China's Covid-19 Containment Measures Are Heavily Affecting European Businesses

A recent survey by the European Chamber of Commerce in China shows that a large number of respondents is decreasing revenue expectations for 2022 and considers shifting investments to markets outside China.

Joerg Wuttke

The most significant challenge to business posed by China’s current Covid-19 containment policy is the massive uncertainty that it creates. This has led to nearly 60% of the 372 respondents in a recent flash survey by the European Chamber of Commerce in China decreasing their 2022 revenue projections, with most doing so in the range of 6 to 15%. 19% of members are forecasting a drop of 16 to 20% and 15% projecting a decrease in their revenue of over 20%.

China’s Covid-19 containment measures have had a negative impact on overall operations for 75% of respondents of the survey, with businesses struggling 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.

Supply chains are severely constrained

The main impacts have been felt with regard to logistics and 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 also taken a pounding, both upstream and downstream, with 92% of respondents reporting a negative impact. Specifically, 85% are struggling to access raw materials or components needed for production, 89% are struggling to transport raw materials or components needed for production; 87% are struggling to deliver finished products within China, and 83% are struggling to deliver them to the rest of the world.

Just over two thirds of respondents (67%) report that they have so far managed to retain staff, but 27% have experienced a decrease in their staff levels. This has taken place most in the education sector (80%), followed by legal (46%), retail (43%) and cosmetics (40%).

Although 11% of respondents report that they are going to downsize their China operations as a result of China’s stringent Covid-19 measures, the majority indicate either that they are not planning to make any changes (36%), or that it is too early to consider doing so (46%).

China becoming less attractive for investment

This demonstrates that, despite the challenges now being faced, European companies seemingly remain committed to China in the long-term and are prepared to weather the storm for now.

The question is, for how long? The Chinese market has lost a considerable amount of allure for many respondents, with 77% reporting that China’s Covid-19 measures have made it a less attractive destination for investment.

Businesses are pragmatic and are always looking for optimal conditions. As a result of the mass lockdowns across China, and other Covid-related restrictions, 23% of respondents have started to consider shifting current or planned investments in China to other markets. This is more than double the number that were considering the same just two months ago in the BCS 2022, and is in fact the highest percentage recorded in the past decade.

As detailed in the European Chamber’s Position Paper 2021/2022, and the joint European Chamber / MERICS report (Decoupling: Severed Ties and Patchwork Globalisation), while decoupling is leading to some European companies being forced out of China, this is not happening on the scale that some had predicted. Instead, companies are re-evaluating how they can optimise their operations in China while minimising the impact of geopolitical disruptions.

Given the difficulties that travel restrictions have had on companies’ abilities to attract and retain international talent, it is not surprising that 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 twelve 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.

Predictability is needed

To restore confidence in the Chinese market, European businesses need more predictability. One of the best ways to provide this would be to introduce measures that will allow China to open further, while maintaining a robust response to minimising health risks posed by Covid-19. The approach recommended by the European Chamber in letters to the Chinese authorities is:

  1. To focus more on vaccinating the entire population, including those over 60 who are the most vulnerable.
  2. Allowing positive cases with no or mild symptoms to quarantine at home, thereby alleviating pressure on the health system.
  3. Permitting the best mix of vaccinations and boosters to be used, including mRNA vaccines.

When asked for their opinions on these three options, 91% of respondents agreed with proposal 1), 82% agreed with proposal 2) and 82% agreed with proposal 3).

Just 5% of respondents felt that China does not need to change its current Covid-19 policy.

Rail freight between China and Europe no longer an option

While the war in Ukraine is not as immediate a concern for European businesses in China as Covid-19, it is impacting them nonetheless. A third of respondents report that China has become a less attractive investment destination due to the war. The impact of geopolitical tensions is garnering more attention in boardrooms as the susceptibility of operations to future shocks must be weighed, in particular the prospect of a deterioration in EU-China relations. For a small proportion of businesses (7%), the risks have already led them to consider pulling the plug on current or planned investments in China.

In terms of the tangible effect the war has had on European businesses operating in China, the main impact has been the disruption of logistics to and from Europe, with 65% of respondents being negatively impacted.

Companies are having to adapt to new conditions, with rail freight between China and Europe no longer an option and the need for aircraft to circumvent Russian and Ukrainian airspace increasing 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, as commodity prices are driven up, further impacting freight prices, with trucks and ships having to pay more for gas and oil.

The picture is similar in terms of the impact that the sanctions imposed on Russia have had, with logistical challenges (negatively impacting 52%), rising material costs (57%) and energy costs (52%) ranking as the top-three challenges faced.

Joerg Wuttke

Joerg Wuttke is the president of the EU Chamber of Commerce in China. He’s been living in Beijing for more than thirty years.
Joerg Wuttke is the president of the EU Chamber of Commerce in China. He’s been living in Beijing for more than thirty years.