China Direct

China's innovation ecosystem and the localisation dilemma - EUCCC / MERICS Report

Executive Summary

Members of the European Union Chamber of Commerce in China (European Chamber) have provided unique insights into China’s innovation ecosystem for this report. A late 2022 survey of 107 European companies— backed up by extensive follow-up interviews—portrays a complex environment that necessitates a wide range of localisation strategies to be deployed depending on the industry each company is in and the contribution they can make to China’s strategic goals, as well as their size.

Periodic adjustments to these strategies are also required in order to both better align with China’s increasing innovation capacity and manage emerging political factors that are undermining long-term business confidence. There are several positive market factors steering a large share of European companies towards deeper localisation, including the size of the Chinese market (61%), strong demand (47%) and the fast pace of commercialisation of
research and development (R&D) results (39%).

These factors have created an extremely dynamic environment that incentivises onshoring of R&D operations in order for companies to be closer to their customers so they can tailor innovation to their needs more effectively and, in some cases, even export R&D results to the rest of the world. At the same time, a number of regulatory factors are having both a positive and negative influence on R&D strategies, with some incentivising companies to localise and others forcing companies to put strict limitations on their R&D operations.

Policy-related factors reported as having had a negative influence on R&D strategies include China’s weak intellectual property rights (IPR) protection system (34%), an unlevel playing field for foreign companies (32%) and limited or non-existent government support (24%). However, of those that could access R&D-related government support, policies reported as having had a positive impact include tax incentives (46%), access to related subsidies (35%), and those related to attainment of high- and new-technology enterprise (HNTE) status (32%).

Further complicating the picture is the Chinese Government’s ongoing advancement of its technological self-reliance campaign, aimed at creating completely localised supply chains insulated from external shocks, while expanding the country’s access to foreign technology. This is resulting in increased pressure for certain companies to localise technology and onshore R&D into China.

While demands to do so are coming primarily from state-owned enterprise (SOE) and government customers, private business partners are increasingly exerting their own influence. One of the core requirements for investing in R&D is a predictable and reliable business environment. While business confidence was deeply eroded by China’s stringent zero-COVID policy and the subsequent lockdowns and travel restrictions, many European companies are optimistic and expect this to be restored over time.

However, the impact that geopolitics is having on the stability of China’s business environment is only expected to worsen. Nearly half of respondents reported negative impacts on R&D strategies resulting from Russia’s invasion of Ukraine, and many interviewees said the role that corporate risk assessments are now playing in strategy-making is unprecedented.

A potential escalation of Russia’s war in Ukraine or further frictions in the Taiwan Strait are scenarios that businesses are taking into account, and the potential risks they pose do not support a case for increasing R&D investments in China. These factors, among others, pose a dilemma for European companies. The rewards of localising technology and R&D into China are considerable, but so are the potential hazards.

The broad spectrum of strategies being employed by European companies are bookended by two opposing views: as one company noted, it is essential to do R&D in the China market to make the most of the innovation ecosystem and compete for market share with domestic rivals; another posed that since China’s system favours local competitors and because technology leakage risks are high, it makes more sense to secure and increase their share in other markets outside China; their logic being that there they only have to compete with their Chinese counterparts, and not the Chinese Government as well.

To access the full report please click here.

Our sincere thanks to both MERICS and the EUCCC for kindly sharing this report.

EU-China Opinion Pool: Calibrating interdependence with China

One of the EU’s most heated current debates about China concerns the question of how to reduce risks arising from interdependencies with the country. Over the last years, Beijing has demonstrated its readiness to make use of economic coercion. And the Covid-19 pandemic and looming geopolitical crisis over Taiwan has made Europe acutely aware of supply-chain risks. Business leaders and politicians in Europe are now discussing options to ensure competitiveness and economic resilience.

MERICS Analyst Grzegorz Stec has asked experts for their opinions on how the EU should proceed as it attempts to calibrate interdependence with China.

