German Chamber’s Business Confidence Survey 2023/24: Key Findings

The German Chamber’s Business Confidence Survey 2023/24 reveals apprehension among German companies, citing issues such as China’s slow market growth, increased domestic competition, and the regulatory climate for their business outlook in 2023. However, most of the surveyed companies, in particular long established firms, reaffirmed their commitment to the Chinese market, expressing cautious optimism for enhanced business confidence in the current year.

The German Chamber of Commerce in China released its annual Business Confidence Survey (BCS) 2023/24 on January 24, 2024.

This survey interrogates member companies on a variety of factors that influence their investment choices in China. The BCS Report provides a clear view of the current sentiment of German companies towards China’s present business environment.

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The companies were surveyed between September 5 and October 6, 2023, and they were questioned about their expectation for business growth in China in the coming year. The companies surveyed in the report encompassed various sectors among which the most notably represented were: machinery and industrial equipment, automotive, and business service.

In this year’s survey, respondents focused mainly on issues related to the slow growth of China’s market, increased domestic competition, regulatory challenges, and risk management.

In this article, we look at some of the main findings provided by the survey and provide some context and analysis of the challenges and concerns that German companies are currently facing in the Chinese business landscape.

What did the 2023/24 survey find?

Growing optimism for China’s economic rebound

The findings: The report reveals a cautious optimism among companies operating in China, a sentiment attributed to a slower-than-expected market growth in the region.

Notably, half of the respondents cited this factor as a significant cause of concern for their industry development, highlighting a perceived deterioration of the 2023 situation compared to the previous year. From the statistics presented, it appears that the Business Service sector, in particular, exhibited a worsening perspective on development as of 2023.

The survey also notes a trend of companies postponing their hopes for business improvement to 2024. Eighty percent of the companies acknowledged the current downward trajectory of China’s economy. However, within this group, around 90 percent expressed confidence in China regaining robust growth within the next five years. Consequently, half of the respondents anticipated a yearly expansion ranging from 5 percent to 20 percent.

The survey underscores that the positive outlook for mid-term growth potential depends on the size of the company taken into consideration, with larger companies expressing greater optimism about their industry’s growth potential compared to small and medium-sized enterprises.

Analysis: The lifting of the Zero-COVID policy in December 2022 and the full recovery of the supply chains’ normal operations let investors hope for a quick rebound of China’s economy.

In 2023, Chinese economy registered a growth of 5.2 percent, surpassing the target of “around 5 percent” that the government had set for the year. Despite this growth, the performance was still significantly lower when compared to the soaring growth rates that the country has been used to for decades, averaging at 8.89 percent.

Factors such as the ongoing crisis in the property market, and capital outflow, along with demographic headwinds, have negatively impacted the foreign investors and low consumers’ perception of China’s economy, reducing their confidence regarding its fostering of development opportunities.

However, as emerged from the 2023 China’s Central Economic Work Conference, top Chinese leaders are taking new and weighted steps to foster economic stability through policies aimed at setting a pro-economic growth agenda in 2024. While acknowledging that profiting in China has become more challenging due to market shifts, they reaffirm that opportunities persist.

Market attractiveness as an investment location is experiencing two parallel trajectories

The findings: This year’s BCS Report introduced a nuanced perspective on China’s market attractiveness as perceived by German companies, revealing a dual trajectory.

According to the report, while half of the respondents noted an overall decrease in market attractiveness in China, aligning with trends observed in the 2022 report, and resulting in fewer new German companies entering the Chinese market, a contrasting pattern emerged among the already established companies. Remarkably, 90 percent of companies that are already stable in China remain largely committed to the market, with no concrete plan to leave.

In this subset of respondents, half are poised to boost their investments in China over the next two years, with a notable inclination from the automotive industry towards heightened involvement in the region. The maintenance of competitiveness and the meeting of the demand for localization among customers and partners in China were the most frequently cited reasons behind this choice.

Despite the challenges, the report underscores a positive outlook for China’s appeal as an innovation market, with only 15 percent of the respondents expressing diminished attractiveness in this specific aspect. Over half of the respondents foresee Chinese competitors assuming leadership roles in innovation within their respective companies over the next five years. Once again, the automotive industry emerges as a prominent sector with the highest expectations for Chinese competitors to become future leaders in innovation.

Analysis: In the last few years, China has raised its effort to successfully implement policies aimed at attracting foreign direct investments (FDI).

The high-tech sector, in particular, is at the center of these measures, where efforts have been made to promote the expansion of new technologies and business forms. The benefits spanning from these measures became especially evident in automobile manufacturing and in the new-energy batteries industries, both key sectors for German companies.

China’s fast-paced innovation in such strategic sectors has impacted foreign companies, creating substantial business opportunities and possibilities for innovation spillover. As a result, German companies find themselves compelled to accelerate their operations in China to meet the challenges posed by China’s own homegrown push for innovation and its prominent position in the rapidly advancing electric vehicles sector.

