A decade of data: Business Confidence Survey 2014

BCS cover EN.jpgThe purpose of the European Union Chamber of Commerce in China’s European Business In China Business Confidence Survey (BCS) is to take an annual snapshot of European companies’ successes and challenges in China. Now in its tenth year, the survey has enabled the European Chamber to build a rich data set to serve as a broad indicator of how European companies judge the business environment in China, both now and in the future.

The European Chamber invited its members to take part in the BCS 2014 over a three-week period during February 2014. Published on 29th May, 2014, the survey was conducted in cooperation with Roland Berger Strategy Consultants. Below are the conclusions drawn from this year’s BCS.

China’s strategic importance has climbed year on year in the ten-year history of this Business Confidence Survey. This trend is due to the massive opportunities that China’s breakneck growth has brought for European companies during this decade. It is bolstered by the fact that China has been the buttress of global growth since the onset of the global economic crisis. Expansion of top-line growth has tended to be relatively simple and, at times, this has meant that China has been perceived by many to be the saviour. As such, European companies have invested heavily in China and have to date largely focused on driving expansion, mirroring China’s seemingly ‘growth at all costs’ stratagem.

Growth brings rewards, but also pressures. The fruits of China’s expansion have rightfully started to be better distributed into the hands of the workforce, but years of rising costs must be offset by years of proportional productivity growth. European companies now perceive rising labour costs to be the most significant factor influencing net profit margins, though the cumulative effect of years of fiercely intensifying competition from state-owned and, in particular, privately-owned Chinese companies, while undoubtedly good for China’s economy, is also presenting a challenge to business. However, when looking forward, companies are most concerned about an economic slowdown in China.

After thirty years of almost unbroken rapid growth, the Chinese slowdown, caused primarily by rising labour costs and structural economic problems owing to a near decade-long stagnation of reforms―and further exacerbated by the massive stimulus package of 2009 that in effect turned the clock backward on reform―is already contributing to the steadily declining performance of European companies, both in terms of bottom-line and top-line growth. Revenue and EBIT growth have both dropped progressively since 2010 and most companies are struggling to grow their margins. Less than two thirds of European companies in China are now profitable and these pressures do not appear to be easing. Optimism for growth is at its lowest levels since the peak of the economic crisis as downward pressures on growth are becoming entrenched. Business is already tough, and it is getting tougher. This is leading many to the conclusion that the good times are over.

Most businesses in China have known nothing other than growth and expansion. A Chinese economic slowdown is a game changer that would fundamentally and necessarily alter the corporate strategies of businesses in China. European firms are already reacting to this new reality. European companies will continue to regard the Chinese marketplace as strategically important because the sheer size of the marketplace means that they will continue to generate a high proportion of their global revenues in China. However, it is clear that they are starting to reappraise China’s role. More modest expectations are being set and investment plans are being revised downwards. Fewer European firms are considering China a top priority for investment, fewer are considering expanding current China operations, including through M&A, and fewer are looking to expand to other Chinese provinces as they come to terms with this new, more sombre reality.

The European Chamber also estimates that our member companies missed out on EUR 21.3 billion in potential revenues due to market access and regulatory barriers in 2013. This continues to manifest itself in a sense of inequity, as most European companies feel that domestic Chinese companies continue to receive comparably favourable treatment. On the regulatory front, the most significant challenges are the unpredictable legislative environment and the discretionary enforcement of regulations. As a result, the reforms that European companies most want to see are administrative in nature and related to fostering increased rule of law. The reforms laid out in the Central Committee’s Third Plenum Decision are viewed positively; however, after years of unrealised promises, European companies remain sceptical and have yet to be convinced that meaningful reforms will be implemented.

These regulatory and market access issues heap further pressure on European companies in China at a time when the business environment is becoming increasingly testing and when most companies are worried about a sustained slowdown in economic growth in China. It is not surprising that European companies are adapting their China strategies and being cautious not to put all their eggs in one basket. European companies are ‘looking over the fence’ to see what opportunities exist in China’s neighbours, with half the European companies in China routinely reviewing investment opportunities in other Asian countries.

There is an opportunity to reverse this trend. China’s leaders have correctly identified the need for sweeping reforms. Recent actions and reforms, including the promulgation of the Third Plenum Decision, the opening of the China (Shanghai) Pilot Free Trade Zone, VAT reforms, the launch of negotiations for an EU-China Investment Agreement and reforms to the administrative approval process, are generally viewed positively by European companies. However, while the Third Plenum Decision is immensely important and welcomed by European industry, the reforms it lays out will only reap dividends in the medium term and are not short-term palliative remedies. On the contrary, the crucial reforms will inevitably be growth-diminishing in the short term, which likely explains why only approximately one quarter of European companies are more likely to increase their investment plans in China as a result of the release of the Third Plenum Decision. Instead, it is market-opening reforms that present an immediate opportunity. A lifting of market access constraints would spur over a half of European companies to re-intensify their China investment plans.

To download a full copy of the BCS 2014, please click here.