European businesses forced to ‘reduce, localise and silo’ in China

European businesses forced to ‘reduce, localise and silo’ in China

European business leaders in China have warned that their companies are being forced to “reduce, localise and silo” operations in the Asian country as it loses “its allure as an investment destination”.

The assessment of business relations from the European Union Chamber of Commerce in China is by far its most pessimistic since its founding in 2000, the year before Beijing joined the World Trade Organization.

“Over the past year, there has been a significant shift in focus at the headquarters of European companies when evaluating China,” the chamber said in its annual position paper released on Wednesday.

“The extent of European firms’ engagement [in China] can no longer be taken for granted,” the chamber continued. It said China was quickly losing “its allure as an investment destination” and that the two regions were “drifting further and further apart”.

“It is the most dark [position] paper ever,” said Jörg Wuttke, president of the EU chamber, citing the geopolitical environment and the “terrible state” of China’s economy.

The warning came as the EU reassesses its economic and political relationship with China. Brussels and Beijing have hit an impasse on a proposed trade agreement after exchanging sanctions over China’s mass detention of Uyghur Muslims in Xinjiang. EU representative Josep Borrell described the sides’ annual summit in April as a “dialogue of the deaf”.

Brussels is about to adopt a series of tools to retaliate against trade partners that block market access to European companies. These measures are expected to be applied to China.

“Discussions once centred primarily on investment opportunities . . . are now focused on building supply-chain resilience, the challenges of doing business, managing the risk of reputational damage and the importance of global compliance,” the European chamber said.

China’s zero-Covid policy has made it all but impossible to enter the country, leading to an exodus of foreign staff. Since the beginning of the coronavirus pandemic, no new EU businesses have moved into the Chinese market, according to the chamber.

Rapidly changing protocols over importing goods — including the disinfection and sometimes confiscation of parcels — have disrupted companies’ supply chains, while severe lockdowns imposed across the country have shot down consumer demand.

Beyond these pandemic problems, the chamber described a growing political gap, with companies coming under “increasing scrutiny” at home for their practices in China.

“China is no longer viewed as a stable sourcing destination,” Wuttke said.

The Uyghur Forced Labor Prevention Act, passed this year in the US, as well as two forthcoming EU regulations on forced labour and corporate due diligence, “pose a compliance challenge for European businesses operating in China . . . due to the inability to carry out independent third-party audits of supply chains in Xinjiang”, the chamber said.

Fears over further Covid supply chain disruptions, and to a lesser extent the prospect of a Chinese invasion of Taiwan, have led companies to diversify their suppliers and redirect investments.

Businesses are evaluating “reshoring, nearshoring or ‘friendshoring’”, the chamber said, referring to the practices of bringing production home, closer to consumers or to allied countries.

The Russian invasion of Ukraine and subsequent sanctions have also made EU companies in China worry about their investments in the event of a Chinese invasion of Taiwan. In a survey by the European chamber in April, a third of respondents said that the war in Ukraine made China a less attractive investment destination.

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