Drastic turnaround
Chinese crowd out foreign brands
By Marina Zapf
1/24/2022 5:33 p.m
Foreign products have long been in great demand in China. But times change. This should be unpleasant for German companies.
Their names are Geely, Dongfeng and Chagang. They have not yet come close to the best-selling car brand, Volkswagen. But the trend in the world’s largest car market is clearly going in the direction of “buy Chinese”. China’s consumers want domestic brands. Foreign manufacturers and the German industry are looking for new forms of cooperation – to put on a Chinese coat, so to speak. Only a third of German companies in China now expect increasing demand for formerly highly sought-after foreign products.
It is a drastic turnaround compared to 2019, when almost two-thirds still expected a continuous upward trend – and just one of the massive shifts in business expectations that are shown in a recent survey by the German Chamber of Commerce Abroad (AHK) in the People’s Republic. The results signal a clear deterioration in sentiment. The optimism is giving way to growing uncertainty and subdued expectations, as also became apparent in the most recent elite panel of “Capital” and “FAZ”.
The driving force behind the change in mood is the Chinese government, which wants to make the People’s Republic more independent from other countries. “Decoupling” and “Dual Circulation” are the buzzwords that stand for a future strategy of self-sufficiency. Against this background, Germany’s ambassador in Beijing, Frank Rückert, expects “negative effects on trade”. The state leadership set the course last year, among other things with the concept of two cycles in the five-year plan valid until 2025, which is intended to strengthen domestic companies and free them from foreign technology and world trade.
“Investments are welcome where there is a backlog, and they are restricted where Chinese competitors are already technological leaders,” says Andreas Glunz, Head of International Business at KPMG in Germany. The auditors are involved in the survey, in which almost 600 companies from various sectors with business in China took part last October, 70 percent of them with their own production.
politicization of the economy
The companies surveyed are now most concerned about the increasing unequal treatment they are facing in the regulatory environment in China. 34 percent of them observed that domestic competitors are preferred – especially in the areas of market access, public procurement and regulation. A year earlier it was just 20 percent, and inequality was the sixth top concern.
“The lack of equal treatment has become the biggest regulatory challenge for the German economy in China,” says Clas Neumann, President of the German Chamber of Commerce in Shanghai. 42 percent of the companies that took part in tenders see themselves disadvantaged and report a lack of transparency, “buy-local” policies and the preference given to state-owned companies. Officials have to justify it well, they say, when they award the contract to foreign bidders.
These are excesses of the increasing politicization of the Chinese economy, which is still based on the smoldering trade dispute with the USA, but has recently been expressed above all in the government’s tough interventions to control leading large corporations. Ambassador Rückert emphasized to press representatives that if borders were to be raised again, it would also be a shame for internationally oriented Chinese companies. “A level playing field is the prerequisite for a basis of trust.” AHK representative Neumann demanded: “For a future-proof commitment in the Chinese market, the German economy needs a sign that equality is part of the economic system.”
In the harsher business environment, companies are confronted with problems such as high raw material, energy and logistics costs in addition to corona-related restrictions. To meet demand increasingly targeting the domestic market and domestic brands, and increased local competition, they are looking for new forms of collaboration – such as strategic partnerships rather than joint ventures, says Neumann – a rather paradoxical development now that it is easier to enter into joint ventures establish and lead.
Pandemic leaves damage
Irrespective of the new hurdles, the expectation of further expandable business opportunities in the second largest economy in the world prevails: According to the AHK survey, only a very small proportion of local companies are planning to go out of business. 96 percent want to extend their presence by at least two years. Half of the companies expect improvements in their sector, 18 percent a deterioration. Fewer opportunities than before are seen in increasing domestic consumption. On the other hand, quite a few companies sense greater opportunities in green growth and the path taken by Beijing towards CO2 neutrality by 2060.
Last but not least, the pandemic leaves lasting damage, according to the conclusion of the business representatives. There is a lack of opportunities to bridge gaps and solve politicized problems through personal dialogue. Without a charter operation set up by the Chamber of Commerce and the Embassy, commercial air traffic would have come to a complete standstill. And if it could take two months for travelers to be there due to the strict quarantine regulations, there is only hope that the state leadership will find more pragmatic ways. At the same time, with the arrival and spread of the Omicron variant, people in the People’s Republic are preparing for renewed lockdowns – and probably two more years of travel restrictions.