The Flanders-China Chamber of Commerce – with the support of Flanders Investment & Trade – organized a webinar focusing on “Emerging trends for Belgian businesses in China”.
Ms Gwenn Sonck, Managing Director, Flanders-China Chamber of Commerce, welcomed the participants to the webinar. Both speakers have been living and working in Shanghai for many years. Travel restrictions to China and the several lock downs are the biggest difficulties now. However, the quarantine has been reduced to 7 days in a hotel and 3 days at home. European companies are committed to remain in China and continue to invest. They believe there is more to gain than to lose being in China.
Mr. Raoul Schweicher, Managing Partner, Moore – MS Advisory, shared the results of the 2022 Sino Benelux Business Survey. Originally from Luxembourg, he has been in China for 10 years, guiding Moore Advisory's practice in Shanghai. The Sino Benelux Business Survey is conducted annually by Moore Advisory and the Benelux Chamber of Commerce in China and is in its 7th edition with 32 questions asked and more than 180 completed surveys, the second-highest ever. In 2022 there is a relatively larger proportion of companies with headquarters in one of the three countries participating in the survey with 44% from the Netherlands, 37% from Belgium and 5% from Luxembourg.
Benelux companies in China are mostly located on the coast with 84 respondents in the Beijing-Tianjin-Hebei region, 184 have offices in the Yangtze River Delta and 39 in the Greater Bay Area. Benelux businesses have 97 offices in other areas. The top three industrial categories are industrial services (19.5%), industrial goods (18.9%) and consumer goods (18.4%). This year, 18.4% of companies reported revenues of more than CNY500 million, which is a relative jump from last year. Small companies with less than CNY10 million, including start-ups, amount to 32.4% of respondents. Looking at the number of employees, 8.6% have more than 1,000 and 32.4% have between 0 and 9 employees. Within the group, what is the importance of the China entity? This year, 29% said it had top priority, and another third said it had top 3 priority.
Looking at revenue growth between 2015 and 2020, more companies are reporting that their business is shrinking and there are less companies reporting extraordinary revenue growth. But in 2021, only 13% of companies reported a revenue decrease, while 28% indicate strong revenue growth. Looking at profits, there is a small trend of companies reporting losses, and at the top end in 2020 23% filed high profit growth. In 2021 there was a decline in the number of companies reporting losses from 17% down to 13%. The number of companies with strong profits increased slightly from 23% to 24%. Given the last three difficult years it is not a bad picture at all. The most significant positive drivers are increased turnover/economies of scale; innovation/R&D and use of technology. The importance of economies of scale has declined over the years, while innovation and R&D have become more important. Looking at the negative drivers there has been a strong development this year with logistic costs at the top, which also includes the rising costs of interprovincial transport. Material and salary costs have also been prominent negative drivers, but the importance of salary costs has decreased over the years.
Looking at the perception of the Chinese market, from 2017 to 2019, negative perception increased, but there was a strong reverse in 2020, but this was an exception, with negative feelings rising again in early 2022 looking at 2021. Favorite tax allowance for expatriates was said to end in 2021, but has since been extended for two years. However, 24% of respondents had already taken action with 36% adjusting remuneration packages and 25% localizing expatriate positions. From 2017 to 2020 less companies were considering to move some Chinese activities to other Asian regions, the proportion going down from 31% to 13%, but in 2021 this increased again to 30%. For companies leaving, Vietnam would be the No 1 destination (53), followed by Singapore and Thailand.
The Covid-19 impact on performance in early 2020 at the start of the pandemic was expected by 55% of companies to be strongly negative. When asked the same question at the end of the year, the result was not that bad, with 23% saying the impact was strongly negative and 20% said the impact was actually positive. In the early months of 2021, 7.9% expected a strongly negative impact, but at the end of the year, the figure rose to 23%. Asked about which factors negatively impacted your business, 79% mentioned travel restrictions and 81.7% said China's border policy negatively affected the company, mainly the lengthy quarantine making it difficult to get qualified people over to China. In early 2021, 52% of companies said the main impact was on operations abroad, while in 2022 the impact on China operations increased significantly. Looking at expectations, more companies now expect shrinking revenue growth. One in four expect shrinking operations in China this year. Profit expectations are not that bad, with less companies expecting losses.
Closing remarks:
• increased revenue after a continuous trend of revenue decrease for four years
• increased turnover/economies of scale is the most important positive driver of performance
• logistic costs are the main negative driver of performance, replacing salary costs for the first time
• perception of the market continues negative trend again after a brief year of positive change
• in contrast to the previous year, Covid-19 policies negatively impacted Benelux businesses in China in 2021
• negative outlook for 2022, but companies remain rather optimistic in the long term
• Benelux businesses in China have suffered a severe setback from Covid-19 and the majority has a negative outlook on the future business environment in China
Mr. Philippe Snel, Managing Director, DaWo Law Firm Shanghai, reviewed the latest regulation changes and government policies and discussed how they affect foreign investors doing business in China. Philippe Snel started his presentation with a look at compliance issues. The level of regulation and administrative requirements has been increasing in the past years, but is till far from what we are used to in Europe.
