European Firms Assess China Exit

Business, China, Company Strategy, Economics, Europe

By John Richardson

CHINA’S rising labour costs and a worsening regulatory environment had resulted in almost a quarter of European firms to consider relocating their activities elsewhere, said a survey by the EU Chamber of Commerce and Roland Berger Strategy Consultants.

Twenty-two percent of 557 respondents said they may move investment to other developing economies, including those in Southeast Asia and South America, where doing business is easier, according to the survey.

This is in line with what the chemicals industry has been telling the blog.

Low-value manufacturing in the developed provinces is being deliberately starved of credit, and is struggling with government-mandated wage rises and higher environmental compliance costs, as part of the 12th Five-Year-Plan (2011-2015).

Reformers in Beijing want to move up the value chain in the eastern and southern regions, while encouraging lower-value manufacturing to shift inland.

And as manufacturing costs rise, challenging China’s position as the automatic outsourcing choice for Western companies, there are no guarantees that, in the long term, the reformers will win.

The Bo Xilai incident has exposed the divisions among China’s senior leaders, as the country prepares for its first leadership transition in a decade.

The Chamber of Commerce survey supports our view that “vested interests” might get in the way of reforms, thus creating huge uncertainty over the business environment.

“There is an overwhelming lack of optimism among survey respondents for future positive reform, with many companies perceiving regulatory reform to have stalled,” said the survey.

Peter Huntsman, CEO of US-based chemicals major Huntsman, also made the point during an investor call last week that China’s permitting process for chemicals projects was taking much longer.

Previously, China had welcomed chemicals investors with open arms, but attitudes had changed as a result of rising self-sufficiency, he added.

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