Working with our partners in European countries we created research about China market Challenges and opportunities in 2022/ 2023. We surveyed 123 companies from Latvia, Estonia, Poland, Germany, Italy and Finland who have manufacturing or sales offices in China. Regions and provinces: Shanghai, Zhejiang and Shandong.
CHALLENGES IMPACTING CHINA’S ATTRACTIVENESS
- China’s general attractiveness as a market decreased for almost half of Companies
- Views on business opportunities in China descended dramatically
- Investment confidence is decreasing significantly due to the zero-COVID-19 policies, but as restrictions are canceled from January 8, 2023 that could create positive changes.
- 43% of Companies believe the attractiveness of China as an investment location is decreasing compared to other markets
- The zero-COVID-19 policy was largest operational business challenge for Companies in China in 2022. But as restrictions are canceled from January 8, 2023 that could create positive changes.
- Legal uncertainty, internet access restrictions, and cyber security are top regulatory business challenges for European companies in China
- 20% of the Companies consider “Made in China 2025” and “Buy China” as one of the top regulatory business challenges
- Preferential treatment of Chinese competitors is still an issue for 25% of EU companies 38 of EU companies report favorable treatment of domestic companies in market access.
COMPANIES’ ADAPTATION STRATEGIES IN CHINA
- Despite headwinds: A large majority of Companies remain active in China
- Companies react to geopolitical tensions with a two-tracked adaptation strategy: Localization in China and diversification outside of China
- Larger companies tend to diversify more outside of China than smaller companies
- 73% of the respondents are affected by rising economic and technological decoupling tendencies
COMPANIES’ HOPE FOR YEAR 2023
- More optimistic, with profits and turnover expected to rebound.
- Optimism returns in the mid-term perspective: on a 3 year perspective, 80% the companies expect positive developments for their industries in China, especially in the electronics, automotive, wood and chemicals industries.
INVESTMENT PLANS
- Investment confodence decresed. China as an investment location is losing attractiveness
- Main reasons to invest in China:
- new manufacturing facilities,
- research and development,
- machines for automation and productivity development,
- digital transformation of business operations,
- new office facilities, distribution channels (incl. e-commerce),
- decarbonization of production, product portfolio and supply chains
- Main reasons not to invest in China:
- Continuation of zero-COVID-19 policy (i.e., travel restrictions, lockdowns, mass testing, etc.) but it is canceled from January 2023,
- low expectations for market expansion/ expectation of slower growth in China
- geopolitical tensions (leading to potential trade defense measures/sanctions)
- increased domestic competition
- change in attitudes toward China in HQ
- china’s economic policies targeting self-reliance (such as Made in China 2025, Buy China), HR issues (i.e., rising labor costs, talent shortage), Lack of regulatory transparency, Geopolitical tensions (Ukraine war)
- technology decoupling tendencies (e.g., different standards, decoupling of R&D functions)
OPERATIONAL AND REGULATORY CHALLENGES (in decresing order)
- Increasing labor costs
- Rising transportation and raw material costs
- Finding and retaining qualified staff
- Rising operational costs (real estate, rent, utility costs)
- Competition from Chinese privately-owned enterprises
- Competing against non-compliant competitors
- Impact of international sanctions
- Intellectual Property Rights infringement
- Impact of economic and technology decoupling
- Industry overcapacity
- Competition from Chinese state-owned enterprises
- Corruption Electricity supply
- Access to local funding/ financing
LEGAL UNCERTAINTY AND CYBERSECURITY INCREASINGLY CHALLENGING (in decresing order)
- Legal uncertainty
- Internet access restrictions
- Cyber and Data security regulations
- Preferential treatment of local companies/protectionism
- Intellectual Property Rights enforcement
- Customs regulations and procedures
- “Made in China 2025, Buy China“
- Capital transfer and cross border payments
- High tax burden compared to other markets
- Lack of participation in the development of industry standards
- Obtaining required licenses
- Unequal accessibility of public procurement
- Market access barriers and investment restrictions
50% COMPANIES FIND CROSS-BORDER DATA TRANSFER LEGISLATIONS CHALLENGING (in decresing order)
- Unclear regulations concerning technical requirements of IT infrastructure
- Data transfer from China to headquarters and other locations worldwide significantly affected
- Requirements to localize a substantial amount of critical and/ or personal information (especially HR-related) data in China
- High efforts in sorting out data (since “important data” is not clearly defined yet)
- Significant influence on our revenues and/or administrative costs
FAVORABLE TREATMENT OF DOMESTIC COMPANIES IN MARKET ACCESS (in decresing order)
- Chinese competitors receive more and easier market access
- Chinese competitors receive easier/ preferential access to incentives/ supporting measures
- Chinese competitors receive easier/ preferential access to information
- Chinese competitors receive easier/ preferential access to political stakeholders
- Chinese competitors receive preferential access to public procurement (e.g., through “Buy local” requirements)
- Chinese competitors receive easier/ preferential access to licenses
LOCALIZATION AND DIVERSIFICATION
- Localization trends among companies in China have been observed for about a decade. The first wave of localization was driven by Chinese government regulatory restrictions, such as direct or indirect joint venture requirements.
- The second wave was more market-driven: companies decided to continue localization mainly because of changing customer markets and the speed and dynamics of innovation.
- The third wave, which started with the China-US trade war and escalated, and is exacerbated by the zero-sum policy on COVID-19, as well as rising geopolitical tensions, is now leading to dual adaptation strategies. Sudden lockdowns and travel restrictions disrupt communication channels with headquarters and cause significant supply chain bottlenecks; Geopolitical tensions are forcing companies to become targets of sanctions regimes and politically driven divestment programs. To create resilience, companies must adapt to this reality, either by localizing in China, diversifying into other parts of Asia, or doing both. This means that companies are not only increasingly localizing supply chains, manufacturing and R&D capabilities, but are also looking to establish parallel supply chain structures across the Asia-Pacific region. Chinese companies work closely with their headquarters to find suitable adaptation strategies to overcome geopolitical tensions and decouple trends both inside and outside China.