Navigating the Shifting Landscape: Analyzing Business Sentiment in China

The Context: Current Challenges for European Businesses

In recent months, European business optimism about China has plummeted to unprecedented lows, even more severe than during the pandemic. According to a survey conducted by the EU Chamber of Commerce in China, a staggering 73% of respondents report that doing business in China has become increasingly challenging over the past year. This persistent decline marks a new high for four consecutive years and underscores a critical juncture for foreign companies operating in one of the world’s largest markets.

Rising Concerns and Decreased Confidence

The latest survey, which included responses from 503 European businesses between January and February, highlights a host of challenges that have intensified since the pandemic lockdown of 2022. Jens Eskelund, president of the chamber, expressed that while companies are feeling the pressure, many still recognize the compelling supply chains China has to offer, necessitating a continued presence in the market. However, the prevailing sentiment is far from optimistic.

Eskelund pointed out, "We haven’t seen an inflection point yet. A lot of it boils down to uncertainty." The sentiment resonates with companies navigating local competition and an anemic demand environment, exacerbated by a downturn in the real estate sector and job market instability.

Industry-Specific Impacts

Among various sectors, cosmetics companies have been particularly hard hit, reporting a striking 45% drop in revenue in 2024 from the previous year. This marked the second decline in the last decade for the industry. On a more positive note, sectors like aviation and aerospace indicated that conditions for doing business in China have improved, presenting a silver lining amid the broader malaise.

The survey further revealed that only 12% of respondents felt optimistic about their profitability in China over the next two years. A record low percentage ranked China as a top destination for future investments, while 38% of respondents noted plans to expand operations in the upcoming year.

The Regulatory Landscape and Market Access Issues

The road ahead for foreign businesses seems rife with obstacles. An astonishing 63% of respondents indicated they missed out on business opportunities last year due to China’s stringent market access restrictions and regulatory barriers. European medical device companies voiced concerns over public procurement practices that appear to favor domestic players, demonstrating a growing sense of unfair competition.

Even with the Chinese government’s announcement of initiatives aimed at improving conditions for foreign investment, the sentiment of discontent persists. Interestingly, 53% of respondents stated that they would be inclined to increase their investments if more proactive measures were taken to enhance local market accessibility.

The Supply Chain Dilemma: Competitive Edge or Caution?

Despite the challenges, China’s dominance in the global supply chain remains a critical factor influencing business decisions. Most companies continue to rely on China for accessible, quality components at competitively low prices, a fact Ekelsund emphasized after engaging with numerous businesses across the chamber’s six chapters in China.

Onshoring and the Future Outlook

When examining supply chain strategies, more than 25% of respondents reported plans to increase onshoring to China to better meet localization needs and tap into the domestic market. Conversely, only 10% indicated they were establishing alternative supply chains abroad while maintaining their networks in China. Notably, nearly half of those surveyed acknowledged that their Chinese suppliers are also beginning to relocate operations to other markets, a trend that could signal a significant shift in regional manufacturing dynamics.

Looking Ahead: Strengthening Ties in a Dynamic Environment

As geopolitical tensions and trade tariffs continue to reshape the landscape, a summit in Beijing this July between Chinese and EU leaders aims to bolster bilateral ties. With the EU as China’s second-largest trading partner, the stakes have never been higher for businesses in navigating these complex waters.

Conclusion: The Need for Strategic Adaptation

At Extreme Investor Network, we understand the challenges that foreign businesses face in China. With a focus on strategic adaptation and informed decision-making, our insights help investors navigate the complexities of this evolving market. By fostering deeper connections and employing innovative strategies, businesses can not only survive but thrive in an uncertain global economic climate.

Stay tuned for our upcoming analyses and market insights to ensure you remain ahead in your investment journey!