Nearly half of European businesses fear their "golden times" in China are over, amid tougher business conditions in a slowing economy, according to the 2014 European Business in China Business Confidence Survey.
It's conducted by the European Union Chamber of Commerce in China in partnership with Roland Berger Strategy Consultants.
Of the 552 businesses surveyed, 46 per cent said they believe that the "golden age" for multinationals in the country has ended. That's particularly true for large firms with more than 1,000 employees and veteran companies with more than five years in the country. They have started to feel the pinch with 68 per cent and 61 per cent, respectively, stating that business in China has become more difficult over the past year.
"A Chinese economic slowdown is a game-changer that will fundamentally and necessarily alter corporate business strategies," Jorg Wuttke, president of the chamber, told a press conference on Thursday in Beijing. "With costs rising and regulatory issues continuing, European companies are starting to put expansion plans on hold."
Only 57 per cent of companies plan to expand current operations in the world's second-largest economy, down from 86 per cent last year. Only one-fifth of companies gave China as their top investment destination compared with one-third two years ago.
Different industries have contrasting outlooks. Healthcare companies, including those dealing in medical devices, were the most optimistic. with 88 per cent saying they had a positive outlook for growth in 2014.
At the opposite end of the spectrum, only 49 per cent of financial services companies, including insurers, were optimistic about their business outlook along with only 52 per cent of legal companies.
The economic slowdown has drawn fewer foreign businesses to China, said Sara Marchetta, a partner at Italian legal firm Chiomenti Studio Legale and vice-president of the chamber. However, a trend that started in 2012 has seen her firm take up more Chinese clients looking to make mergers and acquisitions overseas.
For some, it has been a question of whether the costs of a presence in China are worth the money that Chinese companies are willing to pay. Her firm has had operations in China since 2006 and, as it is small in terms of personnel, this question has not come into the decision-making process.
She said her company, and most small and medium-sized ones, have the flexibility to adapt to the market and the ability to find niches. This is a luxury that multinational corporations seldom have.
Despite the dip in optimism, China remains critical to the revenue-generating capacities of European companies. The percentage of firms that generated 10 per cent or more of their global revenue from China has increased on an annual basis for the past five years.
"European companies will continue to regard the Chinese marketplace as strategically important because the sheer size of the marketplace means that they will continue to generate a high proportion of their global revenues in China," said the survey report. "However, it is clear that they are starting to reappraise China's role."
Nearly half the European companies surveyed are reviewing investment opportunities in other parts of Asia, but so far only one-tenth of the companies have shifted plans from China to elsewhere in the past two years.
"It's not like 'Oh, my God, I'm gonna leave'. Actually I see no rush to leave China," said Gilbert van Kerckhove, president of Beijing Global Strategy Consulting Co.
Van Kerckhove said the survey result should not be interpreted in a completely negative way.
There are some positives, too, as rising competition means China's local companies are becoming more competitive and rising labour costs mean rising living standards.
"The slowing growth does not mean there is no growth," van Kerckhove said. "It is not growing as rapidly as before, and that, in a way, is the normal mode."
Wuttke agreed. He said that the global economy is now leaving the unusual situation of the recessionary West and China in double-digit growth, when it was seen as the undisputed top investment destination. The more usual situation of developed economies rebounding and China growing at a more normal rate is emerging.
"The new normal means that people are looking at other investment locations. China's top position as one of the only investment areas is still important, but not as important as a couple of years ago," Wuttke said. "Subsequently, companies are holding back on investment."
What remains a significant concern for European businesses in China are regulatory obstacles. While the majority view Chinese laws and regulations to be adequate, most find the enforcement of laws to be lax.
Companies surveyed identified an "unpredictable legislative environment" and "discretionary enforcement of regulation" as the top two regulatory obstacles. Intellectual property rights protection, a traditionally strong concern, has receded to seventh position.
The survey estimated that due to market access and regulatory barriers, European Union Chamber member companies missed out on $29 billion in revenues in 2013, a figure equivalent to 15 per cent of the EU's annual exports to China.
The dominant perception of European companies in China is one of inequality, with most viewing their companies receiving unfavourable treatment compared with local ones.
For human resources departments in European companies, air pollution has become the top difficulty when they try to attract and retain talent.
"Yes, air pollution indeed is a problem. I've talked to many HRs, and they all complained of this; high-quality talents are hesitant when making the decision to come to China, especially those with a spouse and kids," Kerckhove said.
The surveyed companies said they most want to see reforms that are administrative in nature and related to increasing the rule of law.
These problems that European companies face are not new but have been exacerbated by the slowing economy and a sense that they are being entrenched, the chamber noted.
However, many businesses viewed the reforms laid out during the Third Plenum of the 18th Central Committee of the Communist Party of China to be positive.
Of the reforms outlined, two-thirds viewed administrative reform to be the most important. Forty-five per cent said implementation of these reforms would be good for their companies in China, although only half are confident that the Chinese leadership will start meaningful implementation in the coming one to two years.
Zheng Yangpeng and Mu Chen
Business & Investment Opportunities
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