German Companies in China Have Low Business Confidence; Many Plan to Leave Market: Study

A security personnel stands guard next to Chinese and German flags during a meeting between China's President Xi Jinping and German Chancellor Angela Merkel at the Great Hall of the People in Beijing on May 24, 2018. Jason Lee/AFP via Getty Images

More than 20 percent of German companies operating in China are planning to relocate production away from the Asian country, according to a Nov. 12 study released by the German Chamber of Commerce in China.

Twenty-three percent of the 526 member companies who responded to the study have made the decision or are considering moving production capacity, an increase from 19 percent of those who responded a year ago.

Among the companies that have decided to leave or are planning to do so, 71 percent attribute the reason to rising costs, including labor costs; 33 percent cited an unfavorable policy environment; 25 percent cited the Sino-U.S. trade war; and 22 percent pointed to market access barriers. Firms can choose more than one reason in the survey.

As to the preferred destinations of relocation, Southeast Asia was the top choice with 52 percent, followed by India at 25 percent, and the United States at 5 percent, the survey showed.

Overall, the trade war and the slowdown in the Chinese economy have resulted in the lowest business confidence in years, and 83 percent of polled firms said they felt either directly or indirectly impacted by the trade dispute. Only 27 percent of polled companies said they expect to reach or exceed their business targets in 2019.

China’s third-quarter gross domestic product (GDP) growth rose 6 percent year-on-year, the slowest rate since the first quarter of 1992, according to Reuters, and down from the previous quarter of 6.2 percent growth. The growth decline was attributed by economists to weakness in export-related industries, particularly the manufacturing sector.

Next year “is likely to be characterized by uncertainty, stemming from an unresolved U.S.–China trade dispute related to a decelerating Chinese and global economy,” Jens Hildebrandt, executive director of German Chamber of Commerce in North China, said in a statement.

German firms also said they faced many business challenges in China, with nearly two in three firms polled saying they have experienced either direct or indirect market access restrictions.

Examples of those restrictions are: difficulties in obtaining licenses, certification, or product approval; discrimination during the bidding and tendering process for projects; lack of participation in the development of industry standards; and market restrictions set up by China’s negative list, which sets out sectors that are off-limits to foreign investment.

According to Chinese state-run media Xinhua, Beijing recently shortened its negative list for foreign investment to 40 items from 48. For example, ownership restrictions in telecommunications and entertainment services were removed.

German firms also identified two other major challenges: uncertain and unclear regulatory frameworks (54 percent) and technology transfer requirements (48 percent).

In March, a U.S. congressional report pointed out that U.S. and other foreign companies currently “have few options” beyond forming a joint venture with Chinese firms in exchange for access to the Chinese market, in which they must provide their intellectual property and technology to their Chinese partners.

The German study also pointed out that German firms have invested about 81 billion euros ($89 billion) and created more than a million jobs in China. However, 37 percent said China’s efforts to “level the playing field” for foreign companies were insufficient.

The Chamber, with 2,300 member companies, comprises roughly 50 percent of all German companies in China.