Companies are also adapting their supply chains to become more resilient in the face of uncertainty.

A record 64 per cent of survey respondents reported that doing business in China had become more challenging over the past year. Furthermore, 30 per cent of respondents noted a decline in their revenue compared to the previous year, a significant increase of 20 percentage points and a new high in the survey's history. Meanwhile, a concerning trend showed 11 per cent of businesses have relocated existing investments away from China, and 8 per cent are choosing to channel future investments initially earmarked for China to other locations, as per the European Business in China Business Confidence Survey 2023 (BCS).

Additionally, one in every ten respondents disclosed intentions to move their Asian headquarters or business units out of Mainland China. The country also saw a drop in its investment appeal, with a 13-percentage point decrease in respondents considering China as a top-three destination for future investments.

As for supply chain strategies, 75 per cent of respondents reassessed their plans in the last two years. Specifically, 24 per cent are looking to partially relocate their supply chains into Mainland China, while 12 per cent have already shifted parts of them out of the country.

Nearly 75 per cent of respondents have localised their IT and data storage infrastructure. A notable trend of staff localisation has also been observed over the last five years, with 16 per cent of respondents reporting no foreign nationals employed in their China operations.

These shifts come at a significant cost to both companies and China. Creating divergent systems for China and the rest of the world disrupts the overall efficiency provided by global economies of scale. Moreover, the decline in foreign nationals employed contributes to a reduced transfer of knowledge and best practices, difficulties in communication, delayed investment plans, and even the closure of Chinese operations, the survey added.

“The negative trends we see in this year’s survey are concerning and reflect both recent challenges—brought by uncertainties in China’s policy environment and rising geopolitical tensions—and the persistence of long-standing market access barriers,” said Jens Eskelund, president of the European Union Chamber of Commerce in China. “For China to turn the tide and allow European companies to develop and contribute to their full potential, we really need to see concrete action.”

“Unless further steps are taken to address the uncertainties confronting companies, then the trend of supply chain diversification is likely to strengthen in the medium-term,” said Denis Depoux, global managing director of Roland Berger. “Many European companies are now focusing more on how to make their China operations more durable instead of capturing greater market share, which is not good for competition.”

Fibre2Fashion News Desk (DP)