On 29 June, the EU-China Business Association (EUCBA), BusinessEurope and the European Union Chamber of Commerce in China organized an interesting EU-China hybrid conference in Brussels during which European Union Chamber of Commerce in China President Jens Eskelund shared the key findings of the European Chamber’s annual Survey outlining European business sentiment in China.
Ms. Gwenn Sonck, Executive Director of the EU-China Business Association (EUCBA), welcomed the participants and introduced the speaker. On behalf of the EU-China Business Association, she congratulated Mr Jens Eskelund with his new position as Chairman of the European Union Chamber of Commerce in China. President Eskelund, who has lived and worked in China for 25 years, is Chief Representative for Maersk in Greater China and Northeast Asia. He has served two terms as Vice President of the European Chamber as well as State Representative and has also been actively involved with the Chamber’s working groups. He has also served as both Board Member and Chairman of the Danish Chamber of Commerce in China.
This is our second annual hybrid conference with EUCCC and BusinessEurope in 2023 after three years of only online activities. The views from European companies on the ground in China are always very valuable to us, such as also the annual position papers. This year marks the 20th anniversary of the China-EU comprehensive strategic partnership. EU leaders are also holding a strategic discussion on China at the European Council in Brussels. The EU and China need each other. Taking into account the size of the market and the opportunities for cooperation in several sectors, more European companies should be able to take part in this growing market. Being in China shouldn't really be a choice. You can't miss out on the innovation and the local market.
President Jens Eskelund shared the key findings of the European Chamber’s annual survey, which has been held for the past 20 years with almost the same questions, allowing to distinguish trends. Altogether 570 companies responded to the survey, which is a 46% response rate. Small, medium and large companies were well represented, with most respondents from industrial goods and services related sectors. More than 80% of respondents have been in China for more than 10 years. There are now about 60,000 European companies in China. The survey was done two months after China reopened following Covid. President Eskelund had expected more positive responses, but the survey turned out to be rather downbeat. The key finding is that more needs to be done if China is to successfully rebuild post-zero-Covid. The way European businesses approach the China market has shifted. They are not running for the exit, but the direction of travel is clear in the following three dynamics: investor confidence is the lowest on record; there is an increased focus on resilience; and companies are diversifying investments and decoupling their China and RoW supply chains. Zero-Covid has ended, but other headwinds will need to be addressed if China is to regain its attractiveness.
Two-thirds of the survey respondents said that business had become more difficult in 2022. Also two-thirds said their company had missed business opportunities in mainland China as a result of market access restrictions or regulatory barriers, a large jump from 42% in 2022 to 62% in 2023. This is almost a 50% increase in the number of companies that indicated it is more difficult to do business. Bottom lines suffered following a difficult 2022 and record numbers (30% up from 10% in 2022) reported revenue decreases year-on-year. This is also a result of the slowing down of the Chinese economy.
Investor sentiment dampened. The proportion of companies saying that China is the top or one of the top three destinations for future investments declined from 68% in 2022 to 55% in 2023. The European FDI as a percentage of China's total FDI is on course to remain limited, dropping from 11.1% in 1999 to 2.8% in 2021. Businesses are diversifying their investments to mitigate risks and build resilience, as 11% of companies said they had already shifted investments elsewhere, which is the same percentage that reported they were considering investments in China in the BCS 2022. Also 8% said they were shifting future investments previously planned for China. Another 20% are sitting on the fence and considering shifting investments. This is a signal to the Chinese government to reach out and find out what the root causes are, so that some of the companies sitting on the fence now might not make that decision.
Supply chains are also being shifted, both into and out of China, as 20% of companies said they were planning to further onshore supply chains into China and 4% said they would fully onshore. But also 12% said they had taken tangible action to move parts of their supply chain out of China. One in 10 respondents moved their Asia headquarter out of mainland China in the past five years and 37% were planning to do so in the future. One element is that costs are very expensive in China. EU companies' China operations are becoming more localized with less foreigners based in China.
Zero-Covid has ended but other challenges remain on the horizon. The top three significant business challenges were the Chinese economic slowdown; the global economic slowdown; and the U.S.-China trade war. Half of respondents expect regulatory obstacles to increase over the coming five years and 83% see no improvement in the next five years. Over a quarter expect to never see meaningful market opening and 38% said their industry was already fully open. The politicization of business continues to be a major challenge with 21% saying the business environment in China had become more political last year compared to 13% of respondents answering yes to this question last year. Sanctions and challenges from politicization of consumer demands further complicate the picture.
New legislation is set to force businesses to further re-evaluate their China operations, as 21% said their operations would be impacted by new U.S. export controls and 33% said the introduction of the Corporate Sustainability Reporting Directive (CSRD) would impact their China operations. Ensuring that companies can meet corporate decarbonization pledges is imperative. The top three challenges were listed as limited access to renewables; lack of industrial guidance and best practice references; and uncertainties over China's national carbon-trading market.
Pro-business rhetoric needs to be matched with action if China is to restore its allure. Recommendations for China are:
• to refocus on reform and opening up;
• to refrain from erratic policy shifts and consult with business before implementing new policies;
• to avoid politicizing the business environment;
• to increase China's integration with the global economy and steer away from excessive self-sufficiency;
• and to create the conditions for companies to ensure their China operations remain compliant with new global binding legislation and meet corporate ESG targets.
Luísa Santos, Deputy Director General, BusinessEurope, moderated the question and answer session and made the concluding remarks. Ms. Santos said that we are probably at a turning point in many aspects. We see an increase in the security aspects and this will also have an impact on the economy. We believe in free trade and investment and as European businesses are concerned that this stronger emphasis on security could hamper trade and investment.
We understand the concerns in terms of security but it is important to have a balance between addressing these security concerns and finding the right proportionate responses to address these concerns. European businesses have already been voicing these concerns. Covid has not been great in terms of the bilateral relationship. It is good that contacts are now being resumed. Europe needs to remain engaged with China but we also need to recognize that the trade deficit is increasing. China needs to understand that it is in the interests of both sides to have a more balanced relationship. We have a lot of common challenges and it is important that companies on both sides are prepared to address some of these challenges. The main issue is that China also has regulations such as the anti-spying law that could be in direct conflict with EU legislation putting European companies operating in China and Chinese companies operating in Europe in a very difficult situation. We need to make sure that both sides engage in dialogue because the worst case scenario is that companies would be forced to disengage from the market.
The survey can be downloaded via this link: https://lnkd.in/eqr4TMFc
