Beijing/Guangzhou/Shanghai, December 15, 2022: Today, the German Chamber of Commerce in China published the results of the annual Business Confidence Survey. China’s recent pivot away from the zero-COVID-19 policy is a much-welcomed development and will help restore business confidence in the mid- and long term. However, the disruption of business operations relating to China’s zero-COVID-19 policy has left deep tracks: 2022 marks a historic low in business confidence and perceived attractiveness of the Chinese market for German companies with 41% expecting a decrease in profits for 2022. Localization and diversification are the prevailing response by German companies to mitigate the risks associated with the previous zero-COVID-19 policy and the shifting geopolitical framework.
Key findings:
- Business confidence reached a historic low: 49% of German companies find China’s attractiveness to be diminished compared to other markets. Only 51% intend to increase investment in China within the next two years, compared to 71% last year – a drop of 20 percentage points. The main challenges named were China’s zero-COVID-19 policy and geopolitical tensions.
- China’s zero-COVID-19 policy was detrimental to business success in 2022: 66% of German companies named China’s zero-COVID-19 policy as their top operational business challenge and the main reason to decrease investment or exit the market entirely, which 10% of respondents were considering (up from 4% last year.)
- Regulatory hurdles remain a concern: The leading regulatory business challenges are legal uncertainty (33%) as well as cyber and data security regulations (31%), which are tied to the unclear implementation of China’s Cyber Security Framework. Policy initiatives such as ‘Made in China 2025’ and the country’s pursuit of self-reliance give local competitors a leg up, resulting in 29% of German companies reporting unfavorable treatment.
- Diversification and localization are strategic directions: Headquarters’ response to the previous zero-COVID-19 policy and rising geopolitical tensions combines increased diversification outside of China and intensified localization inside China.
- Cautious optimism for 2023: German companies’ expectations for 2022 were adversely affected. Optimism returns in 2023, where 50% expect an increased business turnover and 37% forecast higher profits. Also, 77% of German companies expect increasing annual growth in their industries for the next five years.
Business confidence reached a historic low
“German companies have been plagued by China’s zero-COVID-19 policy. It has spoiled business confidence, market attractiveness, and business opportunities in 2022” summarizes Clas Neumann, Chairman of the German Chamber of Commerce in China | Shanghai. He adds, “geopolitical tensions put additional pressure on German companies and are causing decision-makers to re-evaluate their engagement in China.”
58% of respondents say that China’s attractiveness as an investment location is decreasing compared to other markets. Only 51% of German companies plan to increase their investment in China in the coming two years, a drop of 20 percentage points compared to 2021. Also, views on business opportunities are more pessimistic. For instance, only 30% of German companies rate growth in domestic consumption as a significant business opportunity compared to 68% in 2019.
China’s zero-COVID-19 policy was detrimental to business success in 2022
This year, 66% of German companies named the zero-COVID-19 policy as their main operational business challenge, a jump of 24 percentage points compared to last year.
61% of companies that did not plan to invest or decrease investment over the coming two years in the Chinese market named the expected continuation of the zero-COVID-19 policy as the main reason. Out of the 10% of companies contemplating a market exit, 72% said it’s because of COVID-19-related restrictions.
Regarding China’s recent covid-policy shift, Clas Neumann says: “The sudden end of China’s zero-COVID-19 policy is a game changer. German companies will quickly adjust their business operations to the new conditions to help overcome the expected COVID-19 infection wave and will be more optimistic thereafter for the year ahead.”
Diversification and localization are strategic directions
The headquarters’ response to the zero-COVID-19 policy and rising geopolitical tensions is a combination of increased diversification outside of China and intensified localization inside China. 77% of German companies’ headquarters have already adapted their strategy in response to China’s zero-COVID-19 policy. 70% are taking steps to mitigate the risks tied to geopolitical tensions such as an international sanctions regime. To build resilience, companies are localizing operations and supply chains inside China, diversifying in South-East-Asia, or simultaneously doing both. Larger corporations find it easier than smaller companies to build up parallel structures and diversify outside of China.
Cautious optimism for 2023
The year 2022 was bruising for German companies in China: only 24% of companies say that the development of their industry has improved in 2022, while 51% were forecasting a positive development when asked last year. For 2023, 38% of German companies are expecting to see a positive development. Clas Neumann concludes: “Despite all odds and challenges, China remains unrivaled in terms of market size and market growth opportunities for many German companies. The large majority will stay committed to the Chinese market.”
China’s policy makers need to act now
The German Chamber welcomes the Chinese government’s pivot away from the zero-COVID-19 policy. The new regulations must be well-planned and implemented in a structured manner on all levels throughout the country. German companies are committed to doing their share in managing the transition. Combined with leveling the playing field for domestic and foreign companies and a more transparent legal framework, this will help restore predictability, and business and investment confidence across all market players.
About the Business Confidence Survey 2022/23
Between August 23 and September 21, a total of 593 member companies of the German Chamber of Commerce in China responded to the survey, making this one of the most representative samples of German business sentiment in China. The Business Confidence Survey was first launched in 2007 – it is the Chamber’s most important publication and the main tool and source of our advocacy work.
About the German Chamber of Commerce in China
The German Chamber of Commerce in China currently has more than 2,100 members and is the official member organization for German companies in China. By providing up-to-date market information and practical advice, the German Chamber helps its members to succeed in China. It offers a platform for the Sino-German business community and represents its members' interests toward stakeholders, including government bodies and the public.
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