The EU-China Business Association and the Flanders-China Chamber of Commerce organized a webinar on June 24, 2021 focused on the results of the annual Business Confidence Survey 2021 of European Business in China.
Ms Gwenn Sonck, Executive Director, EU-China Business Association/Flanders-China Chamber of Commerce, welcomed the participants to the annual webinar. The survey was conducted by the European Union Chamber of Commerce in China in cooperation with Roland Berger. Foreign investments in China have increased by 6.2% year-on-year. There is still enormous untapped potential for growth. In the first quarter of this year, EU investments in China increased by 50% compared to last year, reaching USD2.34 billion. Investment mostly came from automotive, basic materials and healthcare. The value of completed Chinese investments in the EU in the first quarter was USD500 million and the top sector was automotive, followed by transport, infrastructure and ICT.
Ms Charlotte Roule, Board Member, European Union Chamber of Commerce in China, and CEO of ENGIE China, joined ENGIE five tears ago and promoted clean energy, mainly solar and electrical mobility and energy efficiency. ENGIE has six joint ventures in China. Ms Roile first explained the methodology of the survey, which achieved a 46.7% response rate, which is slightly lower than in 2020 but still the second highest ever. The same questions are asked year after year to see how things are improving. Some new themes are also addressed, including carbonization. The Chamber was set up in 2000 with 51 member companies, and now represents more than 1,700 companies. The Chamber has nine local chapters and around 30 working groups to cover all sectors. More than three-quarters of all respondents have been in China for more than 10 years.
The European community in China started 2020 navigating in the dark, and the uncertainty of the Covid-19 pandemic was withering away business confidence. This year's survey shows that European companies found their China operations to be a critical pillar of global operations due to the fact that China managed to keep Covid at bay and recover. European companies see more clouds coming. A year ago they were strategizing on diversification, now they are looking how to further onshore their supply chains and strengthen their position due to the increasingly politicized business environment and geopolitical risks to the supply chains. Decoupling is not exactly what we expected a year ago. It is not European companies decoupling from China but European companies considering how to decouple their Chinese operations from their global ones. While fighting the pandemic, the reform agenda stalled, so there was little or no progress on the topics that the Chamber is addressing, such as market access, a level playing field, SOE reform, tech transfer and IPR. The Chamber hopes that the reform agenda will progress again.
Revenue is dropping year after year, a continuation of a trend that started in 2018. But considering the pandemic, the numbers were quite positive. In February 2020 the EU Chamber did a joint survey with the German Chamber. At that time, half of the respondents expected year-on-year revenue decreases but actually only 24% reported revenue going down. Only 0.5% expected a revenue increase and instead 42% of respondents saw revenues increase. Increases were seen in retail, cosmetics and automotive while decreases were most significant in areas most exposed to Covid restrictions, such as aerospace and aviation, and food and beverage. Revenue swings, both up and down, were sharper for SMEs compared to MNCs. SMEs reported that if they were well-positioned or flexible, they were able to profit immensely. Meanwhile, SMEs exposed to the pandemic, such as those in education, hospitality or construction lacked the resources of larger companies to offset losses.
European companies maintained profitability, as 73% reported positive EBIT, which remained steady over the past five years between 71% and 75%. The resurgence of the Chinese market is also telling compared to the rest of the world as 51% of respondents said their China EBIT margin was higher than their company's world-wide average with a year-on-year increase of 13 percentage points. Respondents reported a strong resurgence of optimism for growth, increasing from 48% in 2020 to 68% in 2021, a very significant increase of 20 percentage points. The outlook on five other categories stayed comparable over a year ago, namely competitive pressure, productivity, profitability, labor costs and access to intermediary inputs.
European companies are not leaving China and few are seeking to diversify supply chains to other markets. Only 9% of respondents are looking to shift at least part of their investments in China to other markets. This is the lowest share of respondents on record. The Chamber sees an increase in the number of respondents that would like to expand in China with 59% aiming to do so, the highest since 2014. European companies see a window of opportunity to strengthen their JV positions. About 30% of respondents have a JV in China, and of those 27% increased their position in the JV, with 18% taking a controlling share and 2% completely buying out their partner.
