European Business in China: Business Confidence 2022

Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/business-confidence-2022-societa-europee-cina

Introduction

As the rest of the world returns to varied pre-pandemic levels of normality, China’s stringent COVID-19 policy continues to exacerbate the challenges of doing business in the world’s second largest economy.

Within this context, The European Union Chamber of Commerce in China, released its European Business in China Business Confidence Survey 2022, which showcases that while most European companies in China posted positive revenues and were profitable in 2021, doing business has become more difficult.

It should be noted that the greater resources larger firms possessed allowed them to better manage the numerous challenges faced throughout the year, take for example, the intermittent power cuts experienced in late 2021. Larger companies had more leverage when negotiating with local authorities to maintain power supplies to their operations, while few small- and medium-sized enterprises (the highest number of survey respondents) had this luxury and their bottom lines suffered more as a result.

Amidst market access concerns, compelled technology transfers, unfavorable treatment, battered supply chains, as well as limitations on travel in and out of China, how are European companies navigating the storm and what are the future prospects in this business environment?

Business Environment Overview

In a nutshell, 60% of respondents report that business in China has become more difficult in 2021 for (an increase of 13% y-o-y), the highest level on record. This marks a continuation of a concerning trend since 2014, when this question was first asked to European Chamber member companies, which is especially worrying given its cumulative nature.

For the second year running, COVID-19 ranks as the top challenge to future business for European companies operating in China (69% of respondents), resulting in decreased business travel for 64% of respondents and difficulties in making business and investment decisions for 33% of respondents.

Difficulties with moving both people and goods resulted in companies experiencing supply shortages, difficulties in establishing relationships with partners and clients (74%); challenges securing new business deals (60%); and challenges meeting project deliverables (reported by 42%).

In order for full clarity on the aforementioned statistics, member company survey data for the European Business in China Business Confidence Survey 2022 was conducted at the start of 2022, prior to the geopolitical fallout of Russia’s invasion of Ukraine on 24th February and the even more stringent approach taken by the Chinese authorities to try and contain Omicron outbreaks, which culminated in mass lockdowns in Jinan, Shanghai, Shenyang and other parts of China, which served to only add to an increased destabilizing effect on European companies’ China operations amid continued business uncertainty.

EU Companies’ Outlook

A positive aspect to note in the business environment is the fact that fewer businesses reported cost-cutting plans for 2022, with only 30% of respondents indicating they expect to do so during the year, an 8% y-o-y decrease. This in part reflects the aforementioned positive revenue and EBIT margins as well as the huge potential they continued to see in the Chinese market.

On that note, of surveyed EU businesses with a Chinese joint venture partner, 37% chose to increase their stake in the business in 2021, a spike compared to 2020 when 26% of members reported they had done so. The proportion of businesses that took a controlling share in their joint venture company or bought out their partner entirely also jumped, increasing 12% y-o-y.

The fact that European companies have better market access in certain industries—following their removal from the Negative List for Foreign Investment in recent years and the lifting of equity caps seen in 2020—partially explains this.

Market Access

In terms of market access, there was just a 1% y-o-y improvement in the number of companies that saw increased market access, however, firms across the board report that market access restrictions continue to prevent them from expanding their investments. A whopping 40% of respondents reported that they missed business opportunities in 2021 due to market access restrictions or regulatory barriers, a continuation of a trend that has changed little over the past seven years.

In order to showcase what this means for European businesses, two out of three respondents have indicated they are willing to increase their investment in the Chinese marketplace should they be granted greater market access. In fact, in recent years, increased investment flows can already be seen in industries where market access has been expanded and operating conditions have improved (e.g., automotive industry)

The scale of this potential investment is not insignificant either, with three quarters of companies indicated they would increase investments in China by more than 5% of their annual revenue should market access barriers be lowered, with 16% willing to increase by 11–20%, and 14% by more than 20%.

In essence, European investors are willing and ready to further commit and expand in the Chinese marketplace, while China continues to pledge its commitment to multilateralism, such sentiments are yet to fully manifest in the market.

Expat Exodus

The impact of China’s COVID-19 containment measures has had significant ramifications on companies’ workforces, put simply, an employee exodus is underway, as sought-after talent look for new opportunities elsewhere due to the uncertainty of living and working in China. One in five respondents reported a decrease of foreign employees of 0–25% over the past five years. 9% reported a decrease of 26–50%; and, most strikingly, almost one in ten reported the number of foreign employees they employ decreased by more than half.

Facing a wealth of ever-changing visa and work permit procedures, and extreme limitations on travel in and out of China, 58% of companies (+9% y-o-y) reported struggling to attract top international and domestic talent, and 42% (+9% y-o-y) reported struggling to retain the talent they have.

In terms of soft power and diplomacy, foreign nationals working in China have long served as the best ‘ambassadors’ for China abroad, frequently praising the positive aspects of their experiences, which is now lacking at a time of geopolitical tension.

On the more commercial side of the spectrum, the negative impacts of losing foreign employees for European businesses include a reduced transfer of know-how and best practices (38%); increased communication difficulties between HQs and China operations (34%); deferred investment plans (8%); and the need to close China operations (3%).

Conclusion

At the start of 2022, conditions rapidly deteriorated in the Chinese business environment, with the geopolitical fallout due to the war in Ukraine and stringent lockdowns in order to contain Omicron outbreaks, European businesses were forced to face an array of challenges both domestically and internationally.

However, with the multitude of uncertainties and concerns raised by European businesses over the course of the previous 12 months, it would be remiss not to mention the rewards of staying the course and persevering in the Chinese marketplace.

As one of the world’s best manufacturing clusters and, in more recent years, a vibrant innovation ecosystem, European companies view it as imperative to be part of China, which despite the wealth of challenges, still see a great deal of potential in the market. China has showcased the potential to become a hub for research and development (R&D) activities, especially for large multinational corporations, with 40% of respondents now view China’s R&D environment as more favourable than the global average.

European businesses in the China market are forging ahead in decarbonization with more than half of European businesses operating in China aiming to achieve carbon neutrality by 2030, making them strong potential contributors to China’s carbon neutrality drive. Realising the potential of this market will require increased collaboration on both sides.