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Asia Economy Last Updated: Jun 3, 2014 - 9:36 AM

European firms in sober new reality in China; Tough and getting tougher
By Michael Hennigan, Finfacts founder and editor
Jun 3, 2014 - 7:26 AM

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The annual survey of the European Chamber of Commerce in China reveals a new sober reality about doing business in China and the association says that "the fact that veterans with over ten years of experience in China markedly perceive the business environment to have become tougher is particularly telling because of the longer memory time span that these companies possess. It means that these results likely reflect a more general observational trend over a number of years that business is increasingly becoming tougher."

The European Business in China Business Confidence Survey 2014 (BCS 2014) - - the 10th anniversary edition of the survey - - was compiled with input from over 550 European member companies and was put together in cooperation with Roland Berger Strategy Consultants of Germany.

"The economic slowdown is a real game-changer for European companies in China," said Jörg Wuttke, president of the European Chamber at a news conference last Thursday. "For multinationals, China is still important but not as important as it was a few years ago."

Just over half of European companies (53%) are confident that China’s leaders will start meaningful implementation of the reforms outlined in the late 2013 Decision of the Third Plenum of the 18th Central Committee (Third Plenum Decision) in the coming one to two years. "A new sober reality is developing," the report said. "An abiding sense of pessimism for future performance is setting in."

While China remains a very important market, many firms said they were scaling back investment plans. Only one in five ranked China as their top destination for new investments, down from a third in last year's survey.

The number planning to expand their activities in the near term dropped to 57% from 86% a year ago.

On profitability, the proportion of companies making a profit fell to 63%, down from 74% in 2010. “For the first time in the history of this survey, more companies noted that their Chinese profit margins were lower than their companies’ global averages than vice versa,” the chamber noted.

The key market dynamics contributing to these results include:

  • A general slowdown of the Chinese economy;
  • Increasing labour costs;
  • Competition from both privately-owned Chinese companies and resurgent state-owned enterprises (SOEs).

This has left many European companies wondering whether the "golden age" of MNCs in China is over. Many firms are in turn setting more modest expectations for revenue and profitability growth and are scaling back their investment plans for the Chinese marketplace.

In addition, market access issues as well as regulatory barriers have led European Chamber member companies to miss out on an estimated €21.3bn in revenues in 2013.

Report can be downloaded after brief registration

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