The EU-China Business Association (EUCBA), the EU Chamber of Commerce in China (EUCCC) and BusinessEurope organized a webinar focused on the EUCCC's Business Confidence Survey (BCS) on June 26.
Ms. Gwenn Sonck, Executive Director of the EU-China Business Association (EUCBA), welcomed the participants and introduced the topic of the webinar and the speaker. The EU and China are interdependent and need each other. In 2023 China was the third-largest destination for EU exports of goods and the largest partner for imports of goods. More European companies should be able to participate in this market. Doing business has become more complex due to geopolitical tensions, the global economic slowdown and the slowing down of the economy in China. But China is still one of the fastest growing economies with a growth of 5.3% in the first quarter. Recent measures by the EU to limit the import of Chinese EVs and potential countermeasures by China make it more difficult for European and Chinese companies to navigate the business environment. European companies need a new China playbook, but many of our companies still view it as imperative to maintain a footprint in China, not only because of the market size, the supply chain and the dynamism of industrial clusters, but also more and more for its innovation power.
Mr. Adam Dunnett, Secretary General, EU Chamber of Commerce in China (EUCCC), presented the result of the Business Confidence Survey (BCS), which is published every year, surveying the Chamber's 1,800 members, with over 500 members responding this year. The Chamber has nine chapters in China. This year's BCS achieved a 44% response rate among eligible entities. Fifty questions were asked. The key takeaway is a negative cycle in the making. European businesses are increasingly worried about the Chinese economy. This year is the worst on record. It is really difficult to predict how the situation is going to be in three or six months. Optimism about profitability and revenue is at an all-time low in the 20 years we have been doing this survey. Companies are adjusting their strategies accordingly, reducing headcount and expenditures. The biggest positive takeaway this year is market opening, which is at the highest level in nine years. The other side of the coin is that market regulations are becoming more difficult.
Economic issues are now in plain sight. The No 1 business challenge is China's economic slowdown, up by 19 percentage points on last year. A GDP growth of 5% is certainly not the feeling that people have here. In 2010, 37% of companies had a higher EBIT margin in China compared to the company's worldwide average EBIT margin. During the Covid years companies did well in China with EBIT margins of 51% (2021) and 42% (2022), but in the past two years companies have higher EBIT margins outside China. This shows the highly competitive environment here. Nevertheless, companies are still staying because there is the scale of the market and China is still growing, even if it is only 4% or 5% and EBIT margins are lower. The scale and longer-term opportunities are still very considerable for many companies. The sentiment towards the business environment is at an all time low. Around 50% of companies used to say that the business environment had become more difficult, but in the past three years this has increased to 60%, 64% and 68%.
The Key issues undermining confidence are:
1. Overcapacity: 36% of companies observed overcapacity in their industry over the past year. There has been huge investments in several sectors. There is a huge reliance on exports to drive China's economy. China is relying on overcapacity for its growth. Most industries have a utilization rate of 70% to 80%. Overcapacity has a large impact on profitability.
2. Competitive and deflationary pressures increase. European companies are losing market share but the scale of the market is such that they continue focussing on it. Overall 42% of European companies are losing market share in China, with 56% in pharmaceuticals, 53% in IT and telecom and 52% in the machinery sector. On a positive note, 29% have been gaining market share. About 71% of respondents that observe overcapacity in their industry have seen price decreases as a result. Prices are falling in China, including those of housing and cars. On a positive note, 45% indicate market opening, with 19% reporting a significant opening including in the sectors of financial services, F&B and cosmetics. China has drastically reduced its negative market access list. Market access is not the issue anymore, but regulations are becoming more difficult, such as the cost of data transfer rules. This has been the No 1 lobby point in the European Chamber in the last eight months. With every EU Commissioner coming to China we have hammered home the point of improving China's regulations on cross-border data transfers. The situation has improved but there is still a lot of ambiguity. Some companies have been given approval but this issue is going to continue for a long time.
A record number of companies – well over half – reported missing business opportunities as a result of market access restrictions or regulatory barriers, such as allowing companies to export data and to have access to green energy. On procurement, the situation has gotten worse, for example in medical devices and in the energy sector. Some companies are getting less access to procurement opportunities, while Chinese competitors are getting the deals. China has been able to build up its supply chain in such a way that it is less reliant on the world while the rest of the world is actually more reliant on China than ever before.
Looking at revenue growth prospects, 12 years ago, 78% of our companies had an optimistic outlook. This year it has dropped to 32% from 55% in 2023, which is the biggest yearly drop ever, while 26% have a pessimistic outlook, up from 9% in 2023, an increase by 17 percentage points. On profitability in 2012, 36% had a positive outlook in the coming two years, while today only 15% have, an 8 percentage point decrease from last year and four percentage points lower than the previous low in 2016. The number of companies pessimistic about profitability has increased to 44%. We have never seen such a high level before. China has been very cautious not to do anything to overstimulate the economy and make the problem worse though.
Before it was all about expansion and growing in China – even at a loss if you wanted to expand market share – but now for foreign companies it is all about holding on to market share and being very careful about expanding. This year for the first time ever there are more companies cutting costs than expanding investments, with an increase by 11 percentage points over 2023 to 52%. Companies are cutting costs in investments, in HR count, and also in salaries. People are getting paid less than their predecessors were. The number of companies planning to move current investments from China has increased from 11% in 2023 to 13% this year and those moving future investments previously planned for China elsewhere has gone up from 8% to 12%. This is just a reflection of the environment that we are in. Still, 85% of companies don't plan to cut investments or leave China and the others at most are postponing investments. European investment in China is half of what it was 8 or 9 years ago and far below what it should be for the size of an economy like China. China used to be the No 1 destination for over a third of our companies. Now only 15% of our members see China as the No 1 destination. The number of companies considering it a Top 3 destination is still roughly the same. If investments are not coming to China, where are they going? Approximately one-fifth is going to ASEAN, 19% is returning to Europe, and 15% going to India, but India is only one-fifth the size of China's economy. If China is growing by 5%, India needs to grow by 25% to match the absolute growth and India has got its challenges as well, such as a lack of supply chains and infrastructure. It is hard to find a second China. Fixing the issues in China is the best way to solve this.
Interesting is that three quarters of our companies plan to reinvest in China and one-third plan to reinvest more than 10% of their profits in China. About 41% report decoupling between the headquarter and China operations, resulting in many challenges.There has been a massive outflow of expats from China as we probably lost about 80% of the foreign business community. There has been improvement in the visa situation though to bring Europe back closer to China. Another reason why companies don't want to come is the geopolitical situation. The Top 3 business challenges are China's economic slowdown (55%, up 19 percentage points), the global economic slowdown (30%) and U.S.-China tensions and geopolitical risks.
The need for meaningful progress is becoming increasingly urgent. European businesses need:
• tangible improvements to the business environment
• full access to legitimate and trustworthy sources of economic data
• full implementation of the State Council's 24 measures
• visa-free measures to be extended to all EU member states
• issues with predictability in the regulatory environment to be addressed
Positive signs are renewed engagement at all levels and signals that the Chinese government intends to improve the business environment
Ms. Elena Suarez from BusinessEurope presented the closing remarks. China remains an important market for European companies, despite the many challenges.
The EUCCC's European Business in China Business Confidence Survey 2024 can be downloaded here.