Meanwhile, China continues to tweak its opening-up policies to better accommodate foreign businesses. China’s announcement, in 2023, of 24 specific measures aimed at foreign investment facilitation is an example.

Despite this, there is still room for improvement, as international stakeholders seek more clarity from and comprehensiveness in the scope of the guidelines.

Increasing importance for risk mitigation

The findings: In addition to the overall attractiveness of China’s market, this year’s BCS Report delved into the risk management strategies employed by German companies operating in the region.

The survey revealed a dichotomy in approaches: 44 percent of companies have already taken steps to address potential risks linked to their business operation in China, while 45 percent have decided not to take any measures yet.

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The primary factors influencing the decision-making process for risk management initiatives are identified as current geopolitical tensions (83 percent) and China’s slower economic development (45 percent). These factors shape strategies, such as building China-independent supply chains, setting up additional operations outside China, and localizing R&D operations in China.

When asked about their destinations for diversification, 75 percent of respondents pointed at other Asian countries as their preferred destination for expanding their business activities, with India ranking as the most attractive investment destination.

Analysis: The prevailing geopolitical uncertainties coupled with the perceived slowing-down in China’s market growth introduce an element of unpredictability and potential pessimism regarding the trajectory of business development within China. This has made diversification and “de-risking” crucial for foreign companies.

The latter term gained significant traction in March 2023 as a consequence of Europe’s increased dependency on China suppliers in recent years.

German companies, notably, serve as China’s primary trading partner in Europe, and this dependency is prominently seen in the automotive sector. In 2021, the automotive industry accounted for over 40 percent of the EU’s foreign direct investments into China. Understanding this, the proactive risk management stance taken by half of the BCS respondents becomes clear.

Nevertheless, despite “de-risking” emerging as a top priority on the agendas of both Germany and the EU in 2023, China’s dominant position in critical sectors, coupled with the existing network of long-standing collaborations between Europe and Chinese suppliers, adds layers of complexity. Disengagement could prove disruptive, costly, and detrimental to production timelines.

For German companies, both large and small enterprises are grappling with the potential repercussions of disengaging from China. This dilemma has led to a visible divide between those cautiously diversifying their strategies and those maintaining confidence in China’s market potential. In this context, German companies are anticipated to sustain their engagement with China while remaining attentive to diversification opportunities.

Unequal or unfair treatment and local protectionism remain high concerns

The findings: The respondents cited “unequal or unfair treatment” and “local protectionism” as the major concerns in 2023. “Legal uncertainties” and “cyber and data security regulations” were also among the top regulatory business challenges.

When asked about issues faced in cross-border data transfer, companies mentioned the extra workload required to transfer the data from China to other locations in the world, and unclear regulations on personal data standard contracts and audit requirements as the two top limitations.

When asked about issues faced during public procurement, on the other hand, companies mentioned experiencing unequal treatment compared to their Chinese counterparts and recognized Chinese market protectionism and its lack of transparency as the main factors that hindered German companies’ ability to conduct business effectively.

Analysis: The last few years have seen major developments in China’s policy and regulatory environment.

On the policy side, there have been major efforts towards securing the enhancement of China’s self-reliance. In particular, the “Made in China” and “Buy Chinese” policies have particularly impacted consumers’ behavior, redirecting their preferences towards domestic providers.

This shift in consumer behavior poses challenges for foreign companies, including German enterprises, as it greatly impacts their access to the market and limits their competitiveness.

Meanwhile, also on the regulation side, no big improvements have been made following the Business Confidence Survey released in 2022/23. Regulation issues related to cybersecurity and data protection still prove to be consistent. Furthermore, regulations such as the Anti-Sanctions Law or the Anti-Espionage Law have a significant impact on foreign companies doing business with China.

These regulations increase compliance and bureaucratic hurdles for foreign companies with cross-border operations. Moreover, many of these regulations present catch-all clauses and little explanation on how foreign companies should comply with them, generating uncertainties.

While China is seeking to balance the protection of its own interests and creating a positive environment for foreign companies, some gaps remain which may be filled with further guidelines over the next years.

What does this mean for the business environment in China?

The year 2023 proved economically challenging for both local and foreign companies operating in China, characterized by heightened local competition, unequal market access, and growing geopolitical uncertainties.

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Against this backdrop, the survey indicates a nuanced blend of optimism, cautiousness, and strategic responses among German companies in China, a sentiment poised to influence the business landscape in 2024.

The survey reveals that some companies are addressing these challenges primarily through increased diversification and localization of supply chains. Their strategic shift is expected to have far-reaching implications, potentially reshaping the global manufacturing and supply chain landscape while influencing the dynamics of international commerce in the years ahead.

On the other hand, large German companies in China have shown steadfast commitment to the Chinese market despite increased challenges. They acknowledge that China remains a vital investment destination and a significant manufacturing hub.

As China continues its economic reforms and addresses regulatory issues, foreign companies are likely to navigate a delicate balance between risk mitigation and capitalizing on growth opportunities in its rapidly evolving market in the years to come.

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