German firms plan to increase China investment in next 2 years despite ‘reality check’ in 2023

And the report, which surveyed 566 member companies in October from industries including machinery and industrial equipment, automotive and business services, showed 91 per cent of companies plan to continue doing business in China.

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Confidence among China’s foreign business community has been eroded by an increasingly tightened and volatile regulatory environment, and Beijing is seeking to restore trust as a lack of transparency and a weak economic recovery has led to an exodus of foreign capital.

Despite a 40 per cent rise in the number of newly established foreign-invested enterprises in 2023, which pushed the total to 53,766, yuan-denominated actual foreign capital used dropped by 8 per cent year on year to a three-year low of 1.1 trillion yuan (US$155 billion), according to the Ministry of Commerce.

“If we ask companies now, and I’ve just done this, the companies are, I would say, a little bit less optimistic than they were in October,” said Jens Hildebrandt, executive director of the North China branch of the German Chamber of Commerce in China.

The survey showed that German companies operating in China face a range of challenges, including increased competition from local companies, unequal market access, economic headwinds and geopolitical risks.

A third of respondents consider legal uncertainty as the most significant regulatory challenge.

The current regulatory environment undermines the competitiveness of German companies

Ulf Reinhardt

More than half of the firms who participate in public procurement – selling goods and services to governments and state-owned enterprises – encountered obstacles, such as a lack of transparency and “Buy China” policies, the report showed.

“Last year was a reality check for German companies operating in China,” said Ulf Reinhardt, chairperson of the German Chamber of Commerce in China – South and Southwest China.

“The current regulatory environment undermines the competitiveness of German companies, which are determined to succeed and harness the country’s innovative potential.”

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After a disappointing 2023, when only 21 per cent of German companies expected a positive industry development, the share has doubled to 42 per cent in 2024, with 78 per cent expecting consistent growth over the next five years.

German companies believe that the market growth would depend on addressing key structural problems, Reinhardt added.

“The potential of the Chinese market is still there, but China’s market attractiveness is shifting, making a profit in China is not as easy as it has been in the past because the market changed. There are still opportunities, as are challenges and risks,” he said.

Germany has always been a crucial part of trade between China and the European Union, but as Chinese companies increase their competitiveness in industrial and automobile sectors, the bar of innovation has also been raised for German firms.

In the automotive sector, 11 per cent of companies view their Chinese competitors as innovation leaders, with 58 per cent expecting the firms to take on the role over the next five years, the report showed.

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But due to rising risks of operating in China, including geopolitical tensions and its uncertain economic development, nearly half of the surveyed companies said they have taken steps to ramp up risk management.

The steps include building China-independent supply chains, setting up additional operations outside China, but also localising research and development operations in China.

Amid the emergence of strong competitors in China, the German Chamber of Commerce in China called on Chinese policymakers to create a true level playing field for foreign businesses by implementing measures that promote fair competition and strengthen investor confidence.

“There needs to be a build-up of trust so that investment can happen again, what we need for that is an improvement of legal certainty and transparency,” Hildebrandt added.

“It is important to simplify cross-border data transfer, but also in other areas where language is vague in laws and regulations. Intellectual property protection is also another topic that won’t go away.”

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