European companies in China are facing increasing difficulties in maintaining profitability due to the country’s slowing economic growth and rising overcapacity pressures. The EU Chamber of Commerce in China released a survey indicating that only 30% of respondents reported higher profit margins in China compared to their global average, marking an eight-year low. The current economic slowdown in China has cyclical aspects similar to those observed during the crash in the Chinese stock market in 2015. With uncertainties surrounding the depth and duration of the current slowdown, European businesses are experiencing challenges in maintaining financial viability in the Chinese market.
Business members in Shanghai reported delays in receiving payments, making it increasingly difficult to enforce contracts compared to the previous year. State-owned enterprises are postponing payments, using the delay as a means to obtain de facto loans from companies, particularly from small and medium enterprises. This practice contributes to the financial strain experienced by European companies operating in China. The obstacles in payment collection and contract enforcement further add to the financial challenges faced by European businesses in the country.
The survey conducted by the EU Chamber of Commerce in China included a new question regarding difficulties in transferring dividends back to company headquarters. While the majority of respondents reported no issues, a significant portion encountered obstacles or delays. Approximately 4% of respondents stated that they were unable to transfer dividends, raising concerns about new regulatory stances or tax audit requirements. These challenges add complexities to the operational and financial aspects of European companies operating in China, creating additional hurdles for profitability.
More than one-third of survey respondents observed overcapacity in their industry within the last year, with an additional 10% anticipating future overcapacity. The civil engineering, construction, and automotive sectors had the highest share of respondents reporting overcapacity, leading to price drops in affected industries. Overproduction resulting from China’s emphasis on manufacturing and modest domestic demand raises global concerns about reduced profit margins. European companies, along with their Chinese counterparts, face challenges in navigating the pricing pressures and market saturation caused by overcapacity.
While Chinese authorities have implemented initiatives to attract foreign investment, concerns remain about regulatory barriers affecting European companies. China’s efforts to open its market to industries like cosmetics and food and beverage have benefited some businesses. However, limitations on foreign ownership and operation in certain sectors persist, with regulatory obstacles hindering market access for international companies. European businesses highlight the need for further improvements in China’s regulatory environment to enhance operational efficiency and growth prospects.
The EU Chamber of Commerce survey revealed that a record number of respondents expressed skepticism about their growth potential in China over the next two years. Competitive pressures intensifying, doubts about profitability, and plans to cut costs through reducing headcount and marketing budgets indicate the challenges faced by European companies in maintaining financial stability. Regulatory barriers hampering market opportunities, coupled with uncertainties about future growth, contribute to the cautious outlook among European businesses operating in China.
European companies in China are navigating a challenging business environment characterized by slowing economic growth, overcapacity pressures, regulatory hurdles, and uncertain market dynamics. The financial viability of European businesses in China is contingent on their ability to adapt to changing market conditions, address operational challenges, and capitalize on growth opportunities amidst evolving regulatory landscapes. By strategizing for sustainable growth, enhancing operational efficiency, and leveraging market access opportunities, European companies can mitigate risks and strengthen their foothold in the competitive Chinese market.