Why are European companies moving out of China?

European companies operating in China are exiting the market due to the strict Covid measures and losses in businesses, states a recent report by European Chamber of Commerce in China.

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European companies moving out of China
Image Source: China Business Review

Confidence is falling in the world’s largest consumer market as European companies are moving apart from their operations in China. A recent survey by European Chamber of Commerce in China states that the supply chain concerns and other disruptions in China due to the tight COVID-19 lockdown measures have pushed around 23 percent of European enterprises operating in the country to consider moving elsewhere.

“The introduction of more stringent COVID-19 containment measures in 2022, with China imposing full or partial lockdowns in at least 45 cities, is causing massive uncertainty for businesses,” the report stated.

The continued Covid outbreaks and lockdowns dampen the future of Chinese economy, nearly one in every four European companies in China are considering exiting the country. The survey that was carried out in April, this year, states that the proportion of European firms re-evaluating their options in China was the most high in a decade. It was also more than double of the 11 percent recorded in a February poll. The April survey received 372 responses, whereas the February poll received 620.

“China operations are becoming increasingly isolated due to China-based staff, both foreign and Chinese, being unable to travel to European headquarters for information exchanges, networking, training and the sharing of expertise,” the chamber said in the report as published in Financial Times.

Foreign enterprises have struggled severely as a result of the restrictions. Foreign industrial firms operating in China witnessed a 16.2 percent reduction in profit from January to April, far worse than the 0.6 percent drop experienced by private Chinese corporations. Profits at state-owned firms increased by 13.9 percent throughout the period.

More than 75 percent of European firms polled felt the zero-Covid regulations had reduced China’s attractiveness as an investment destination. Businesses cited long-standing issues such as forced technology transfers, preferential treatment in comparison to Chinese competitors, and confusing rules and regulations. Between mid-March and early April 2022, goods leaving Shanghai’s port fell by a quarter, and Chinese road freight traffic plunged by 40 percent, as COVID began to spike in Chinese cities.

The report stated, “This is impacting companies’ upstream and downstream operations, with companies struggling to both transport raw materials and components to their factories, and to ship finished goods to customers in China and overseas.”

In the IT and telecommunications sector, 75 percent of the companies polled thought China was a slightly or much less appealing investment location, compared to 76 percent in automotive, 78 percent in industrial, 80 percent in transportation and logistics, and 100 percent in aviation.

China’s tech executives have expressed concern about this scenario, warning the public of serious consequences and losses if the country’s notoriously rigorous lockdowns and factory closures persist.

Despite the fact that survey respondents came from a diverse range of sectors, geographies, and sizes, supply chain difficulties impacted more than 90 percent of them. Eighty-five percent reported difficulty accessing raw materials and components for production, 89 percent reported difficulty transporting those materials and components, 87 percent reported difficulty delivering finished products domestically, and 83 percent reported difficulty delivering them internationally.

China has begun to relax some of its Covid restrictions, but the economic rebound has been patchy. In May, industrial production grew unexpectedly, while consumer spending and the housing market continued to fall. The future for the remainder of the year is murky, as Beijing continues to rely on lockdowns and other restrictions to keep the virus at bay.

“Nobody is leaving China” but the issue is new investment. European companies are delaying decisions because everyone is waiting for an exit strategy in China for Covid restrictions. We will have to wait to see if the government of China will decide to align itself with the rest of the world,” European Union Ambassador Nicolas Chapuis said in an interview on Monday as published in Business Standard.

The report said that 16 percent of enterprises considering a change in investment said they were exploring relocating to Southeast Asia, while 18 percent said they were looking elsewhere in the Asia-Pacific area. Some 19 percent said Europe, 12 percent claimed North America, and 11 percent said South Asia.

While the poll examined both the effects of the Ukrainian conflict and COVID-19 policies in China, the findings revealed that COVID-19 poses a considerably more urgent issue and has resulted in a significant decline in European companies’ confidence in working in China.

The war has also influenced public opinion; one-third of respondents thought it had made the country a less appealing investment. The most significant impact came from logistical difficulties, with 65 percent badly impacted since the war has rendered rail freight between China and Europe unviable for transporting goods and supplies.

Recently, American businesses have also encountered difficulties. Only 31 percent of industrial and service enterprises polled earlier this month by the American Chamber of Commerce in Shanghai stated they were fully operating. The majority of those operating at less than full capacity said that personnel found it difficult to commute to work.

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