For a comprehensive assessment from the EUCCC, BusinessEurope, BDI, GEI and Merics please click on the link below:

“Calibrating interdependence with China - how should the EU proceed? (4 min read)

With our sincere thanks to the team at Merics for sharing this latest EU-China opinion poll.

EUCCC publishes European Business in China Business Confidence Survey 2022

On 20^th June, the European Union Chamber of Commerce in China, in partnership with Roland Berger, released its European Business in China Business Confidence Survey 2022 (BCS). The annual survey shows that while most European companies in China posted positive revenues and were profitable in 2021, doing business became more difficult for the majority.

As the rest of the world returns to a pre-pandemic level of normality, and China’s stringent COVID-19 policy exacerbates the challenges of doing business, many European Chamber members are questioning just how many eggs they are willing to keep in their China basket.

To download the Report and read more details please click below:

EUCCC 2022 Business Confidence Survey

Our thanks to the EUCCC team for sharing the Report and insights.

Advocacy Success: Easing of International Travel Restrictions to China - EUCCC

Quarantine times for international inbound travellers in multiple Chinese cities have been shortened. Beijing (from 15th May), Jiangsu (from early June, on a trial basis) and Wuhan have reduced centralised quarantine time to seven days if the entry airport and final destination are the same and travellers have conditions to do home quarantine for an additional seven days. By end of May 2022, Chinese embassies in many European countries had simplified their Health Declaration Certificate (HDC) code application requirements. Please click here for detailed information and to download a flowchart. On 6th June, The European Chamber was informed during a meeting with Shanghai Vice Mayor Zong Ming that the requirement for PU letters would be rescinded for foreign nationals returning for work and their dependents, an initiative from the central government to promote company operations. Official announcements confirming this policy shift were subsequently published from 10th to 14th June on the websites of Chinese embassies in some European countries, including Austria, the Czech Republic, Finland, France, Germany, Norway, Poland, Romania and Switzerland. The European Chamber is pleased to see positive steps being taken to reduce international travel restrictions after having continuously advocated for this at both central and local government levels since the outbreak of the pandemic two years ago. The Chamber recently had separate meetings with Premier Li Keqiang and Commerce Minister Wang Wentao, during which this topic was raised. The Chamber’s local chapters have also maintained regular communication with local foreign affairs offices, commissions or departments of commerce, and local offices of the China Council for the Promotion of International Trade, among others, to advocate for the relaxation of travel restrictions and assist their members to return to China.

Carbon Neutrality - The Role of European Companies in China's Race to 2060

Beijing, 25th May 2022 – The European Union Chamber of Commerce in China (European Chamber), in partnership with Roland Berger, yesterday published Carbon Neutrality: The Role of European Companies in China’s Race to 2060. Based on a member survey and extensive interviews, the report identifies areas where EU-China cooperation can be deepened so that China can front load the technologies it needs to accelerate its carbon neutrality drive.

Driven by stringent environmental regulations and consumer demand, and guided by their global corporate carbon neutrality pledges, European businesses are well placed to help China peak carbon emissions before 2030, and push towards carbon neutrality in 2060. The report finds that 67 per cent of European companies operating in China are already pursuing carbon neutrality, and 40 per cent have established China focused decarbonisation teams, many of which report directly to the board.

However, three sets of barriers currently prevent European firms from fully contributing to China’s carbon neutrality drive.

Read press release in full.

Download English-CARBON NEUTRALITY- THE ROLE OF EUROPEAN BUSINESS IN CHINA'S RACE TO 2060

Download 中文-碳中和：欧洲企业助力中国实现2060愿景

 

Can you win in the China market? Check out your China-readiness with the EU SME Centre

Have an interest in the Chinese market but worry it’s too risky, and not sure where to start? Indeed, entering the Chinese market requires you to do a lot of homework.
 
The EU SME Centre’s online Self-Diagnosis Tool is specially developed to help European SMEs in this aspect. With over a decade of experience in serving SMEs in the Chinese market, we select and consolidate the most common questions faced by small businesses and build them into an online quiz that will guide you through the whole process.

