Comments to the EU-China Chamber's Business Confidence Report

On 21 June 2023 the European Chamber published a report and press release about the Business Confidence of European companies in China. The title of the press release was "European Chamber Report Finds Significant Deterioration of Business Confidence in China". The full report can be downloaded at https://www.europeanchamber.com.cn/en/publications-archive/1124

When asked my opinion about this article by the Belgian economic newspaper De Tijd, I gave my feedback and comments, but the actual article didn't really take into account what I wanted to bring across. Hence, this article.

Faced with growing risks and a more volatile operating environment, European companies have started reviewing their investment and operational strategies, and ensuring their supply chains are fit for more uncertain conditions.

I read in the report that the survey was conducted in February-March 2023. This is right after the lifting of the zero Covid policy in China and at the time when there was still a lot of uncertainty whether Covid had been eradicated. Only business traveling was possible and you still had to do a PCR test before leaving for China (although no quarantine was required anymore). In short: general sentiment about China at that time was still very uncertain indeed, which is partly reflected in the results.

64% of respondents reported that doing business in China became more difficult in the past year, the highest on record.

Since 2015 this percentage has always been around 47%-56%. Knowing that China had a lot of severe lockdowns in 2022, it is not surprising in itself that 2/3rds of companies feel that doing business in China has become more difficult in 2022. Frankly, knowing that this figure used to average only around 10 percentage points lower, I think 64% is actually still rather low.

30% of respondents reported year-on-year (y-o-y) revenue decreases, an increase of 20 percentage points, and the highest on record.

Again, I think that's not too bad, because that means that 70% of the companies generated more revenue in China, something that was not at all evident in a country that was almost half locked in 2022.

11% of respondents have shifted existing investments out of China, and 8% have taken the decision move future investments previously planned for China elsewhere.

A similar observation and an example of how you can explain a positive figure in a rather negative way. You could also interpret this figure as follows: an overwhelming majority (89%) of European companies have decided to continue their investments in China, despite all the challenges of the past years.

One in ten report they have already shifted, or plan to shift, their Asia headquarters (HQ) or business unit HQ out of Mainland China.

So, 9 out of 10 companies have decided to keep their headquarters in China, still also a large majority.

There has been a 13-percentage point reduction y-o-y in the number of respondents that view China as a top-three destination for future investments.

Not incomprehensible after such a Covid period.

75% have reviewed their supply chain strategies over the past two years, with 24% reporting plans to at least partially onshore their supply chains into Mainland China and 12% having already shifted parts of them out of the country.

In any case, what the Covid pandemic, the high transport prices and supply chain problems of recent years and the geopolitical tensions have taught us is that we are indeed too dependent on China. Many companies have suppliers exclusively in China and consequently have realized that they should also look at alternatives, just in case something like this happens again. This demonstrates a healthy "good housekeeping" policy and is absolutely recommended. However, many companies find that there are not many alternatives other than purchasing from China, simply because they often do not find the required capacity, quality and/or flexibility from suppliers outside China.

Decoupling of HQ and China operations has increased primarily to manage risk, with nearly three quarters of respondents having localised IT and data storage infrastructure. Significant localisation of company staff has also taken place over the last half decade, with 16% reporting their China operations no longer employ any foreign nationals.

These developments come at a considerable cost to companies and to China. The need to create divergent systems for China and the rest of the world means that the overall efficiency brought by global economies of scale is lost; and the reduction of foreign nationals is resulting in reduced transfer of knowhow and best practices, communication difficulties, deferred investment plans, and even China operations being closed.

China's isolation during the three Covid years has indeed created a form of "alienation" between China and the West. The fact that many foreigners have left the country has not helped either. Especially in a country like China, where personal contact, trust and relationships are so extremely important in doing business, staying away for 3 years is not conducive to good relations between parties. It will take a long time to rebuild that lost trust. The only way to resolve this is to restart the dialogue, both at the corporate and European government levels.

“The negative trends we see in this year’s survey are concerning and reflect both recent challenges—brought by uncertainties in China’s policy environment and rising geopolitical tensions—and the persistence of long-standing market access barriers,” said Jens Eskelund, president of the European Union Chamber of Commerce in China. “For China to turn the tide and allow European companies to develop and contribute to their full potential, we really need to see concrete action.”

“Unless further steps are taken to address the uncertainties confronting companies, then the trend of supply chain diversification and divestment is likely to strengthen in the medium-term,” said Denis Depoux, global managing director of Roland Berger. “Many European companies are now focusing more on how to make their China operations more durable instead of capturing greater market share, which is not good for competition.”

The only way out is to keep looking for cooperation between European and Chinese companies. We can no longer win the economic and technological battle with China, but that does not mean that there are no opportunities for European or Belgian companies. On the contrary: it is up to us and European governments to find a way to put our foot between the Chinese-American door and enter into intelligent partnerships with Chinese companies, not only for the Chinese market, but for global expansion. Because Chinese ambitions extend beyond China; it is now a matter of Going Global. And we better not bury our heads in the sand and make sure we jump on that train before others do.