European companies in China are under pressure from slowing growth and excess capacity

BEIJING – European companies in China are finding it difficult to make money in the country as growth slows and spare capacity pressures increase, according to a survey published by the European Union Chamber of Commerce in China on Friday.

In the city of Shanghai, business members reported delays in getting their salaries as fulfilling contracts became more difficult compared to the previous year, according to branch president Carlo D'Andrea.

“The state-owned enterprises have deferred payments and they are using that to get some actual loans from companies, especially from small and medium enterprises,” D'Andrea said, citing members' comments.

Growth in China has slowed in recent years amid geopolitical tensions. The recession in the real estate sector, which has close ties to local government finances, also slowed the economy.

Only 30% of respondents to the EU Chamber survey said their profit margins were higher in China than the global average for their companies – the lowest level in eight years.

In 2016, only 24% of respondents said their profit margins were better in China than they were globally, the report said.

EU Chamber President Jens Eskilund told reporters that this reflects the collapse of the Chinese stock market in the summer of 2015, coupled with the slowdown in the real estate market at the time.

He said the current slowdown in Chinese growth has similar cyclical aspects, but there are questions about how long and deep it will be this time.

The chamber's latest survey included 529 participants and was conducted from mid-January to early February.

This year's survey included a new question about whether members face difficulties in transferring profits to their headquarters. While more than 70% reported no problems, 4% said they were unable to do so, and about a quarter said they experienced some difficulties or delays.

It was not immediately clear whether this was due to a new regulatory position or typical tax audit requirements.

China's economy is now much larger than it was in 2015 and 2016. Trade tensions with the United States have also escalated in recent years, with Beijing redoubling its manufacturing efforts to promote self-sufficiency in technology.

“Our members have seen to some extent that their ability to grow and profit in the Chinese market – the correlation with the GDP number – has become weaker,” Eskelund said.

“What matters to foreign companies is not necessarily the headline GDP number, 5.3% or anything else, but the composition of the GDP,” he said. “If you have a GDP number that is growing because of increased investment in manufacturing capacity, that's not a good thing for foreign companies. But if you have a GDP number that's growing because domestic demand is growing, that's a good thing.”

China's National Bureau of Statistics is scheduled to announce fixed asset investment, industrial production and retail sales for April next Friday.

China's focus on manufacturing, coupled with modest domestic demand, has led to growing global concerns that overproduction will squeeze profit margins.

More than a third of respondents to the EU Chamber survey said they had noticed a surplus in their industries in the past year, and another 10% expect to see them in the near future.

The civil engineering, construction and automotive industries had the highest share of respondents reporting excess capacity.

More than 70% of respondents said that excess capacity in their industries led to lower prices.

“This is not just European companies whining,” Eskelund said. “This is just as painful, if not more so, for Chinese companies.”

At the same time, Chinese authorities have strengthened high-level efforts to attract foreign investment.

Eskelund noted that Beijing's recent visa exemption policy for many EU countries has allowed executives the flexibility to plan China trips one week in advance, instead of two to three months previously.

He added that Beijing's expansion of tax exemption policies has also encouraged more international employees and their families to stay in China.

He said that cosmetics, food and beverage companies benefited from China's recent efforts to open its market, noting that a record percentage of 39% of participants said that the local market was completely open in their industry.

China has restricted the extent to which foreign companies can own or operate in certain industries. Beijing removes some banned categories every year through a “negative list.”

However, the European Union Chamber and other business organizations said China could do more to implement its 24 measures to improve the environment for foreign companies.

The Chamber's latest poll found that a historically large number of respondents said conditions are getting worse:

A record number of participants said they were skeptical about China's growth potential in the next two years. A record number of participants expect intensifying competitive pressure, question the company's profitability in China, and a record high plan to cut costs this year, mainly by reducing headcount and scaling back marketing. A record number of budget participants said they missed opportunities in China due to regulatory barriers, the size of which was equal to more than half their annual revenue, a record decline in expectations that regulatory barriers will fall.

“When you compare to previous years, we can see that a lot of the concerns remain the same in terms of predictability and visibility of the regulatory environment,” Eskelund said. “These concerns remain largely the same.”

“What's happening now is that companies are starting to realize some of these pressures that we've seen in the local market, whether it's competition, declining demand, or perhaps taking on a more permanent nature,” he said. “This is something that is beginning to influence investment decisions and the way of thinking about developing the local market.”