Golden Age Over? European Firms in China Scale Down Expectations, Investment Plans

Half of European firms already believe that the ‘golden age’ for multinational companies in China is over, according to the Business Confidence Survey 2014 by the European Union Chamber of Commerce in China and Roland Berger Strategy Consultants.

The study reveals that many leading European firms are to set more modest expectations and scale back their investment plans for the Chinese marketplace.

The financial performances of European companies in China have further weakened amidst tougher business conditions, and a sense of pessimism is becoming entrenched as persistent market challenges show little sign of abating.

However, European investment in China would likely scale up their investments if meaningful reforms and, in particular, increased market access are implemented, according to the survey.

Revenue, profitability and profit margins continued to decline across the board for European firms in China.

Going forward, companies do not envisage these current business pressures easing.

Labor costs are expected to continue to rise, competition is set to further intensify and a Chinese economic slowdown is now regarded as the primary challenge to business in the short-term.

China’s huge marketplace will continue to offer substantial opportunities and remain  strategic for European companies, but this new sober reality is leading European companies to trim down their investment plans for China.

Due to market access and regulatory barriers in 2013, European Chamber member companies missed out on an estimated EUR 21.3 billion in revenues.

This manifests in a sense of inequity as most European companies feel that domestic Chinese companies continue to receive favourable treatment.

‘Golden age’ for MNCs in China is over

The unpredictable legislative environment and the discretionary enforcement of regulations are  identified as the two most significant regulatory challenges.

It is therefore unsurprising that European companies most want to see administrative reforms and that increased rule of law continues to be ranked first as the driver deemed most significant for China’s future economic performance.

“The Chinese economic slowdown and tougher business conditions are starting to bite and financial performances are getting much tighter," says Jörg Wuttke, President of the European Chamber. "Half of European companies already believe that the ‘golden age’ for multinational companies in China is over."

Wuttke notes that a Chinese economic slowdown is a game-changer that will fundamentally and necessarily alter corporate business strategies.

With costs rising and regulatory issues continuing, European companies are starting to put expansion plans on hold.

Although the reform agenda laid out in the Third Plenum Decision and other policy developments over the last year are regarded as positive, European firms are yet to be convinced that real change will be made in the coming one to two years. Instead, it is market-opening reforms that present an immediate opportunity.

Wuttke adds that a lifting of market access constraints would spur over a half of European companies to re-intensify their China investment plans.

"China is certainly still a strategic market for European companies, affording significant opportunities," says Charles-Edouard Bouée, President of Roland Berger Strategy Consultants Asia. "If there are more positive policy developments, specifically greater market access and lower regulatory barriers, increased investment would follow."

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