The issue of data safety is coming back regularly with the latest addition on outbound data transfers, affecting multinational companies big and small. The rules are similar to the European ones. Any company regularly exporting data overseas shall have a legally binding document executed with the overseas recipient, who should be aware of the legal implications. The definition of “important data” has been specified further, which will require prior approval by the relevant authorities, e.g. medical information is considered to be important data. Especially for SMEs this is increasing the costs of operations. Tesla has decided to no longer exchange data with the U.S. and has set up a data center in China. The regulation on personal information (PIPL) is also similar to the one in Europe. The car hailing app Didi Greater China has been fined CNY8 billion for infringement on personal information. We see more and more administrative fines imposed on companies. The maximum is CNY 50 million or 5% of the last annual revenue.
2022 has been a record year for tax evasion investigations. The State Council's 2021 annual audit report pointed to a massive IIT evasion problem, involving more than 20 provinces and more than CNY4.7 billion. The automated tax system implemented in most companies is sharing data among banks, the Administration of Market Regulation (AMR) and Customs. Other compliance issues include illegal advertisements, where the rules are also similar as in Europe, but had not been strictly implemented. Fake information, such as saying a company is the best or the oldest is not allowed if it is not true or you cannot prove it. In the field of anti-monopoly, a CNY18.2 billion fined was imposed on Alibaba for example.
Companies are reconsidering their options on their presence in China through restructuring or leaving China. The Covid-19 lockdowns have been an important driver in recent months with Apple relocating part of its iPad production. For some industries it is no longer inevitable to stay in China. The process of restructuring or closing down is a complex one. There are corporate matters, employment, and assets involved, and there is a social impact. Provided things are done according to the rules, the government will not be obstructive, but it is not an easy process.
Decoupling, for foreign countries to become more independent from China, involves not only raw materials, but also technology. Covid and the closed borders have caused a material decoupling. With Covid no longer an issue abroad, China is now a Covid island instead of a Covid-free bubble. The 7+3 quarantine is still preventing most business people from traveling to China, besides the limited number of flights. International management is no longer traveling to China, which has an effect on how businesses are run. There is also a growing nationalization of supply chains when local staff are running the China operations of multinationals. Those companies are operating more and more as autonomous entities and in a closed circle. This has substantially changed the way business is done in China. This is not a value judgement, but a fact. The good news is decoupling does not work. Large and small U.S. and European companies that have a market in China are staying in China. The Chinese market is too big to ignore or leave, like has happened in Russia as a consequence of the war in Ukraine. For many companies the Chinese market is still No 1 and they could not survive without it.
Lockdowns are still continuing, hurting the Chinese economy. The situation in the real estate market is a serious concern. There is not much room anymore for further investment in infrastructure, so the government response has been limited. Historically high interest rates have been lowered, but there is not such an inflation problem like in Europe. The government continues to encourage loans for small business. For SMEs it remains quite difficult to access financing. The VAT refund has been expanded and the “6 taxes and 2 fees” reduction policy has been announced. Promotion of foreign investment and support for particular industries is continuing.
Looking ahead, the outlook is not encouraging. The current situation is the most challenging we have ever seen with a high level of uncertainty. We don't know when the Covid rules and border closing will change. We all hope it will be fixed and become reasonable by next summer. The quarantine period might be reduced further to three days and in Hong Kong the hotel quarantine requirement will be lifted. It used to be that the sun was always shining on the economy in China, but now uncertainty is high and we need to learn to live with it. The Chinese economy will continue to develop along the existing lines. It has slowed down, but nobody believes it will crumble. Technology continues to be top of the bill for all investments in China. It now has the most patents and quality is also increasing. Semiconductors are the new oil. U.S. measures have led to Chinese technology giants designing their own chips and attract new investment. China is investing massively to catch up although it has still many years to go. Renewable energy is a major issue for China to reach the zero-carbon target. Health is a hot issue as well with investments in biotech continuing to flow. The leisure industry has slowed down due to Covid, but there are still strong investments. China is the world leader in the digitalized world. About one in four goods are bought online.
A Q&A session concluded the webinar. Is there an increase in manufacturing investment? Mr Schweicher: If your industry fits into the five-year plan, it is a good time to come over. There were less foreign companies coming in during the past 18 months.
Has the business climate in China worsened since the latest survey? Mr Schweicher: The confidence into the business climate keeps dropping and has dropped significantly compared to last year. Mr Snel: The coming months are going to be critical. The foreign population in Shanghai has dropped by a third in the few months after the lockdown. This will continue if the situation doesn't improve. Long term there is no issue. Major and even smaller companies will tell you you can't count the Chinese market out. This is definitely not the Russian market. China is the largest or one of the largest markets for many industries.
