Business Confidence Survey
German Business in China: Dampened business outlook and challenging regulatory environment
Subdued business prospects and a challenging regulatory environment shape the business climate of German companies operating in the Chinese market. Challenges such as bureaucracy and administrative hurdles, legal uncertainty and unclear regulatory framework conditions, as well as slow and limited internet persist. Nevertheless, China remains an important market with good business opportunities for the majority of German companies.
The German Chamber of Commerce in China conducted its annual Business Confidence Survey between 27th August and 22nd October 2018 and collected 423 valid responses from its member companies. The representative sample allows for a comprehensive overview on developments and business sentiments of German companies in China. In total, the survey comprised 52 questions, focusing on business outlook and performance, investment climate, China’s reform efforts and deficits, the trade conflict and its consequences as well as Made in China 2025.
German business in China covers a broad range of sectors. The two largest industries are machinery and automotive, making up 29.3% and 19.5%, while business services rank third at 11.4% of German companies in China. The majority of German businesses in China is located in coastal areas, thereby especially concentrating in the main economic clusters of the Yangtze Delta (East), the Bohai Economic Rim (North) and the Pearl River Delta (South). More than 70% of German companies in China are organized as Wholly Foreign Owned Enterprise (WFOE) and the majority are small and medium sized enterprises.
Stable assessment of the current economic situation, cautious outlook for 2019
China remains a significant market to German companies, but the momentum of recent years has diminished. Merely 40 percent of German companies rate the current development of the Chinese economy as positive - 14 percentage points less than in 2017. And the less optimistic outlook of German companies stretches into 2019: Almost 30 percent expect a worsening in the development of the Chinese economy. A similar picture can be observed on industry level: Around half of German companies in China are still satisfied with the growth potential in its primary market segment. Nevertheless, the three largest German industries in China are less optimistic about the year 2018 and see their last year’s expectations about their industry development not fulfilled. For 2019, no significant improvements are forecasted. However, China still ranks among the top three markets for most companies. The share of those considering China as Top-1 market increases compared to last year.
Further Investments planned
Around two thirds of the German companies plan to further invest in China within the upcoming two years. Investment in staff development and training are the main areas of investment. A notable share of respondents furthermore plans investment in sales, marketing and business development, new manufacturing facilities, as well as Research and Development. The main reasons for the one third of respondents who do not plan to invest in China within the next two years are the increasing labor costs. Furthermore, the expectation of slower growth in China, the lack of regulatory transparency, predictability and impartiality as well as increased domestic competition were also often stated as the reason. In addition to slower growth expectations in their China-business and rising costs, regulatory barriers to investment are relatively more significant to surveyed German companies than last year.
Reform Efforts, Deficits and Business Challenges
40 years ago, China's economic opening-up and reforms began, leading to an unprecedented and successful economic development for the benefit of foreign and Chinese companies alike. Around 50 percent of the surveyed companies believe in the Chinese government's commitment to further open the market. However, the market opening rhetoric in previous months has fallen short of the expectations of German companies in China. Around one in two respondents rates the Chinese government's efforts in the areas of economic reforms, the creation of a level playing field for foreign companies, the reform of state-owned enterprises and the liberalization of the financial sector as insufficient. Roughly 45% of the surveyed German companies in China are dissatisfied with the efforts on the rule of law and the improvement of the regulatory framework. In the field of tension between enormous market opportunities, uncertain regulatory conditions and growing competition, German companies still face various challenges on the Chinese market: Bureaucracy/administrative hurdles, legal uncertainty and an unclear regulatory framework are evaluated as regulatory business challenges. Internet-related challenges such as slow cross-border internet speed and internet access restrictions hamper German businesses in China. HR-related issues remain unchanged among the most severe operational challenges. Additionally, rising operational costs, general economic slowdown and domestic competition also challenge German companies in China.
Made in China 2025
China’s Made in China 2025 strategy is a good opportunity for joint business development, but the image of China ‘s industrial policy is perceived negative, and it does not convince the majority of surveyed German companies in China as a revenue opportunity. A few German companies benefited from tax relief, direct financial support from municipalities and investments from special funds. But the large majority of has not benefitted from Made in China 2025 financial support schemes or is not aware of them. Furthermore, concerns over a lack of information and beneficial treatment of Chinese companies in tenders were reported.
Trade Conflict, Reactions and Consequences
In 2018, the bilateral relations between China and the US were characterized by the ongoing trade dispute, resulting in mutual implementation of punitive tariffs. In general, relatively few German companies in China are dependent on exports. The majority of German companies in China produce for the local market. Only few companies have larger exports to the USA. The effects of the trade conflict have nevertheless become noticeable for surveyed companies. Around one third of the respondents stated that they were directly or indirectly affected. Among the directly or indirectly affected companies the majority do not consider changes to their business. And those that do consider changes, shifting focus on other markets – along with production site relocation and product portfolio changes – were considered as the most likely strategic consequences.