Outlook for European Businesses in China

Outlook for European Businesses in China

Business Sentiment Among European Companies in China

The European Chamber of Commerce in China’s (EUCCC) latest Business Confidence Survey reveals a year of mixed sentiments for European businesses in the wake of China’s reopening post-COVID-19. Despite the initial optimism spurred by the lifting of pandemic-related restrictions, several structural issues and regulatory challenges have tempered expectations. This article delves into the survey’s findings, shedding light on the current business climate and the outlook for European firms operating in China.


Economic Challenges and Geopolitical Animosities Pressure Foreign Companies in China

In 2023, European businesses in China faced significant hurdles. The anticipated rapid recovery did not materialize, largely due to sluggish demand, high local government debt, and persistent challenges in the real estate sector. The Chinese government's mixed signals, balancing economic development with tightening security regulations, further eroded business confidence. Although the abandonment of the zero-COVID policy brought some relief, 55% of respondents still perceive the business environment as increasingly political.

The geopolitical landscape adds another layer of complexity. The ongoing efforts by the EU, US, and China to enhance economic security and risk management frameworks have led to increased pressures from conflicting legal regimes and politicized customer demands. This has driven businesses to diversify and silo their supply chains on local-for-local approaches, often struggling to find alternative sources for essential components.

Some Investments Shifting Away from the Global Workbench

The survey highlights a notable decline in China’s attractiveness as an investment destination. Only 15% of respondents currently rank China as a top destination for present investments, with just 12% considering it for future investments. This is the lowest on record, indicating a shift towards other markets. Additionally, only 42% of companies plan to expand their China operations in the coming year, and 35% intend to reinvest less than their historical average in 2024.

The trend of moving operations to other markets is not limited to European firms, 45% of respondents reported that their Chinese suppliers or customers are also relocating. This migration underscores the long-term nature of investment decisions and the difficulty in reversing them quickly.


Impact on Revenue and Profitability

The overall revenue for European businesses in China took a hit, with only 39% reporting increases in 2023—the lowest level on record. While 69% of firms reported positive net profits, this figure remains unchanged from 2022 and represents the joint lowest since 2015. Macroeconomic factors were the primary concern, with 68% of respondents citing them as major challenges. The economic slowdown in China, exacerbated by weak demand and overcapacity, further impacted profitability, according to the EUCCC.

Positive Developments and Opportunities

Despite the challenges, there are positive signals. The proportion of respondents reporting market opening in their industry increased by 9 percentage points year-on-year to 45%. However, the potential for increased investments remains uncertain, as only 53% of respondents would consider investing more if granted greater market access—a significant drop from previous years by 10 percentage points.

2023 was a year of both challenges and opportunities for European businesses in China. While economic and regulatory issues persist, there are signs of market opening and potential for renewed engagement. The Chinese government’s pledges to improve the business environment are promising are essential for meaningful change.

How EAC - International Consulting Can Help

At EAC - International Consulting, we recognize the complexities of navigating the Chinese market. Our expertise can help you manage these challenges and seize emerging opportunities. Whether you need strategic insights, market entry strategies, or tailored business model transformation support, EAC is here to guide you. Reach out to us to learn how we can support your business in China’s dynamic landscape.

For more information, please contact Daniel Berger, Partner at EAC Shanghai.