Many companies are seeking to secure their supply chains. Five times as many are onshoring as offshoring. Of all production companies 80% reviewed their supply chains in the last two years, while 26% are further or fully onshoring their supply chains. This reflects the “in-China-for-China strategy”, coupled with the new strategy of limiting exposure to cross-border risks like tariffs and export controls as onshore supply chains are more resilient. A third of manufacturers are exposed to critical input disruptions. Only 21% of respondents are not exposed to such critical inputs and 34% noted that there are no viable alternatives.
Market access restrictions exist for 55% of respondents. Chinese authorities made a lot of efforts, but market barriers are increasingly indirect barriers, such as administrative approvals. 45% of respondents said they missed out on business opportunities as a result of market access restrictions and regulatory barriers. The sectors most impacted are pharma, construction and legal. Only 25% of respondents expect regulatory obstacles to decrease in the coming five years.
Unequal treatment is reported by 46% of respondents, whether favoring local or foreign companies. It is important to end unequal treatment towards any company as the Chamber favors equal treatment and not preferential treatment for European companies. Areas of unequal treatment include market access, public procurement and communication with the government. A good example of unfair enforcement is in environmental protection. Equal access to subsidies is also a critical issue.
The state advances again and the private sector retreats again. SOE reform continues to go in the wrong direction. 48% of respondents expect that the state-owned economy will benefit at the expense of the private economy. Regulatory obstacles change little year-on-year. The top three obstacles are ambiguous rules and regulations, market access barriers and the unpredictable legislative environment.
There are growing concerns over the tech localization push. In ITC, network providers are negatively affected both directly through regulatory requirements and also through their customers. In banking, foreign banks are pushed to integrate with local digital systems and network equipment, requiring extensive amounts of money. If they are required to do so, smaller European banks are considering leaving China. The market share of all foreign banks in China is 0.3%.
The Foreign Investment Law failed to stop compelled tech transfers as 16% of respondents said their company was compelled to transfer technology to maintain market access, 40% of those in the past 12 months. For the first time, half of respondents find IPR enforcement to be excellent or adequate. But compared to Europe it is still not a good result and only 1% higher compared to last year. It is an important milestone but also a reminder that there is still a long way to go. Innovation is one of the reasons the Chamber's members want to be in China. The China market Is becoming a global driver for innovation, as 72% of respondents see Chinese firms as equally or more innovative than European ones. About 41% of respondents' business in China has become more politicized in the past year. Not being able to come back to China due to Covid-19 resulted in the number of foreign workers nosediving. For 73% the most negative impact of Covid-19 restrictions is travel restrictions. 35% reported that they had decreased the number of foreign workers in their China operations in the past five years, more than double the numbers that have increased their foreign headcount. This presents a long-time concern as the decrease in people-to-people exchanges between the EU and China is likely to negatively impact relations and is starting to create a gulf between China operations and headquarters. European companies are leading in decarbonization, as 55% have already reached carbon neutrality or are expected to do so by 2030.
European companies in China navigated the darkness, but see more storm clouds on the horizon. Those who can are preparing for politically-challenging times, while having to cope with long-standing issues. The Chamber's members are calling for full engagement between the EU and China, but also with the U.S. European companies in China will have to proceed under the assumption that things will get worse before they get better.
Mr. Johan Verstraete, Board Member, Flanders-China Chamber of Commerce and Vice President Weaving Machines, Picanol Group, commented on the results of the survey. First he introduced Picanol, which has two production units, one in Belgium and one in Suzhou, China. About 80% of the company's weaving machines is still built in Belgium. The 20% made in China largely remain in the local market and there is still some export from Belgium to China. One positive challenge is that the market has been booming since the middle of 2020. Another challenge is the shorter lead times from machines made in China, which the company can supply in a couple of months whereas importing from Belgium takes eight months. There is optimism but also caution as people tend to look shortly ahead and try to jump on short-term opportunities. Picanol is facing challenges in the supply chain, both within China and from Europe to China, as the company is still shipping some strategic parts from Belgium to China to prevent copycats making the same products in China. Seven or eight companies are making similar products based on Picanol designs.
