Chinese market continues to pose problems for European companies

A recent report from Roland Berger has outlined the array of challenges many European companies are facing when operating in the Chinese market.

The European Chamber of Commerce (ECC) recently commissioned German-origin management consulting firm Roland Berger to survey nearly 600 businesses that conduct significant activity in China on local conditions, with the final report revealing the array of challenges European companies face in the market, from regulatory burden and unequal treatment to growing competition and equity caps on local business endeavours.

Canvassing the perspectives of a range of firms operating in China across a variety of sectors, Roland Berger – which incidentally has offices in Shanghai, Beijing, Hong Kong, and Guangzhou – found that despite many hurdles, European businesses feel slightly more welcome today than when they first entered the Chinese market, with greater access the most frequently cited reason for this improvement following several recent foreign direct investment initiatives.

Still, in line with the now almost $6 billion local management consulting industry, which is dominated by several US firms despite an apparent dictate five years ago that local companies should cut ties with American advisors, many of the survey respondents reported that it still remains to be seen if all reform promises will actually become a reality due to the lack of consistency in the signals coming from the Chinese government.

“China’s significant market opening announcements were received with mixed feelings by the European business community,” state the authors of the report. “Despite bringing some improvements, positive impacts have been diluted by stagnation, or even backsliding, in other areas.” Other factors cited by European companies included being less equally compared to local companies, licensing difficulties, and regulatory systems that don’t meet expectations.

Among many others, one example given of how Chinese regulations frustrate market entry by foreign corporations is in respect to the local banking sector, where state-owned banks have been protected from international competition for such a time that they already have a well-established foothold, making it extremely difficult for foreign banks to expand their market share – which still stands at less than 2 percent according to figures from late last year.

When it comes to state-owned enterprises, the situation presents an even greater challenge. Seven out of ten of the European businesses surveyed by Roland Berger affirmed that state-owned enterprises are present in their same industries of operation, with, as might be expected,  the national firms perceived to hold an advantage in most areas of doing business, including in public procurement, the ability to influence policy, and access to financing and licences.

The transfer of intellectual property is another area of common discontent, for larger European-origin corporates in particular. Roland Berger’s survey found that European firms are still being forced to hand over intellectual property in order to retain local market access, and at a growing rate, with the number of firms reporting such instances doubling in the just the past two years, from 10 percent in 2017 to 20 percent this year.

On top of these challenges in the slowing local economy, tipped by McKinsey and backed by the IMF to reach around 6 percent this year. Shading many other local issues, the economic slowdown is now considered by 27 percent of the companies surveyed as their greatest current challenge in China, with the figure rising by eight points compared to last year. Rising local labour costs also figured, along with a range of issues around the ongoing trade tiff with the US.  

“Macroeconomic challenges coupled with the slow pace of regulatory reform mean that many European firms are facing increasingly difficult times while tied up in red tape that should have been cut years ago,” state the authors of the report, while the European Chamber of Commerce speaks of a missed opportunity. According to the institute, 65 percent of its members report that they would likely increase their investment in China if granted greater local access.

To illustrate the potential: Europe represents the largest source of foreign direct investment worldwide, accounting for roughly half of the globe’s total FDI stock abroad, yet overall European investment into China amounted to just €6.1 billion in 2018, compared to the more than €150 billion invested into the US market in the same year. “China would do well to capitalise on this situation, and foster a more competitive economy,” concluded the authors.