China’s business climate perceived as challenging, yet promising
Every year, many international Chambers of Commerce in China conduct surveys among their members, to understand how businesses feel operating within this market. From the Chambers’ perspective, this information lets them better advocate for their member businesses. We read these surveys with great interest and compare them against our experiences working with international clients who set up and operate business in China.
There are many questions we seek answers to through these surveys: what are the most common issues international firms (many of which are SMEs) face in China? Which of those issues pose the most serious challenge to their endeavors? And does the ongoing trade war affect their overall outlook on business performance in China? We analyzed five business sentiment surveys conducted by international chambers in China. In the following two-part article, we share our conclusions and insights based on our analysis and comparison of the data. If you want to read the original surveys instead, please follow the links below.
Five surveys, one goal: How are international businesses doing in China?
We looked at results of five different Chamber surveys in China: the European Union, Germany, Benelux, the United States, and the United Kingdom. As seen in Figure 1, the breakdown of total survey respondents was roughly equal, with the majority of responses coming from the European Union and Germany.
Respondents mostly from China’s prosperous Eastern provinces
The majority of businesses who specified their location in the surveys can be found on the Eastern Chinese coast within first or second tier cities. This is in line with the distribution of population and economic output in China: most foreign businesses choose to establish themselves on the East coast, with some in the center-East and the rest dispersed throughout the West and Northeast (region North of Beijing).
As seen in Figure 2, Shanghai is the most popular location for foreign businesses to establish a local presence by a wide margin, with Beijing and Guangdong being the second most popular locations. Jiangsu and Guangdong represent high profile locations not only because they’re close to major international metropolises (Shanghai and Hong Kong), but also because of the growing urban regions within each province, such as Nanjing in Jiangsu and Guangzhou in Guangdong.
Interestingly, Sichuan is a popular spot for enterprises, with the fifth most businesses of any province. This is notable because Sichuan is usually considered a “Western” region of China, and not traditionally a high-volume location for international businesses. The province’s relative popularity likely results from the rapid growth of Chengdu, a major city in Sichuan, as a financial and technology center within China.
Industries: Manufacturing, energy and professional services together account for more than 50 percent
As previously mentioned, the diversity of business industries is broad. Viewing Figure 3, one sees that more than thirteen general industries were included across the five surveys (some were lumped into the “other” category), and many more sub-industries can be identified. Unsurprisingly, Manufacturing and Energy represent two of the top three largest industries. Professional services represent 13 percent of total respondents, and is the second largest industry by responses. Professional services include legal and accounting sectors, and especially when viewed together with the financial services industry (6 percent of respondents), highlights China’s ascent to a services and technology-based economy. While this change presents new opportunities for international companies, many enterprises still encounter some challenges when attempting to do business in China. Next, we will have a look at what these challenges are, and what businesses perceive are the most significant challenges to doing business in China.
Common nuisances: Bureaucracy and internet issues
In figure 4, businesses were asked to rate their top perceived challenges when doing business in China. The two most commonly perceived issues are what one might expect: 74 percent of respondent companies perceived bureaucratic or administrative issues, and 55 percent encountered difficulties with internet or IP  regulations.
From here, the next three most commonly felt issues in China are, in order: labor shortages (29 percent), tax/finance difficulties and market barriers (24 percent), and increasing Chinese competition (18 percent). Notably, labor costs and the trade war are notcommonly felt challenges, with only 7 percent and 6 percent feeling these challenges respectively (this includes US respondents). However, viewing challenges generally, without understanding the significance of these challenges in relation to each other, leads to somewhat misleading interpretations of the Chinese business environment.
What really impacts businesses: Chinese competition and policy challenges
Even though some issues are experienced quite commonly, they might not have as big an impact on the businesses who experience them.
In certain surveys, respondents were asked to rank the challenges they experienced by the significance of the impact on their business. Taking significance into account, an entirely different picture emerges. The most troublesome issue for foreign companies in China is actually an increase in Chinese competition, with 30 percent of respondents citing this as their greatest challenge to succeed in the Chinese market. This supports the notion that China is advancing in its economic development, as Chinese companies begin to reclaim market share previously owned by foreign companies.
The next four issues listed as having a high impact on the respondent’s businesses are all closely related to government policies. Legal and regulatory issues are perceived as the main obstacles by 25 percent of respondents, followed by Bureaucracy/ Administrative Issues (20 percent), Internet and IP (15 percent), and Tax/Finance Difficulties and Market Barriers (9 percent). Viewed together, these two trends point towards a feeling from responding businesses that the Chinese market is becoming more difficult to enter as domestic companies capture a larger share. Doing business in China remains a complex endeavor for foreign companies, with regulatory issues and government policies still being perceived as an obstacle.
Concluding thoughts from part one – find out more in part two
From this article, we learned what types of businesses respond to the Chamber of Commerce in China surveys from major international Chambers, and what challenges they perceive within the Chinese market. Bureaucratic and administrative challenges are the most commonly experienced, while the most significantly felt challenge is the rise of domestic Chinese competition. Additionally, the trade war does not appear as a top challenge to respondents, even when including American respondents.
In the second piece of this two-part article, we will dive deeper into the survey responses. We will look at the perceived overall business outlook in China for foreign companies, the effects of the trade war, and observe a more complete picture of the Chinese market for foreign companies. If you do not want to miss part 2, sign up to our newsletter here.
Contributions and data analysis by David Treadwell IV.
Consultant, Lawyer, Partner and Co-Founder at ECOVIS Beijing
Richard obtained an honor’s degree in law in Germany and worked for various prestigious law firms in Germany, America and China. In addition to being member of the management board at ECOVIS International he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg.
Richard has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV and radio stations such as CCTV or Reuters. He obtains more than 10 years working experience in China and with Chinese Companies. He speaks German, English, French and Chinese.