelerates in the second half of 2022.

Write to Al Root at allen.root@dowjones.com

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