European business sentiment toward China has plunged to historic lows as companies reassess their strategies amid slower economic expansion, mounting regulatory complexity, and intensifying geopolitical tensions. In a recent survey covering more than 500 European firms operating in China, nearly three-quarters of respondents indicated that doing business in the world’s second-largest economy has become markedly more difficult over the past year—an unprecedented share, eclipsing levels recorded even during the height of pandemic lockdowns.

Executives describe a perfect storm of challenges: a faltering consumer environment weighed down by a real estate downturn, supply chain disruptions lingering since 2022, and a regulatory landscape that many perceive as tilting heavily in favor of domestic competitors. Coupled with rising U.S.-China tensions and the threat of new tariffs, these factors have left European companies increasingly cautious about future investments in China.

Economic Slowdown and Tepid Consumer Demand

After decades of rapid expansion, China’s economic growth has moderated significantly. Official figures show GDP growth rates slipping to the mid-4 percent range, compared to well above 6 percent prior to 2020. This deceleration has had a direct impact on European exporters and service providers, which once flourished on robust demand for premium goods and technology.

As household incomes have stagnated and consumer confidence wavered, many European companies report sluggish sales in sectors such as luxury goods, cosmetics, and high-end automobiles. In particular, several well-known European cosmetics brands experienced revenue declines approaching 45 percent year-over-year in 2024, reflecting weaker discretionary spending among Chinese middle-class shoppers. Retail foot traffic remains down in major cities, as younger consumers shift toward homegrown brands perceived as offering better value or more trend-driven offerings.

The real estate sector’s slump—where property investment growth tumbled sharply—has rippled through the broader economy. Local governments, once buoyed by land sales, have tightened spending, resulting in subdued infrastructure outlays. This has hit European construction equipment suppliers and engineering services firms, which had anticipated robust project pipelines upon the easing of COVID restrictions. Instead, many are left with idle factory capacity and stranded inventory.

Regulatory Hurdles and Perceived Discrimination

Beyond macroeconomic pressures, European businesses cite a slew of regulatory barriers and market access issues that appear to be tightening. Nearly two-thirds of companies surveyed said they lost opportunities last year due to local procurement policies that favor domestic players. In the medical device and pharmaceutical sectors, for instance, European firms report facing opaque approval processes and sudden shifts in technical standards, often at odds with international norms. This has slowed product launches and forced costly delays in crucial supplies of medical equipment.

For industrial goods exporters, new rules on cybersecurity reviews and data localization have come to the fore. European technology companies, ranging from semiconductor equipment suppliers to cloud service providers, find themselves navigating a labyrinthine approval process that can stretch for months. While Beijing has periodically signaled a willingness to streamline foreign-investment rules, many executives remain skeptical, noting that regulatory pronouncements too often lack concrete timelines for implementation.

In the automotive sector, European carmakers also face growing pressure to partner with local electric vehicle (EV) startups or transfer technology to maintain visibility in key urban markets. Several established European auto brands have seen their market share erode as Chinese EV producers aggressively undercut prices and offer extended warranty packages. The perception that new energy vehicle subsidies are structured to favor domestic competitors has added to the sense of standing on shifting sands.

Supply Chain Fragmentation and Rising Costs

Despite China’s enduring role as a manufacturing powerhouse—offering competitive unit costs and extensive supplier networks—many European firms are now reexamining their supply chain footprints. Over 25 percent of companies in the survey indicated they are increasing local sourcing in China as a way to meet stringent localization requirements and gain preferred access to domestic markets. Yet nearly half also reported that Chinese suppliers themselves are relocating operations to alternative low-cost countries, such as Vietnam, India, and Mexico.

These shifts have increased logistical complexity and elevated operational costs for manufacturers. European electronics and automotive parts producers, for example, have had to contend with rising labor and input expenses in Chinese coastal provinces. Coupled with the country’s ongoing efforts to move up the value chain—emphasizing robotics, automation, and higher-value manufacturing—some foreign suppliers are finding it harder to compete on price.

Moreover, lingering fallout from the 2022 zero-COVID lockdowns continues to affect factories in southern China. Even as most restrictions have lifted, outbreaks of new COVID variants or local quarantines in key production hubs occasionally force temporary shutdowns, creating supply hiccups. To mitigate these risks, approximately 10 percent of respondents said they are establishing overseas alternative supply chains while retaining their existing networks in China—an indication that a subset of companies views diversification as insurance against future disruptions.

Geopolitical Tensions and Tariff Uncertainties

European firms’ gloom is further fueled by rising geopolitical frictions. The standoff between Washington and Beijing over trade, technology decoupling, and geopolitics has placed European companies in a precarious position. U.S. export controls on core semiconductors, stringent curbs on cutting-edge artificial intelligence chips, and the threat of transatlantic tariffs have all contributed to an atmosphere of uncertainty.

While the European Union has aimed to maintain a neutral stance, the possibility of collateral damage from U.S. sanctions or retaliatory Chinese measures remains a specter for many CFOs and supply chain directors. In recent months, the U.S. has floated the idea of applying tariffs on select Chinese-made goods in response to perceived subsidies for Chinese EV makers—a move that could force European multinational groups to choose between conflicting regulatory demands. The prospect of being caught in the crossfire of U.S.-China trade battles has prompted some European investors to pause major capital allocations until global leaders reconcile their stances.

