Is China no longer worth it for foreign firms?

(00:00) If we don't have that certainty, we don't have that transparency, you're going to see a lower level of foreign investment. There is an economic cost if you choose to prioritize security issues above economic growth. It's no longer a given that foreign direct investment will simply flow into China at very elevated levels.

(00:28) What's in it for Europe? China has become a more difficult market for foreign businesses in recent years, and Beijing doesn't seem interested in making changes. That's the new message of a policy paper put out by the European Chamber of Commerce in China. It represents more than 1,700 firms active in the country. President Jens Eskelund joins me now. Has China essentially become a bad place for Europeans to do business?

(00:52) What we have seen is that, following COVID, we have not seen the bounce-back in demand that we had expected. Many of our companies are squeezed on profitability, partly due to what we see in many industries as growing overcapacity. While many of the old issues related to the regulatory environment remain, they are now compounded by generally lower demand levels and lower profitability. Overall, for many of our companies, China has become less attractive. Companies, for many reasons—not least for supply chain resilience—are beginning to explore opportunities to establish supply chains in countries other than China.

(01:32) In your paper, we read that a sentiment is emerging at company headquarters and among shareholders that the returns on China investments are no longer commensurate with the risks faced. And yet we see that foreign direct investment from Germany, for example, was just at a recent high in 2023. So, it doesn't really seem like firms are reconsidering anything, does it?

(01:53) I think it depends on what kind of company you're looking at. It's absolutely correct that very large multinational companies, some of them German, will continue to view China as an existentially important market, and many are continuing to invest. But if we look at small- and medium-sized enterprises, which are the backbone of the European economy, many of these have started to find other places to invest or are reducing their exposure to China. It's no longer a given that foreign direct investment will simply flow into China at very high levels. That's what we’re trying to communicate to the Chinese government—that something is happening here, and they need to keep reviewing the regulatory environment and demand in China to continue attracting these high levels of European FDI.

(02:36) Isn't it true that the bar is quite high for other nations to replace China, considering its infrastructure, educated workforce, and decades of industrial know-how? We often hear about India or Southeast Asia, but are they really ready to take over, or how close are we to that?

(02:55) What we've seen is that for 71% of our members, their profitability in China today is at or below the global average. So, if almost three-quarters of our members say you might get a better return on investment outside of China, it's only natural that companies will begin looking elsewhere. That's why we're saying China needs to act now to maintain its position as a top destination for European investment. If profits aren't growing in line with what we expect elsewhere, we need to figure out how to turn that around.

(03:39) We know, however, that for China, the economy is a second-tier concern compared to its security issues. It's passed a series of security laws that have alienated many neighboring countries, but also businesses. Do you really believe Beijing will address some of these concerns when it's clear they're willing to prioritize domestic security over economic growth?

(04:00) This is, of course, something for the Chinese government to decide. Our job is to point out that without certainty, transparency, and clarity regarding the national security agenda, the consequence might be a lower level of foreign investment and employment in China. As European companies, we want to prevent that and address these issues. What we can do is make it clear that there’s an economic cost to prioritizing security over growth.

(04:43) It's fair to say that relations between European firms and China will get more difficult in the coming years, especially as European governments feel compelled to defend their companies facing increased competition from China. We've already seen that in the auto industry with the new tariffs. Other industries, such as machine building, also depend on China for sales, but will face increasing competition from Chinese companies. Is it fair to say things will get harder rather than better?

(05:10) It's likely. No one will dispute that the significant presence of European companies has been a good thing for China. We've always asked ourselves, "What’s in it for China?" when we establish a facility or grow our activities there. Now, perhaps it’s time for Chinese companies to ask, "What’s in it for Europe?" There’s no doubt that our success in China has always been based on a clear value proposition. But perhaps right now, it’s not clear enough what the value proposition is for Europe. It’s not just about getting a competitively priced product. What about the impact on local communities, tax payments, employment, or local supply chains? These are the discussions we need to have.

(06:09) That was Jens Eskelund, President of the European Chamber of Commerce in China. Thank you very much.