In recent years, China has been consistently ranked as one of the most favoured investment destinations for foreign companies. In 2012, China even overtook the US as the world’s largest recipient of foreign investment. However, many foreign multinationals are thinking twice about their future in the world’s second-largest economy.
In its annual business confidence survey, released last month, the European Union Chamber of Commerce in China (EUCCC) said many of its members -- including some of China’s largest foreign investors -- are becoming increasingly pessimistic about doing business in China. For the first time in the history of the decade-long survey, more companies reported that their Chinese profit margins were lower than their global averages.
So are the golden days over for foreign multinationals in China? EUCCC president Jörg Wuttke certainly thinks that's the case -- and the latest survey results back him up.
For years, foreign multinationals have surfed the waves of China’s double-digit growth. Life was good. But macroeconomic conditions in the country are worsening: it is improbable that China will ever regain its double digit-growth again, and many Europeans think it will only manage 6 or 7 per cent annual growth -- a far cry from the 12 per cent seen only a few years ago.
But China's slowing economy is not the only factor weighing on foreign multinationals in China. Greater competition from politically connected state-owned enterprises, increasing regulatory uncertainty and worsening environmental conditions are also contributing to deteriorating business conditions.
When China entered the World Trade Organisation 14 years ago, its economy represented only 2 per cent of the world’s total GDP. Now it accounts for 15 per cent. But Wuttke believes China’s headroom for growth will be limited in future. He is also concerned about the economic impact of China’s ageing population.
It is plain for everyone to see that most of the low-hanging fruits in China have been picked, and the country’s old economic model needs to be updated in order for it to escape the much-dreaded middle-income trap.
China’s weakening macroeconomic conditions show up clearly on multinationals’ balance sheets. In 2010, 78 per cent of companies reported year-on-year revenue growth -- but that figure dropped to just 59 per cent last year. Profitability also took a hit -- only 63 per cent of foreign companies are profitable in China today, compared to 74 per cent four years ago.
“A new sober reality is developing. An abiding sense of pessimism for future performance is setting in,” the EUCCC survey says; “…a general gloom about profitability prospects has continued, with only 31 per cent of companies optimistic about profitability in their sector over the next two years.”
Market access and regulatory barriers continue to create headaches for foreign companies. The EUCCC estimates that its members have missed out on approximately €21.3 billion ($30.4bn) worth of business deals because of these issues. Fifty-five per cent of companies believe they have received unfavourable treatment in China compared to domestic companies.
Though hacking and corporate espionage are not covered in the survey, many European companies are concerned about internet speed and the Great Firewall of China, which filters and censors internet information. Recently, around the time of 25th anniversary of the Tiananmen Square Massacre, the Chinese government blocked access to Google. Wuttke says the ability to access unfettered information is crucial to companies’ ability to conduct business in China.
“If we can't get the information we need, we have to move to Hong Kong or Singapore,” he told Chinese media. The business veteran is also concerned about recent reports that Beijing wants Chinese companies to avoid using American IT equipment, in light of the Edward Snowden revelations.
China’s notorious smog problem is also turning many foreigners away, and multinationals are paying ‘pollution benefits’ to their expatriate workforce. Wuttke says China’s environmental regulations and standards are even tougher than the EU’s, but the problem is a lack of enforcement. His advice is simple and straightforward for the Chinese: don’t enact new laws, just follow the existing ones.
Despite the gloomy outlook, there is still an element of cautious optimism. Though many companies view China’s bold reform package positively, they remain sceptical about its implementation.
“Only 53 per cent believe that there will be meaningful implementation of the reforms while 40 per cent remain unsure, further showing that many companies remain cynical about the prospect of consequential reforms following a decade of general inaction and regulatory stagnation as well as continued discrimination,” the survey says.
Life for multinationals is getting tougher; many of them are subject to the vagaries of China’s increasingly volatile business and political environments. Microsoft’s offices were raided in China only days after major Western fast food chains were hit with a food safety scandal. It is hard to tell whether measures like these represent genuine enforcement of the law, or are simply thinly disguised attacks on Western companies.