The company's revenue progressed significantly in 2020, which is remarkable as there was no production during three months, but the last nine months have outperformed many years before. The company remains optimistic for the next years. Textiles is a growing business as the middle class population worldwide is growing and China is one of the most important suppliers of textiles. Some Chinese textile companies are investing more and more in other countries, such as Vietnam and Indonesia and also in South and Central America to get around import restrictions and be close to the customers, but also to escape rising salary costs. China is no longer a cheap country.
Picanol is relatively safe from regulatory obstacles to doing business in China, but it is not in a strategic sector. It does have to pay some import taxes which protect local companies who do not have to import machines anymore. There are also difficulties to protect IP as it is not easy to enforce it. The Chinese government choses some champions, which they give almost unlimited support and looking at their debts you wonder how sustainable this model is. Since the start of the Covid pandemic foreigners who are in China are still there, but expats who are outside China have difficulties to go back. In Suzhou you face two weeks of quarantine when you enter the country and two weeks after entering Suzhou.
Q&A: What's the view of the Chamber on the new Anti-Sanctions Law? Ms Roule: The law almost came as a surprise. It came very quickly and the process lacked transparency. The law prohibits all organizations from implementing or assisting in implementing discriminatory restrictive measures. The law may conflict with measures companies need to follow in the EU.
How many companies shifted operations from China? In some sectors China is no longer a low-salary country and some Chinese companies are also delocalizing.
Mr. Jochum Haakma, Chairman, EU-China Business Association, asked whether the white paper of the U.S. Chamber of Commerce runs parallel to the European one or are American companies even more strictly treated than European ones? Ms Roule: American companies are not treated differently. Chinese counterparts differentiate between political and business issues. U.S. companies face similar issues and don't have more difficulties compared to European ones despite the political context. Mr Haakma: Has financial reform also stalled? Ms Roule: Despite the low market share of foreign banks, there is a lot of opening in the financial sector in terms of what they can do, but it is too difficult for many foreign banks to increase their shares in JVs.
Is there a change in attitude by local administrations towards foreign companies? Ms Roule: Local authorities try to put aside the political and talk about business. The energy transition is a hot topic and there is no change in attitude. Mr Verstraete: The local governments are – just as before – very business oriented and stimulate you to invest more.
In which sectors do you see the biggest push towards the creation of local champions? Ms Roule: The most obvious sectors are 5G and artificial intelligence, initiated by China 2025. There is also a push to localize tech whereby the technology of European companies might not be chosen.
In which sectors do you think the new Five Year Plan will have significant impact? Ms Roule: Carbon neutrality is mentioned in the Plan. There is a big move to upgrade industry to become carbon neutral. Mr Verstraete: Our customers are pushed by the local governments to invest in big data and the Internet of Things (IoT).
How does the corporate social credit system affects business? Ms Roule: Due to Covid there isn't much change so far.
Is the Chinese population sensitive to carbon neutrality and reduction? Ms Roule: China is a continent so it is difficult to speak for the whole population but there is an ambition set nationally. However, people are still consuming massively.
What are your top tips for doing successful business in China? Ms Roule: To have no prejudice. When I came to China people told me not to do business with SOEs, but I have excellent experiences with SOEs. You need to demonstrate your value to your Chinese partner and have real discussions. You can't do it in front of the Communist Party Secretary of the province, but face-to-face you can say you are not happy. Don't stay alone, look for support. Mr Verstraete: Be fast, if you're not fast, you miss the train. China is no longer a cheap production country, but focus on the local market potential. Don't look at China as a developing country anymore. Come in with first-quality products to have a chance to win.
Mr Haakma delivered the closing words. The European Chamber is very strong to represent European companies in China. Of the 900 or so issues in the position paper, 20% to 30% are followed-up by the Chinese. The percentage of companies saying they make more profits in China than anywhere else was always very high despite all the difficulties. Most of the companies want to stay in China because it is an incredibly big and mature market. Market conditions have changed a lot and the competition has also become much more mature. Communication with your headquarters has to go well because decisions are being made very fast. There should be a board member specifically responsible for China who should travel to China frequently.