Gloomy prospects: Despite the end of the zero-Covid strategy, European companies in China are less optimistic about the future today. The economy is weakening, political risks are increasing. What to do?
European companies are finding doing business in China more difficult than ever. The second largest economy is losing its attractiveness as an investment location, according to a survey by the European Chamber of Commerce in China on Wednesday. Despite the end of the zero-Covid policy, confidence in China’s economic prospects is fading. Profitability is also suffering.
Amid rising risks and an unpredictable environment, a record 64 percent of the companies surveyed said it has become more difficult to do business in China.
As a consequence, the companies checked “how many eggs they want to keep in their China basket,” said the EU chamber in Beijing when the results were presented. Eleven percent have already withdrawn investments from China. Ten percent have already relocated their Asia headquarters from China or are planning to do so. 62 percent complained that they missed business opportunities due to a lack of market access or regulatory hurdles. The number has increased by 20 percent compared to the previous year.
geopolitical tensions
Politics and geopolitical tensions are increasingly affecting business: 59 percent said the environment was politicized – an increase of nine percentage points compared to the previous year. “The fallout from the Russian invasion of Ukraine has also changed the view of the Chinese market, forcing companies to seriously consider whether or how they might be affected should cross-strait tensions escalate,” the chamber said with.
Beijing regards the democratic island republic as part of the People’s Republic and is threatening to conquer it. Taiwan, on the other hand, has had an independent government for more than seven decades and is seeking more international recognition as a state. The US is committed to the island’s defense capability and is supplying weapons. In this way, the great power could easily be drawn into the conflict.
Changes in supply chains
Three out of four companies have reviewed their supply chains in the past two years. 64 percent said they want to make them more resilient. Almost a third cited geopolitical factors as the reason. A quarter also referred to political developments in China, which wants to stand more on its own two feet. Twelve percent of EU companies have already withdrawn parts of their supply chains from China, the survey also found.
Income is no longer the same as it used to be. 30 percent reported a drop in sales – three times more than in the previous year. Slower growth in China, which reached just three percent in 2022 due to lockdowns and other Covid restrictions, was cited as one of the reasons. Profitability also fell. Although China abruptly ended its zero-tolerance policy in December, companies are no more optimistic about the future today. In fact, only 55 percent are still optimistic – a decrease of six percent compared to the previous year, when China still had zero Covid.
Significant cost
“Increased challenges for doing business in China, geopolitical tensions and weakness in the Chinese and global economy have undermined China’s attractiveness as an investment destination,” the chamber said. The exodus of foreigners, which had been compounded by the zero-Covid policy, has been described as another problem. 16 percent no longer have any foreigners working in their company – five percent more than in the previous year. Small and medium-sized companies are particularly affected.
“All of these factors come at a significant cost, as member companies report reduced transfer of know-how, difficulties in communication and even the need to postpone investments,” the chamber said. “The mismatch between corporate headquarters and operational risks in China continues to damage confidence in the Chinese market and trigger a vicious circle of retreat.”
The annual survey, in which 570 companies took part this time, was carried out in February and early March in cooperation with the management consultancy Roland Berger.
Source: Stern
