Four in 10 European companies operating in China want to move their production out of the world’s No. 2 economy because of supply chain concerns, according to a recent survey from the European Central Bank (ECB).
Forty-two percent of European companies want to relocate to politically closer countries, or “friend-shoring,” in the next five years, according to the survey, which was published on Nov. 6. Friend-shoring involves relocating production to politically or economically favored countries to minimize geopolitical risk.
The ECB questioned 65 large European Union companies regarding decisions on locations and input production sources as well as how they respond to supply-chain risks.
The survey found that almost half of the firms noted “geopolitical risk” as the most frequently cited factor behind “decisions to (re)locate production into the EU.”
“As to those countries which posed—or could pose—a risk to supply chains in their sector more generally, two-thirds of all respondents cited China,” the survey found.
Fifty-five percent of the companies sourced critical materials from a specific country or small number of countries, and nearly all said that these supplies now faced elevated risk.
“A large majority of these identified China as that country, or one of those countries, with all of them considering this an elevated risk,” the ECB said.
“China was the dominant source of critical inputs and also the country most frequently mentioned in terms of perceived risks,” it noted.
Regarding key materials sourcing, 80 percent of companies want to source inputs from neighboring countries, near-shoring, or from friend-shoring nations, compared with 55 percent in the past five years. The trend highlights EU firms’ efforts to mitigate growing geopolitical risk and enhance supply-chain security.
‘Challenging and Unpredictable’
The survey reflects a trend among EU businesses operating in China. European Union Chamber of Commerce in China (EuroCham), in its China’s Business Confidence Survey 2023 report, also highlights the worsening business environment in the country.The report found that 64 percent of respondents said doing business in China became harder last year.
“The deterioration of business sentiment that has taken place over the last three years has been significant and cannot be reversed overnight,” the report said.
Eleven percent of European firms have shifted their businesses out of China, and 20 percent have considered doing so. Also, 38 percent have observed “Chinese customers and suppliers shift investments out of” the country.
Moreover, 53 percent of respondents said they have yet to plan to expand their business operations in China in 2023, up 15 percent from a year ago. Seventy-five percent have reviewed their supply-chain strategies over the past two years.
“As a result of China’s more challenging and unpredictable business environment, European companies’ investment and operational strategies are being adjusted accordingly,” the report said.
The two top reasons for EU businesses to shift or consider moving out of China include minimizing China’s decoupling impact and increasing the resilience of their supply chains. This trend shows that investors intend to “de-risk and build resilience, rather than for purely business reasons.”
“The negative trends we see in this year’s survey are concerning and reflect both recent challenges—brought by uncertainties in China’s policy environment and rising geopolitical tensions—and the persistence of long-standing market access barriers,” Jens Eskelund, president of the European Union Chamber of Commerce in China, said in a statement at that time.
U.S. firms also found the same deteriorating business conditions in China, as reflected in a survey from the American Chamber of Commerce in Shanghai. It noted that the investment climate for U.S. businesses in China was the worst in decades.
