Euro­pean firms’ ‘best era’ may be over

Com­pa­nies’ con­fi­dence in out­look for China wanes as the na­tion’s econ­omy loses steam, Zheng Yangpeng and Mu Chen re­port

China Daily (Canada) - - BUSINESS -

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 per­cent 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 per­cent and 61 per­cent, 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,” JorgWut­tke, 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 per­cent of com­pa­nies plan to ex­pand cur­rent op­er­a­tions in the world’s sec­ond-largest econ­omy, down from 86 per­cent 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 per­cent say­ing they had a pos­i­tive out­look for growth in 2014.

At the op­po­site end of the spec­trum, only 49 per­cent of fi­nan­cial ser­vices com­pa­nies, in­clud­ing in­sur­ers, were op­ti­mistic about their busi­ness out­look along with only 52 per­cent 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 in­China 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 per­cent 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 SEN­TI­MENT ABOUT DO­ING BUSI­NESS IN CHINA IN 2014 IS THE ‘GOLDEN AGE’ FOR MULTI­NA­TION­ALS IN CHINA END­ING? 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

RANK­ING OF CHINA AS IN­VEST­MENT DES­TI­NA­TION re­view­ing in­vest­ment op­por­tu­ni­ties in other parts of Asia, but so far only one-tenth of the com­pa­nies have shifted plans fromChina to else­where in the past two years.

“It’s not like

‘Oh, my God, I’mgonna 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 la­bor 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 UnionCham­ber­mem­ber­com­pa­nies missed out on $29 bil­lion in rev­enues in 2013, a fig­ure equiv­a­lent to 15 per­cent 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 un­fa­vor­able 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 per­cent 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. Con­tact the writ­ers at zhengyang­peng@chi­ and muchen@chi­

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