European companies, many of which have long-established operations in China, are increasingly facing challenges in conducting business within the country. This development highlights the impact of China's struggling domestic economy and unclear regulations on international corporate relations.
European automakers, in particular, have been losing market share and facing political obstacles. For instance, Volkswagen agreed to sell its factory in Xinjiang, a region known for the repression of Muslim ethnic groups. Additionally, European pharmaceutical and medical imaging equipment firms have encountered barriers to accessing much of the state-run healthcare system.
An annual business survey conducted by the European Chamber of Commerce in China revealed that nearly 75 percent of respondents reported that operating in China has become more difficult. This marks the fourth consecutive year of increasing corporate pessimism.
The percentage of European companies planning to expand their operations in China has dropped to a record low, with only 38 percent expressing intentions to do so this year. European investments have played a significant role in introducing Western technology to China and integrating Chinese products into global markets.
Representing around 1,700 companies, from large industrial firms like Volkswagen to smaller enterprises, the chamber has been assessing business challenges in China for 25 years. The survey also identified a complex trend affecting U.S. efforts to shield American manufacturing from Chinese exports through tariffs. Despite reducing investments in China, some European firms are increasingly sourcing components from Chinese suppliers, thereby heightening their dependence on Chinese supply chains.
China has retaliated against U.S. tariffs by imposing its own tariffs on American goods, prompting European companies to seek Chinese substitutes for components previously sourced from the U.S., according to the chamber's president, Jens Eskelund. The overall decline in prices in China has incentivized many European firms to purchase Chinese components, further supplemented by a recent depreciation of the yuan against the euro.
Eskelund noted that China offers competitive pricing for components, making it an appealing option for European businesses. Furthermore, not only the United States but also the European Union and other nations have recently imposed tariffs in response to China's rising manufactured exports and stagnant import demand. European companies exporting from China had previously harbored concerns about potential trade barriers, some of which have since become a reality.
Klaus Zenkel, a Shenzhen businessman and chamber member, highlighted that the apprehension has escalated into a "nightmare" for many. Some companies have resorted to establishing temporary assembly operations in other countries, like Taiwan, to circumvent American tariffs by assembling Chinese components and shipping finished products to the U.S. with altered customs declarations.
The Trump administration is actively attempting to curb these indirect shipments from China, threatening high tariffs on countries that maintain significant trade surpluses with the U.S.
However, one aspect of business conditions in China has shown significant improvement over the past year. The survey indicated a notable decrease in the number of European companies concerned about rising wages, which now rank among their least pressing issues. Previously, rising labor costs had been linked to increasing housing prices, but after the housing bubble burst in 2021, many jobs were lost, leading to stagnant or declining wages.
This decline in wages has contributed to weak demand in China across various sectors, creating broadly low prices and raising concerns about potential deflation. Eskelund emphasized that the ongoing economic slowdown in China is viewed as having the most considerable impact on business conditions.