Tough times for European companies in China

European firms are downbeat on profit and revenue growth in China because of rising labour costs and regulatory barriers, the European Union Chamber of Commerce in China's annual report has shown.

At the same time, China remains the one bright spot in a gloomy world economy, and there are growth opportunities there if the new government embraces reform, the group said at the launch of its 2013 report in Beijing last week.

"The overall sentiment is that China remains a key market. Ninety-four per cent of companies on aggregate said China was a priority market, while 84 per cent said they were considering expanding their current operations," said the chamber president Davide Cucino.

"It is not an issue of lack of opportunities, it is an issue of offering those opportunities in an equal way to everybody," he said. The survey was conducted in March by the EU chamber and Roland Berger Strategy Consultants, and was compiled with the input from over 550 European companies operating in China.

“Despite increasing rhetoric from senior Chinese leaders that efforts will be undertaken to transform and level the regulatory environment through allowing greater play to market forces, European companies have so far perceived few concrete changes,” he said.

The number of EU companies reporting revenue growth shrank to just 62 per cent and those noting profitability growth decreased to 44 per cent, leaving only 64 per cent of European companies in China profitable.

“The survey shows optimism on profits in the next two years fell to 29 per cent of companies, the lowest since the report started a decade ago,” said Cucino.

The report was issued on Thursday last week, a gloomy time for China's growth outlook, one day after both the International Monetary Fund and the OECD cut their growth forecasts for China, and various private sector economists said China could miss its own 7.5 per cent growth target this year.

The IMF said China needs "decisive" policy changes to put its economy on a more sustainable path, while the Asian Development Bank said surging wages and costs threaten the nation's growth potential.

Missed opportunities
Approximately half of European companies noted missed business opportunities due to market access and regulatory concerns, thus challenging the government's assertion that China has a level playing field.

A report last week by Nikkei Inc showed that per capita labour costs climbed by more than 60 per cent between 2009 and 2012, which would make it higher than all its significant competitors in Asia.

He said meaningful changes needed to be swiftly implemented to mitigate cost escalations through productivity increases, unlock market opportunities and to establish an efficient and well-functioning business environment that has equal competition at its core.

“We at the chamber have made conservative estimates that our members lost a collective €17.5 billion in revenue last year because of market access difficulties,” he said. European companies also said they are facing increased competition in China from privately owned local firms improving in sales and marketing and brand recognition.

Tough as the Chinese market may be, it’s still the best place in the world in what is a challenging global situation.

“European companies are resigning themselves to this reality and remain committed to the Chinese market,” said Cucino.

Approximately half of European companies note that China now accounts for more than 10 per cent of their global revenues; and, while optimism on growth has decreased, 71 per cent of companies are still optimistic about growth prospects.

Asked if he was worried that China might retaliate in some way in a simmering trade row over solar panels and wireless equipment, where the EU accuses China of pricing its solar panels and mobile telecom devices too cheaply and "dumping" them in Europe to corner the market, Cucino replied: "Who would not be worried?"