Pressures from increasingly challenging market and economic conditions in China, which are exacerbated by a regulatory environment that continues to be demanding and at times discriminatory, have led to a clear downturn in profitability and revenue growth for European companies.
While the outlook on profitability has declined to an all-time low, reforms to promote greater rule of law and fairer competition are clearly identified as major potential drivers to stimulate Chinese economic performance in the future.
However, companies remain unsure as to whether China’s leaders have the appetite to seriously address these necessary economic reforms, according to the Business Confidence Survey 2013 released today by the European Union Chamber of Commerce in China and Roland Berger Strategy Consultants.
As China’s economy loses some of its steam and its marketplace matures, European companies in China have started to feel a pinch to their bottom lines.
The number of EU companies reporting revenue growth shrank to just 62% and those noting profitability growth decreased to 44%, leaving only 64% of European companies in China profitable.
The most notable factor negatively affecting net profit margins is rising labour costs, but slower economic growth in both China and Europe, as well as increased competition, also had notable affects. These market dynamics that affect all players in the Chinese marketplace are aggravated by a discriminatory regulatory environment for European companies. Market access is the key concern.
Approximately half of European companies noted missed business opportunities due to market access and regulatory concerns, thus challenging the government’s assertion that China has a level playing field.
Despite these serious challenges, China remains a pillar for global revenue generation.
Approximately half of European companies note that China now accounts for more than 10% of their global revenues; and, while optimism on growth has decreased, 71% of companies are still optimistic about growth prospects. China is therefore perceived as increasingly important in companies’ global strategies. European companies are committed to serving the Chinese market and 86% are planning further investments to build upon current capabilities and maintain an edge over local competition.
Most companies also perceive a number of opportunities for China’s new leadership to further stimulate Chinese economic growth through reforms. Most notable amongst these is the promotion of greater rule of law, which was identified by over three-quarters of European companies as being a potential significant driver of China’s economic performance in the coming years.
"Financial performance is worsening and optimism about profitability is at its lowest ebb," comments Davide Cucino, President of the European Chamber. "Meaningful changes need to be swiftly implemented to mitigate cost escalations through productivity increases, unlock market opportunities and to establish an efficient and well-functioning business environment that has equal competition at its core.”
Charles-Edouard Bouee, President of Roland Berger Strategy Consultants Asia, said, “Local players are continuing to improve in areas where foreign enterprises have long held dominance and this competitive landscape will only get tougher."
Bouee says European companies are reacting by expanding operations and geographical reach to achieve greater economies of scale and by strengthening in areas where they already hold advantages in order to maintain an edge over local competition.
The major factor negatively impacting profit margins is a rise in labour costs.
In addition, companies regard the talent shortage as the primary HR challenge, with high expectations from local talent in terms of pay and benefits further impacting the outlook.
"These factors represent significant risks to the competitiveness of the Chinese market that can only be countered if productivity growth can keep pace with wage increases," says Bouee.