Meanwhile, China’s own approach to foreign businesses has sparked concerns. Calls for “dual circulation,” which emphasize self-reliance in key technologies and a shift away from foreign-dominated value chains, are viewed by some as signaling a long-term pivot toward economic nationalism. Though Beijing frames such policies as necessary adjustments in an evolving global landscape, European executives interpret them as a warning that senior Chinese policymakers may prefer to bolster homegrown champions over foreign-invested enterprises.

Chinese domestic firms have become increasingly competitive on multiple fronts—quality, price, and speed to market. In sectors such as consumer electronics, telecommunications, and renewable energy, local companies now routinely outperform foreign rivals on price points, often at the cost of narrow profit margins. Subsidies for electric vehicles, solar panels, and battery manufacturers have accelerated the rise of well-financed domestic champions that quickly scaled production and flooded both domestic and overseas markets.

European luxury and mid-tier fashion brands have seen Chinese homegrown labels replicate trendy designs and leverage robust online marketplaces to capture younger buyers. Meanwhile, in manufacturing, Chinese machine tool suppliers have improved both precision and reliability, making them a viable alternative to German and Italian producers in certain segments. This intensifying local competition has compelled European businesses to rethink whether they can maintain premium pricing strategies in China or need to recalibrate value propositions.

Even the aerospace sector, a relative bright spot owing to China’s large-scale aircraft development programs, has encountered hurdles. While Airbus and Boeing have sold hundreds of airliners to Chinese airlines, new requirements around domestic content in advanced composites and avionics components have begun biting into foreign suppliers’ margins. In response, many European companies have either partnered with local entities to establish joint ventures or diverted R\&D investments toward less restricted markets.

Lingering Uncertainty and Future Outlook

Despite these headwinds, roughly half of respondents believe China remains indispensable for global supply chain operations due to its unparalleled scale and integrated ecosystem. European firms continue to hold significant fixed assets in industrial zones across the Pearl River Delta, Yangtze River Delta, and Bohai Economic Rim—clusters that would require immense capital and time to replicate elsewhere. Yet, the strong desire to maintain a presence in China is tempered by calls for greater policy clarity and fairer regulatory treatment.

An overwhelming share of companies—over 50 percent—indicated they would increase investment in China if Beijing took more concrete steps to open markets and ensure a level playing field with domestic firms. Many suggested that clearer guidelines on public procurement, intellectual property protections, and enforcement of foreign-investment commitments would restore some confidence. Some European chambers and industry associations are reportedly in active dialogue with Chinese authorities, advocating for a rollback of opaque licensing procedures and a faster approval process for foreign-funded joint ventures.

At the same time, some CFOs and board members have started to explore alternate markets to offset China’s diminishing allure. Southeast Asia, Mexico, and parts of Central Europe have been singled out for their cost advantages and relatively stable regulatory environments. Nonetheless, few expect a wholesale exodus from China; rather, most companies envision a hybrid footprint that retains core operations in China while incrementally shifting lower-value or riskier manufacturing to other locations.

While the overall tone is bleak, the degree of pessimism varies by sector. Financial services and renewable energy companies, for example, report slightly higher optimism than the average, citing new windows of opportunity in China’s green-transition agenda and the gradual liberalization of its bond and equity markets. Yet, even in these segments, executives remain wary of potential policy reversals or sudden clampdowns on capital flows.

Conversely, consumer-focused sectors—including cosmetics, luxury goods, and fast-moving consumer products—expressed the deepest gloom, with nearly 80 percent of respondents flagging declining sales as a major concern. The automotive industry also felt the pinch, as China’s transition to electric vehicles has disrupted traditional engine and parts suppliers, forcing European auto component manufacturers to undergo costly retooling.

Looking Ahead to the EU-China Summit

European and Chinese leaders are slated to meet in Beijing this July for a high-level summit aimed at revitalizing bilateral ties. With the EU now China’s second-largest trading partner by region, tensions over trade, technology, and climate cooperation are expected to take center stage. Brussels hopes to press for more robust market access for European businesses, while Beijing is likely to reiterate its commitment to attracting foreign investment and ensuring stable economic cooperation.

Nevertheless, analysts caution that any commitments emerging from the summit are likely to be broad declarations rather than binding agreements. Without concrete timelines or legally enforceable measures, European companies may remain skeptical of Beijing’s pledges. Instead, many will likely adopt a “wait-and-see” approach, calibrating their strategic plans to hedge against potential risks of further deterioration in the operating environment.

For now, the prevailing mood among European businesses in China is unmistakably gray. While supply chains remain too integrated to warrant a rapid exodus, the combination of weakening demand, intensifying local competition, regulatory complexity, and geopolitical frictions has created a pervasive sense of caution. As Europe seeks to balance its economic interests with broader strategic considerations, the coming months will be critical in determining whether Chinese policymakers can restore business confidence—or whether European firms will increasingly diversify away from their long-standing reliance on the Chinese market.

(Adapted from Business-standard.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy