EU companies say China units increasingly isolated from HQ by zero-Covid

European corporate leaders are becoming detached from their Chinese operations and less tolerant of Beijing’s diktats as business confidence plummets in the world’s biggest consumer market and factory floor.

The warning from the EU Chamber of Commerce in China comes as strict border closures, which have persisted for more than two years under President Xi Jinping’s stringent zero-Covid policy, extend into the third year.

“China operations are becoming increasingly isolated due to China-based staff, both foreign and Chinese, being unable to travel to European headquarters for information exchanges, networking, training and the sharing of expertise,” the chamber said in a report released Monday.

“Senior decision-makers from HQ are also being deprived of first-hand China experience, which is resulting in less understanding of — and therefore less tolerance towards — China. The loss of diversity among the workforce in China will also impact innovation.”

The chamber’s warning highlighted the risks of long-term consequences for international business from Xi’s policy of eradicating the virus, with snowballing economic and social costs from snap lockdowns, closed borders and fastidious mass testing.

It also reflected rising fears and greater “attention in boardrooms” over worsening geopolitical tensions stemming from Russia’s invasion of Ukraine. Beijing has refused to join international condemnation of the war and has provided support by bolstering Vladimir Putin’s battered economy.

China’s economy is wobbling on the edge of a rare recession this quarter after its zero-Covid policy forced hundreds of millions of citizens into partial or full lockdowns and caused widespread supply chain disruption.

The EU chamber report, which drew on a flash survey from late April and an earlier survey, said that more than 90 per cent of its respondents were affected by port closures, road freight decreases and the spiralling costs of sea freight.

Almost one-quarter of European companies in China are reviewing their investments.

According to the survey, 23 per cent of the region’s companies are “considering shifting” current or planned investments outside China’s borders.

Seven per cent of European companies operating in China said they were reviewing investments directly because of the war in Ukraine, and one-third believed the market had become less attractive since Moscow’s invasion in February.

But it is not just European companies that are considering decoupling from China and stoking concerns about deglobalisation.

More than a quarter of US manufacturers in China are moving production of their global products out of the country while accelerating localisation of their supply chains inside China, according to a survey published by the American Chamber of Commerce in Shanghai last week.

Nine in 10 US companies across the manufacturing, consumer and services sectors have slashed their revenue forecasts for China this year.

More than three-quarters of the European companies surveyed said that the zero-Covid measures had also diminished China’s attractiveness as an investment destination. Businesses highlighted longstanding grievances such as forced technology transfers, unfavourable treatment compared with Chinese rivals and ambiguous rules and regulations.

However, the survey, which was conducted with German consultancy Roland Berger, also illustrated that even after decades of booming growth, some European companies still predicted a “great deal of potential” in the Chinese market.

“The rewards of staying the course and navigating the storm are plain to see,” the report said, pointing out that before the Omicron outbreak and war in Ukraine, about 30 per cent of companies planned to increase their shares in local joint ventures.