Market barriers, tensions hinder European companies in China

 Supply chain risks, politicized business climate bedevil operators

Jens Eskelund, president of the European Chamber, is framed by the Chinese and European Union flag during the launch of the European Business in China: Business Confidence Survey in Beijing on June 21.    © AP

Nikkei staff writersJune 21, 2023 18:37 JST

 

SHANGHAI/LONDON/BRUSSELS/PARIS -- A growing number of European companies operating in China find doing business there more difficult, according to a study by the European Chamber of Commerce in China, as a result of higher barriers to market access and rising tensions between Beijing and Washington.

The study, released Wednesday, found three quarters of the 570 companies surveyed have reviewed their supply chains to strengthen resilience while complying with both the European Union's de-risking strategy and U.S. legislation.

Some 64% of respondents said doing business in China has become more difficult, the highest share since 2014, as companies logged lower revenue as a result of the country's waning growth. China's contribution to average global profit margins fell from 51% in 2021 to 31% in 2023, as the country maintained COVID lockdowns while the rest of the world returned to normality.

The European Commission, the EU's executive body, on Tuesday unveiled a strategy aimed at mitigating economic coercion from China. While a majority of survey respondents remain committed to operating in China, the proportion who regard the country as a top-three destination for future investment declined to 55% from 68% a year ago.

Alicia Garcia Herrero, a senior research fellow at Bruegel, a think tank, cited growing caution among companies as one reason for the slowing growth of European foreign direct investment in China.

Chinese President Xi Jinping began an unprecedented third term in March and has vowed to ease market access to attract foreign investment following a sharp decline in the country's economic growth. China's gross domestic product rose just 3% in 2022, compared with an 8.1% expansion the previous year.

Wednesday's survey results suggest China faces an uphill battle in achieving that objective. A majority of respondents expressed concern over long-standing challenges, including market access and regulatory barriers.

Also, six out of 10 respondents said the business environment has became more politicized over the past year, with some stakeholders clamoring for businesses to pull out of parts of the country where Beijing is accused of human rights abuses, such as Xinjiang and Tibet, while others demand the opposite. Companies can also come under pressure to produce goods containing either no Chinese or no U.S. components, depending on which of the two markets the goods are bound for, the study said.

Commuters cross an intersection in Beijing: A growing number of European companies say doing business in China is harder than before.    © AP

Despite these concerns, China's growing middle class, estimated at over 400 million people, still makes the country attractive to consumer-driven businesses such as carmakers. Two thirds of the automakers surveyed regard China as among their top-three investment destinations.

"In a globalized world, we can only strengthen our business if we maintain and further develop our relations with major economic players such as China," a spokesperson from German automaker Volkswagen told Nikkei Asia.

Nevertheless, a majority of respondents said they are working to bolster their supply chain resilience, both for reasons of cost effectiveness and geopolitics. Other considerations include Chinese cybersecurity and other regulations, and U.S. export controls intended to keep certain high-technology goods and services out of China's reach.

The study, which was conducted from February to early March, also cited the difficulty European companies encounter in getting staff into China following an exodus of foreigners over the past three years. Nearly one in six respondents reported no presence of expatriates in their China operations.

"With China now 'reopening' to the world, following three years of isolation, there is a window of opportunity for the government to demonstrate that the pro-business promises recently made by its leadership are more than just words," the report said.

Reporting by Nikkei staff writers CK Tan, Rhyannon Bartlett-Imadegawa, Catherine De Beaurepaire and Mailys Pene-Lassus.

https://asia.nikkei.com/Business/Business-trends/Market-barriers-tensions-hinder-European-companies-in-China