Not just business: EU firms in China aim to de-risk as they reassess 'how many eggs to keep' there
South China Morning Post
5 min read
Supply-chain relocations away from China are gaining momentum, and the shift reflects how foreign investors' confidence in the Chinese market is waning while the allure of the Asean markets is rising, according to fresh findings by a leading European trade association.
The latest business-confidence survey by the European Union Chamber of Commerce in China shows that 11 per cent of surveyed members have already moved some investments out of China, and that a record-low number of firms are planning to expand in the world's second-largest economy this year.
"Investments begin to shift out of China as de-risking strategies emerge," says the chamber's latest report, released on Wednesday and based on a poll of 570 companies between February and May - a 46 per cent response rate.
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The release comes as Premier Li Qiang is in the European Union on the first overseas trip of his premiership, with an eye on boosting relations with major EU powers.
The latest report also says that a further 20 per cent are either considering shifting investment elsewhere or postponing any such decisions as they wait to see how China's business environment evolves in 2023.
"Faced with growing risks and a more volatile operating environment, European companies are still reassessing how many eggs to keep in their China basket," the report says.
Members of the Association of Southeast Asian Nations (Asean) are set to be the main destinations in supply-chain relocations, followed by the European market, as the two markets account for 48 per cent of relocation plans, according to the report.
Meanwhile, one in 10 European firms in China said they have already moved, or plan to move, their Asia headquarters out of the mainland.
Singapore (43 per cent) and Malaysia (17 per cent) are the top two choices for the new headquarters, and Hong Kong accounted for 9 per cent of those intent on moving, the report says.
The need to increase resilience, counter geopolitical risks, and mitigate the impact of domestic policies such as China's self-sufficiency drive are the top three factors influencing companies' supply-chain decisions, it says.
"This indicates that businesses are considering shifting investment predominantly to de-risk and build resilience, rather than for purely business reasons," the chamber wrote.
Confidence in China's market has further eroded as only 55 per cent of polled companies consider the country as a top-three destination for future investment - a drop from 68 per cent in 2022 and also a record low.
Despite China's restrictive zero-Covid controls being lifted in December, lingering impacts from the nearly three-year policy continue to be seen, according to the chamber's findings.
Members of the aviation and aerospace sectors, along with the medical-device industry, are the most reluctant to expand investments in China.
"Zero-Covid has ended, but challenges on the horizon must be carefully managed to restore business confidence," the report says.
For the first time since 2016, fewer than half of the chamber's polled companies have plans to expand investments this year in China, at 46 per cent - down from 62 per cent in 2022.
Though firms are not entirely abandoning China's market, decoupling has also intensified and supply-chain strategies continue to evolve to hedge against regulatory uncertainties and geopolitical tensions, the report says.
Three-quarters of respondents have reviewed supply-chain strategies over the past two years, and almost a quarter intend to further or fully onshore supply chains into China.
"The growing list of challenges European businesses face when operating in China has pushed many to localise and silo their China operations. An increasing number are creating two separate systems, with one for China and one for the rest of the world - including for supply chains, data and information technology (IT) systems, and staffing - an expensive and inefficient solution."
The report indicates that 27 per cent of polled companies have seen decoupling between their headquarters and China operations over the past two years, up from 20 per cent last year.
"The disconnect between company HQs and China operations risks further damaging confidence in the China market, precipitating a negative cycle of disagreement," the report says.
Beijing has stepped up its charm offensive this year to lure overseas investors, but foreign businesspeople continue to reiterate long-held complaints about "promise fatigue".
The EU chamber notes that only "baby steps in market opening" have been taken, as one in two companies saw no changes to market access.
Ambiguous rules and regulations, an unpredictable legislative environment and market-access barriers have led to an "alarming" number of European companies saying they have missed out on business opportunities.
According to the report, a record-high 62 per cent of European companies reported a loss of business opportunities, a sharp rise from 42 per cent last year.
"There is a window of opportunity for the government to demonstrate that the pro-business promises recently made by its leadership are more than just words," the report says.
