European Companies in China: Challenge at a Turning Point

Foreign companies in China are reaching a critical point in their investments in the world's second-largest economy. The reasons include market barriers, low growth, and fierce competition, as reported by the EU Chamber of Commerce in China. European firms are increasingly facing difficulties, including unclear data, cybersecurity, and espionage laws, as well as a weak domestic economy that leads to lower profits. "For some companies, a tipping point has been reached," said Jens Eskelund, President of the EU Chamber of Commerce in China, during the presentation of the annual report on Wednesday. Eskelund emphasized that companies, in light of supply chain risks, expected profit declines, and ongoing market access barriers, are considering other markets as more attractive. Chinese policymakers are grappling with a bifurcated economy, where a real estate market downturn weakens domestic demand and creates deflationary pressures, while exports have increased due to fierce competition among manufacturers. Foreign companies have long criticized market access barriers in China, particularly in government procurement processes, but rapid economic growth in the past motivated them to continue investing. Beijing aims for a real GDP growth of 5 percent this year, supported by investments from state banks in high-tech sectors. Nevertheless, many foreign investors are concerned that they will not benefit from this growth. According to a survey by the chamber, 70 percent of participants attribute price declines to overcapacity in their industries. Furthermore, 44 percent are pessimistic about their future profit development, the highest figure so far. The chamber's report mentions a defensive stance among member companies. Foreign direct investment in China fell by 29 percent in the first half of 2024 compared to the previous year. While European firms are not fully withdrawing, they are increasingly isolating their China operations from the rest of the world to make them more resilient to regulatory changes and local market growth. This includes investments in separate IT and data storage to comply with Chinese security requirements, as well as creating local jobs instead of focusing on research and market expansion. These defensive measures also involve the diversification of supply chains, with European companies increasingly considering production sites outside China. China's paper from last year on optimizing foreign investments, which included measures to simplify procurement procedures, did not bring significant improvements according to the chamber. National security concerns are increasingly being weighed against economic growth and sometimes take precedence, raising questions about whether Chinese officials have enough leeway for pragmatic, business-friendly policies. Market access barriers such as mandatory technology transfers for foreign rail companies and the preference for Chinese state-owned enterprises in rail sector tenders remain unchanged. "China remains attractive but is no longer the only player in the field," Eskelund concluded. "Our business climate survey shows that 52 percent of our members in China plan to cut costs, and 26 percent intend to reduce staff. Now is the time to change these developments.