China Readiness Self-Diagnosis Tool Link

Know Where You Are

This tool comprises 5 sections: General Market Knowledge, Human Resources, Finance, Business Environment and Product Sales.
 
After completing each section, you will receive a score that indicates your level of knowledge and readiness in the respective area.
 
Find Your Direction

You will receive a tailored list of resources that will help you prepare for the next steps.
 
Seize an Opportunity to Promote Your Business to 250K+ Chinese Companies

As additional support, the Centre is in collaboration with China’s largest trade promotion agency – the China Council for the Promotion of International Trade (CCPIT) – to offer promotion spaces for European SMEs on its official channels, which will provide your company with a unique opportunity to introduce products or services to CCPIT’s over 250,000 member companies in China.

Once you complete the quiz, you will receive an email with further details. This offer will be free of charge but is only available until the end of May.
 
Receive One-to-One Consultation with a China Expert

If you want to have a China expert analyse your specific case, you can also book a one-to-one consultation with us, and we will identify an expert for you.

Our sincere thanks to the EU SME Centre in China and its partner organisations EUCCC, CBBC, DCCC, EuroChambres & China-Italy Chamber of Commerce for kindly sharing this information.

 

Flash Survey Report: China’s COVID-19 policy and Russia’s war in Ukraine cause severe disruptions to European business in China

Beijing, 5^th May 2022 – The European Chamber, in partnership with Roland Berger, today released a survey on the impact that China’s COVID-19 policy and Russia’s war in Ukraine are having on European business in China. The results show that both factors are creating severe challenges to European business operations, with logistics suffering the most overall. Significantly, as a result of China’s COVID-19 policy, 23% of respondents are now considering shifting current or planned investments out of China to other markets—more than double the number that were considering doing so at the beginning of 2022, and the highest proportion in a decade—and 7% are considering the same due to the war in Ukraine.

The introduction of more stringent COVID-19 containment measures in 2022, with China imposing full or partial lockdowns in at least 45 cities, is causing massive uncertainty for businesses. Three quarters of respondents report the measures have negatively impacted their operations, most acutely on logistics/warehousing, business travel and the ability to conduct face-to-face meetings, which have had a negative impact for 94%, 97% and 94% of respondents respectively.

Supply chains have taken a pounding, both upstream and downstream, with 92% of companies being impacted by measures such as China’s recent port closures, the decrease in road freight and spiralling sea freight costs.

More than a quarter of European businesses report headcount decreases because of China’s COVID-19 policy, with this happening most in the education (80%), legal (46%), retail (43%) and cosmetics (40%) industries. Other key findings include the following:

• 60% of respondents have decreased their 2022 revenue forecasts.
• 91% of respondents believe China should focus on vaccinating the entire population, including those over 60; 82% believe that positive cases with no or mild symptoms should be permitted to quarantine at home to alleviate pressure on the health system; and 82% believe that the best mix of vaccinations and boosters should by permitted, including making foreign mRNA vaccines available to all residents in China.
• 78% of respondents feel that China is a less attractive investment destination as a result of its more stringent COVID-19 restrictions.
• The war in Ukraine has also made China a less attractive investment destination for a third of respondents. The war is exacerbating challenges faced by businesses as supply chains disintegrate. Nearly two thirds of respondents have faced disruptions transporting goods to and from Europe. In addition, rising material and energy costs are having a negative impact on 63% and 58% of respondents respectively.

“Our members are willing to weather the current storm, but if the current situation continues, they will of course increasingly evaluate alternatives to China,” said Jörg Wuttke, president of the European Union Chamber of Commerce. “A predictable, functioning market is better than one that, despite having high growth potential, is volatile and suffers from supply chain paralysis.”

“The uncertainty caused by the stringent and dynamic COVID-19 policies impedes the ability for European companies to make sound business decisions, in an overall deteriorating economic context due to the impact of the war in Ukraine,” said Denis Depoux, global managing director of Roland Berger. “A clearer crisis exit strategy would help maintain confidence in a European business community still highly committed to Chinese markets.”

Download the report.

