41% of European Firms Doing Business in China Plan to Cut Costs Amid Mounting Pessimism

Beijing’s failure so far to deliver on promises that foreign-invested enterprises will enjoy a more open, competitive market has fostered mounting pessimism: a significant 41% of European companies are now re-evaluating their China operations and planning to cut costs, including through headcount reduction, according to the annual Business Confidence Survey 2016 released by the European Chamber of Commerce in cooperation with Roland Berger.

Although 47% also report that they plan to expand their operations in China, this represents a thirty-nine point decrease from 2013, when an overwhelming 86% of European companies were intending to do so. However, a clear majority of European business would likely increase their investment in China in the event of market access barriers being removed.

China’s economic slowdown continues to pose a significant challenge to both Chinese and European companies. However, European business is suffering more acutely from its effects due to an increasingly challenging business environment, coupled with a playing field that is perpetually tilted in favor of domestic enterprises.

The survey’s key findings speak to a deepening disillusionment in China’s reform agenda. For instance, 56% of respondents report that doing business in China has become more difficult, a five-point increase from 2015.  A similar percentage (57%) perceive that foreign companies are treated unfavorably compared to their domestic counterparts. Fifty-eight percent of respondents state that the recent tightening of Internet controls and access restrictions has a negative impact on their business, a 17-point jump from 2015.

Meanwhile, a majority (70%) of respondents do not feel more welcome in China than they did 10 years ago. The study also found that  55% would likely increase their investment China if afforded greater access.

It is also noteworthy that European companies’ willingness to invest in R&D in China has dropped from 85% in 2015, to 72% in 2016, indicating that the Chinese Government’s ongoing efforts to attract innovation are not having the desired effect.

The successful completion of the EU-China Comprehensive Agreement on Investment is seen to be integral to improving the business environment and reducing market access barriers. European Chamber President Jörg Wuttke said, “European companies now need a roadmap. This will give them with the confidence they need to commit more to China’s future development in these economically challenging times.”

“Despite slowing and L-shaped growth, China's economy could be powered for another two or three decades of high-quality expansion by measures including further pruning overcapacity, supply side transformation and strengthening innovation," said Roland Berger CEO Charles-Édouard Bouée. "Addressing these tasks and the challenges highlighted by the Business Confidence Survey will ensure both that all of this growth ultimately takes place and that European business is able to make a major contribution toward attaining it.” 

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