European companies in China lose patience with zero-Covid

Mark O'Neill June 20, 2022 10:35

The Zero-Covid policy has forced nearly a quarter of European companies in China to consider moving current or planned investments to other countries. Only five per cent of them support the government’s policy.

This is one finding of the latest survey by the European Union Chamber of Commerce in China, who sought to measure the impact the double-whammy its members are facing – the Covid epidemic and the Russian invasion of Ukraine.

The epidemic is hitting them more. “This presents a far more immediate challenge and has caused a considerable drop in business confidence,” it said. “Nearly 60 per cent of respondents decreased their 2022 revenue projections, with 15 per cent projecting a decrease of over 20 per cent.

“Businesses struggle to carry out the most basic of tasks, and not knowing from one day to the next if they will have enough staff to maintain operations or if their premises will be suddenly shut down altogether.” The main impact has been felt in logistics/warehousing, business travel and the ability to conduct face-to-face meetings. “Supply chains have also taken a pounding, both upstream and downstream, with 92% of respondents reporting a negative impact -- 85% struggle to access raw materials or components needed for production, 89% to transport raw materials or components they need; 87% struggle to deliver finished products within China, and 83% to the rest of the world.”

Retaining staff is also a struggle, with 27% experiencing a decrease. Worst hit are education, the legal sector, retail and cosmetics.

A total of 23% of respondents have started to consider shifting current or planned investments in China to other markets, the highest percentage recorded in the past decade.

One result of the epidemic and the severe restrictions on travel for non-Chinese is a rapid increase in localisation. “Firms have already localised many functions, all the way from junior staff up to board level, and will continue to do so over the coming 12 months. This will be most pronounced with mid-level and senior staff, with 65% and 62% of respondents respectively planning localisation in these areas to some extent, and 60% planning the same for junior positions.”

To address these serious issues, the companies want more predictability from the government and a revision of its zero-Covid policy, including opening up. In letters to the government, the Chamber has proposed that it focus more on vaccinating the entire population, including those over 60 who are the most vulnerable: allowing positive cases with no or mild symptoms to quarantine at home, thereby alleviating pressure on the health system; and permitting the best mix of vaccinations and boosters to be used, including mRNA vaccines.

The impact of Russia’s invasion of Ukraine has been less serious, but severe nonetheless. A third of respondents reported that China had become a less attractive investment destination due to the war. For seven per cent, the risks have already led them to consider pulling the plug on current or planned investments in China.

The main tangible effect of the war has been the disruption of logistics to and from Europe, with 65% of respondents being negatively impacted. Rail freight between China and Europe is no longer an option and the need for aircraft to circumvent Russian and Ukrainian airspace increases both the distance and cost of air routes. “Sea freight costs have also spiralled out of control due to several factors, and major ports such as Shanghai have suffered COVID-induced congestion on an unprecedented scale.”

Other key impacts from the war include rising material and energy costs, which is having a negative impact on 63% and 58% of respondents respectively, and rising commodity and freight prices, with trucks and ships having to pay more for gas and oil.

The boardrooms of European firms must consider a possible deterioration in relations between the EU and China. Beijing has taken Russia’s side in the war and its media do not refer to a “war”, but “a special military operation”, the wording used by Moscow.

The war is likely to last for months, with an increasing toll of death of soldiers and civilians and destruction of property and economic fall-out around the world. All this makes such a deterioration of relations more probable, with the EU and China being on opposite sides.

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.