 

中国疫情防控政策与俄乌冲突对欧洲在华企业产生严重影响

      北京，2022年5月5日 – 中国欧盟商会与罗兰贝格今日联合发布关于中国疫情防控政策和俄乌战争对欧洲在华企业所产生的影响的调查报告。结果显示，这两个因素都给欧洲企业的商业运营带来了严重挑战，其中物流业所受的整体影响最大。值得关注的是，中国为遏制疫情而采取的严格防控措施导致23%的受访企业正考虑将现有或计划中的对华投资转移至其他市场。这一结果与2022年初有此想法的企业数量相比，增加了一倍多；这也是过去十年间达到的最高值。另有7%的受访企业表示，俄乌战争导致他们正考虑取消现有或计划中的对华投资。

      2022年，随着国内各地落实更为严格的疫情防控措施，中国已有至少45座城市实施了全面或局部封控，给企业生产经营带来了巨大的不确定性。四分之三的受访企业表示，公司整体运营受到严重影响，主要集中在物流仓储压力、商务旅行暂停以及线下会议取消这三方面，受影响企业分别占94%、97%和94%。

      中国的港口关闭、公路货运量下降以及海运价格飙升等一系列原因导致供应链上下游面临严峻考验，92%的受访企业受到严重影响。

      在中国严格的防控措施下，逾四分之一的欧洲企业遭遇人才流失，流失率最高的行业集中于教育（80%）、法律（46%）、零售（43%）和化妆品（40%）。

      其他主要结果包括以下几点：

• 六成受访企业预计2022年收入将有所下滑。   
• 91%的受访企业认为中国应积极推进全民疫苗接种，尤其是提高60岁及以上易感人群和高危人群的疫苗接种率；82%的企业建议，应允许无症状感染者或轻微症状感染者实行居家隔离，以减轻公共医疗系统的压力；82%的受访企业建议国内应推广新冠疫苗序贯加强免疫接种，并早日投入使用mRNA疫苗。
• 78%的受访企业认为，在国内严格的疫情防控政策下，中国市场作为投资目的地的吸引力下降。
• 三分之一的受访企业表示，俄乌战争导致中国作为投资目的地的吸引力下降。战争导致的供应链断裂正在进一步加剧企业面临的挑战。近三分之二的受访企业面临往返中欧的物流中断。此外，原材料和能源价格的上涨分别给63%和58%的受访企业带来挑战。

      “我们的会员企业愿意咬紧牙关渡过眼前困难，但如果现状持续下去，更多企业将开始评估替代中国市场的其他方案，”中国欧盟商会主席伍德克表示，“与一个潜力巨大但是不稳定而且供应链濒临瘫痪的市场相比，可预测性强且运作正常的市场更具吸引力。”

      “特别是在乌克兰战争的影响导致整体经济形势严峻的情况下，严厉及具有动态性的疫情政策造成的不确定性阻碍了欧洲企业做出合理商业决策的能力。因此，一个更为清晰的应对危机退出策略，将有助于欧洲商界保持对中国市场的信心。” 罗兰贝格全球管理委员会联席总裁戴璞先生说道。

Preparing SMEs for China - Podcast Insights

In this episode the host Adam Dunnett, secretary general of the European Chamber, sits down with guest speakers Renzo Isler, director of the EU SME Centre, Helika Jurgenson, project manager at the China IP SME Helpdesk, and Ester Canada Amela, advocacy manager at the EU SME Centre. They discuss China’s business environment for SMEs, and propose recommendations both for those that are looking to invest in China and those already operating here.

Subscribe to ‘China Dispatches’ on Apple Podcast or Google Podcast.

To listen to the podcast please click here.

With our thanks to the European Chamber of Commerce in China for kindly sharing this information.

