“Stay, or leave?” is the question facing foreign companies in China now.

The alluring growth potential of the Chinese market has drawn in numerous foreign investors. Having weathered the U.S.-China trade war, the energy crisis and the Covid-19 pandemic, these companies kept their faith in China. Yet, with the two-month long lockdown slowing the supply chain to a standstill, foreign companies are wavering. 

According to recent surveys by American and EU chambers of commerce in China, the previously unimaginable option of leaving China has become a real possibility for foreign businesses and their employees.

Though lockdowns in Shanghai have gradually lifted, its long-term impact on foreign businesses' confidence on China remains. Jörg Wuttke, the President of the EU Chamber of Commerce in China, had publicly criticized the uncertainty created by sporadic lockdowns in China. “A predictable, functioning market is better than one that, despite having high growth potential, is volatile and suffers from supply chain paralysis,” he commented.

Among European countries, Germany has the largest presence in China, especially in the auto sector. Maximilian Butek, the executive director of the German Chamber of Commerce in Shanghai, contended that unpredictability has become the greatest challenge for foreign businesses operating in China. The following is an excerpt of CommonWealth’s interview with Butek:

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I’ve been living in China for three and a half years now. During this time, I got to experience the U.S.-China trade war, then the outbreak of the Covid crisis, the energy crisis, and all the consequences of the travel restrictions.

But the lockdown in Shanghai has been way more challenging than anything before. We simply didn’t expect that this would happen in such an international and developed city like Shanghai. 

According to our most recent survey, approximately 30% of the foreign employees in German companies are planning to leave China because of the COVID-19 policies.

If you look at how companies work, especially when they are engaged with fixed assets in a market, it is not so simple to relocate somewhere else. Companies are unlikely to decide to move their assets out of the country just because supply chains were disrupted for two months.

Furthermore, China is one of the most important markets for Germany, and we have no indication this will change any time soon. If you want to serve the Chinese market, you have to be on the ground to better understand the Chinese consumer and react faster to demand.

However, if you want to diversify in the region to strengthen the resilience of your supply chains, then investments planned for China might be shifted to other countries.

Companies have to fulfill their obligations toward customers, which you can’t do if you produce on a limited scale. Our survey shows that only 19% of companies surveyed could produce during lockdowns at a limited capacity of average 40 to 50%.

For German companies in China, confidence and trust in the Chinese market have been severely affected by the recent lockdown and COVID-related measures. Besides, they have to handle the trust of international customers for whom supply chain resilience is extremely important. 

Therefore, German companies will have to focus on diversifying their supply chains and building up capacity in other countries, should their production in China be again limited and operations put under restraints, they are still able to serve their global customers.

Other foreign companies and Chinese companies are dealing with the same issues. Chinese companies are also diversifying. We all face the same challenges.

And we must not forget the political situation. For instance, the Russia-Ukraine war created a lot of uncertainties. Companies with production sites in China but who are not serving the Asian markets might consider it less of a risk if they move their production closer to Europe. Although production in Europe might be more expensive when it comes to labor, energy and resources, the trust in Europe is simply higher than countries further away.

From our first Flash Survey this year, we know that due to the current geopolitical crisis, 10% of the surveyed companies reported that their current business might be moved out of China.

The major concern we are having in China at this particular moment is we don’t have any predictability yet.

President Xi Jinpin has made it clear that there will be no change to the zero-Covid policy. As we now know a lot about Covid, it is extremely difficult to avoid new infections. This means there would be on-and-off lockdowns for an unlimited time.

For Germans, predictability is everything. If we go into a market, we don’t go for two years, but we often plan to stay for the next decades. Now our ability to predict the market conditions of tomorrow has become way more difficult, and this of course will decrease confidence for new investments in China.

What we need from the Chinese government is predictability. We don’t have clear policy guidelines about what we should do, so we don’t know what the risks are. 

Nevertheless, we strongly believe that China is still a good place for doing business. That is not only because of the huge market, high productivity of the suppliers and talent, but also the innovation power.

If you look at the NEV (new energy vehicles) market for example, China is already selling three million NEVs a year. Germany’s ambitious plan until 2030 is to have seven to 10 million NEVs on the street. China is already producing half of that number in one year.

We also believe that it is important for German companies to stay in China in order to remain competitive on the international market. 

Climate change is a major topic in Germany. If we want to achieve those [climate] targets, mutual cooperation with China is essential. 

China needs Germany as much as we need China. 

China's exports to Germany are much bigger than Germany's exports to China. For big topics such as food, climate, and energy, we believe that we can only achieve our goals and synergies if we work together.

But still, we believe we learned (from the lockdown) that the resilience of supply chains was underestimated. We came from a world where global supply chains were the most efficient way. We did not expect the global supply chain to be threatened.

In 2011, when Fukushima occurred, the whole automotive supply chain in Germany was disrupted. We then learned to diversify somewhat, but did not go far enough. 

With today’s situation, it is really crucial to put more emphasis on risk analysis of the supply chain.

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Have you read?

• What price has Shanghai paid for China’s zero-COVID policy?
• China under lockdown: The global supply chain crisis
• Why the Chinese military has increased activity near Taiwan

Uploaded by Penny Chiang