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Industrial Giants Upbeat On China Amid Major Shift

China's transition to consumer-led growth is hitting capital equipment giants like Caterpillar, while automakers like Ford are rushing to build more factories there. But the shift may not produce clear winners and losers.

Beijing underscored the move from investment-heavy growth late Thursday by ordering more than 1,400 companies in 19 industries to cut capacity, as manufacturers struggle with excess production.

Days earlier, China issued a five-year ban on construction of new office buildings by government agencies, the Communist Party and state-owned enterprises.

Real Estate Elevated

Curbs on private construction have had mixed results on cooling real estate. In fact, continued robust property development is helping United Technologies (UTX) sell more Otis elevators and climate-control systems in China.

While public-sector housing has leveled off, the residential market remains strong despite recent restrictions and commercial office buildings are starting to improve, United Technologies CFO Gregory Hayes said in a conference call.

"I think Otis would tell you today that the market is growing a lot faster than what we had anticipated going into the year and I think these order rates more than support that," Hayes said.

Even Caterpillar (CAT) remains upbeat long-term, while projecting this year's construction equipment sales in China to be just half of 2011's.

China will continue to urbanize and improve its standard of living, meaning more electricity output, higher demand for coal and more mining, Caterpillar said.

Commodities-related companies are experiencing a short-term correction in demand from China, but even consumer-focused growth will require more materials for cars, housing and electronics, according to Bill Adams, senior international economist at PNC Financial.

"In the medium to long term, we'll still see relatively rapid growth in resource demand," he said.

Caution Over Safety

The prospect of a billion Chinese spending more money on themselves may not be a bonanza for consumer-focused firms either, as the government tightens scrutiny on those companies.

Beijing's pursuit of bribery claims against drugmaker GlaxoSmithKline (GSK) followed anti-monopoly investigations into foreign makers of baby formula.

Attention to product safety is an appealing populist issue for the government, Adams noted.

Shoppers are getting more cautious as well, and bird-flu and other health fears slammed Yum Brands' (YUM) KFC restaurants earlier this year. Yum recently said it sees signs of a turnaround.

Ford (F) is doubling its lineup of cars in China and recently announced it will build three more plants there for a total of seven. The No. 2 U.S. automaker said its biggest challenge in China is meeting demand.

China's auto market, already the world's largest, is expected to expand to 20.5 million-21.5 million units this year from 19 million in 2012. Such growth offers a tempting upside, but profit margins are much smaller there because foreign automakers must use joint ventures with local companies.

Ford's per-unit operating profit in North America averaged $2,848 in Q2 vs. $441 in Asia.

Companies will likely have a long time to adjust, with economic changes playing out over several years, possibly a decade, said Stephen Wood, chief market strategist at Russell Investments. He pointed out that Beijing still uses five-year plans.

"It's a structural story," he said. "We're looking at a long-term roll out."