September 25, 2022
European businesses forced to ‘reduce, localize and silo’ in China

In a bleak report on operating conditions in the world’s second-largest economy, officials said European companies were being forced to “reduce, localize and silo” operations in China as the country looms large as an investment destination. loses its charm.

The European Union Chamber of Commerce’s assessment of China is its most pessimistic yet since its founding in 2000, officials said, following President Xi Jinping’s regulatory crackdown on already thriving industries and his administration’s tougher efforts to crush Covid. Enforcing lockdown and travel restrictions. 19 outbreaks.

“Ideology tramples the economy,” said chamber president Jörg Wutke. “Prediction has been challenged by frequent and uncertain policy changes, especially when it comes to COVID. [Zero-Covid] There is a real burden to the economy.”

which Wutke described as the “darkest” of the chamber. [position] paper ever”, the organization warned that “the engagement of European firms [in China] It can no longer be taken lightly.” It added that China was rapidly “losing its attractiveness as an investment destination” and that China and the European Union were “moving further and further apart”.

The warning was issued after the European Union re-evaluated its economic and political ties with China. Brussels and Beijing have struck a standoff over a proposed trade deal after China exchanged sanctions over the mass detentions of Uighur Muslims in Xinjiang. EU representative Josep Borrell described the annual summit of the parties in April as a “dialogue of the deaf”.

Brussels is preparing to adopt a series of tools to retaliate against trading partners who block market access for European companies. These measures are expected to apply to China.

“Discussions once focused primarily on investment opportunities . . . are now focusing on supply-chain resilience, the challenges of doing business, managing the risk of reputational damage, and the importance of global compliance,” the European Chamber said. .

Xi’s zero-Covid policy has made it impossible to visit the country, halting travel by officials at headquarters and leading to an exodus of foreign workers frustrated by the conditions in China. According to the chamber, since the start of the coronavirus pandemic, no new EU business has entered the Chinese market.

Wutke noted that his last trip from China was in February 2020, but added that he expected to return to his native Germany at the end of the year. “It is high time,” he said. “I haven’t seen my . [older] Children in Germany in two and a half years. ,

Rapidly changing protocols on the import of goods – including disinfection and sometimes confiscation of parcels – have also disrupted companies’ supply chains, while severe lockdowns imposed across the country have weakened consumer demand.

“China is not the stable sourcing destination it used to be,” Wutke said. “It was a rock, [but] shanghai lockdown [in April and May] It was a blow to our companies and to the global economy.”

Beyond the challenges related to the pandemic, the chamber described growing political differences, with companies at home coming under “increasing scrutiny” for their practices in China.

The Uighur Forced Labor Prevention Act, passed in the US this year, as well as two upcoming EU regulations on forced labor and corporate due diligence, “present a compliance challenge for European businesses operating in China . . . because of the inability to conduct independent third-party audits of supply chains in the U.S.”, the Chamber said.

Fears over further COVID supply chain disruptions, and to a lesser extent the possibility of a Chinese invasion of Taiwan, have prompted companies to diversify their suppliers and redirect investments.

Businesses are evaluating “reshoring, nearshoring or ‘friendshoring’,” the chamber said, referring to practices of bringing production home, closer to consumers or affiliated countries.

The Russian invasion of Ukraine and subsequent sanctions have made EU companies in China concerned about their investments in the event of a Chinese invasion of Taiwan. In a survey conducted by the European Chamber in April, a third of respondents said the war in Ukraine had made China a less attractive investment destination.

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