Stop Press: EUCCC launches 2021/2022 Annual China Position Paper

 

European Chamber Position Paper Highlights Costs of Self-reliance

Dear CBI Members and Partners,

• On 23^rd September, the European Union Chamber of Commerce in China released its European Business in China Position Paper 2021/2022 (Position Paper), its most important publication and the cornerstone of its annual advocacy plan.
• Compiled by its 35 working groups and sub-working groups over a six-month period, the 930 constructive recommendations contained in the Position Paper illustrate both the depth of the challenges faced by European companies in China and their commitment to supporting the improvement of the business environment.
• Despite the many difficulties experienced in 2020 due to the COVID-19 pandemic and increasing geopolitical tensions, European businesses in China did well overall, and remain firmly committed to the market.
• However, while business opportunities still remain, signs that China is turning inward—as can be seen in its 14^th Five-year Plan’s (14FYP’s) aim to increase self-reliance, and even achieve self-sufficiency, in parts of the economy—are a real cause for concern for foreign-invested enterprises.
• European companies are unsure about the extent to which they will be able to contribute to China’s future growth, with some fearing market exit, and there are now doubts over China’s future growth trajectory.

To read more and to download the Position Paper Report please click here.

Our sincere thanks to the European Union Chamber of Commerce in China for kindly sharing its 2021/2022 Position Paper.

 

European Business in China - 2021 Business Confidence Survey Summary

Dear CBI members and stakeholders,

Please find bilingual summaries of the 2021 EUCCC Business Confidence Survey below:

Key findings

Prospects, last year, seemed quite gloomy: an early 2020 survey, conducted jointly by the European Chamber and the German Chamber of Commerce in China, found that half of respondents expected 2020 revenue to drop year-on-year (y-o-y), and a mere 0.5% anticipated revenue growth. In fact, only a quarter of respondents to the BCS 2021 reported revenue declines and 42% experienced growth. Strong performance was indicated in other areas as well:

• Three out of four respondents turned a profit in 2020, the same proportion as the last five years, demonstrating that even in challenging times, European companies adapted and found success.
• 68% are optimistic about future growth, a significant 20 percentage point increase y-o-y.
• Commitment to the China market remains strong – a mere 9% of respondents are considering shifting any current or planned investment out of China, the lowest share on record.

Yet, as geopolitical tensions grow, companies are looking for ways to decrease their exposure, particularly to possible cross-border disruptions resulting from either the trade war or the ongoing technological divergence between China and the west.

• Only 21% of manufacturers reported that they do not import critical components. Meanwhile, a third import components or equipment for which there are no viable alternatives. The rest can find other solutions, but at higher costs, lower quality and/or with compatibility issues.
• In response, over a quarter of manufacturers are onshoring at least some of their supply chains, five times as many as are offshoring.
• European companies in joint ventures with local partners are strengthening their positions, with 27% increasing their shares, and two thirds are taking full ownership or a controlling share.

Meanwhile, as China’s reform agenda continues to lag, and external risks surge, it is imperative that reform efforts accelerate and long-standing regulatory challenges are resolved to offset emerging ones.

• Market access barriers are reported by 45% of members, a marginal increase from the 44% that felt the same in 2020.
• Unequal treatment persists for 47% of respondents.
• SOE reform appears to have stalled, with only 15% of respondents expecting the private sector to gain opportunities at the expense of the state-owned sector, and 48% expecting the opposite.
• Compelled technology transfers persisted for 16% of respondents, the same as 2020 despite the Foreign Investment Law coming into force.
• A third of respondents have been negatively impacted by the new regulatory requirements related to “critical information infrastructure” and “autonomous and controllable technology”.

“Our members’ long-term commitment to the China market paid dividends in 2020, but geopolitical tensions are forcing us to reconsider our strategies here,” said Charlotte Roule, Board Member of the European Chamber. “European companies are not decoupling by leaving China, but instead are considering which cross-border ties between China operations and global ones can and must be cut.”

“European companies both contributed to and benefited from China’s strong and speedy economic recovery," said Denis Depoux, Global Managing Director of Roland Berger. "If given the right opportunities, they are ready to deepen their positions here, and have a wealth of technology and expertise to drive not only growth, but also help with China’s decarbonisation goals and its industrial upgrade."

Download 2021 EUCCC Business Confidence Survey Summary CH

To download the full Report please click here.

Our thanks to the EUCCC for kindly sharing this information.