EU firms to step up investment in China

Companies looking to expand their businesses in country's western areas

More European companies are planning further investment in China, the European Union Chamber of Commerce in China said on Thursday.

These companies are showing increasing interest in China thanks to new opportunities they perceive to be promised by the country's new leadership as it seeks further economic growth through reform, said Davide Cucino, president of the chamber.

Cucino was speaking at a news conference on the release of a business confidence survey for 2013 conducted by the chamber and Roland Berger Strategy Consultants.

Of 550 European companies surveyed — all with a presence in the Chinese market for more than five years — 86 percent are considering further investment to expand operations in the world's second-largest economy, while 41 percent are planning merger and acquisition deals this year.

The proportion of EU companies reporting obvious revenue growth in China in 2012 fell from 36 percent to 22 percent, while the proportion of those recording profit growth dropped from 73 percent to 64 percent, the survey showed.

"In spite of some challenges in weak market conditions, China remains a pillar for European companies' global revenue generation," Cucino said.

The proportion of companies considering moving investments outside China this year is 10 percent, down from 22 percent in 2012.

Ninety-four percent of respondents said China is increasingly important to their global strategy or has the same level of importance it did the previous year.

Cucino said the huge market demand in China is one of the reasons continued investment is being attracted from EU companies.

To upgrade the economy, the central government is looking to a series of reforms in finance, taxation, agriculture and technology.

The survey found that 38 percent of respondents believe China's new leadership will implement significant economic reforms.

Kang Yan, senior partner at Roland Berger Strategy Consultants (Shanghai), said, "European companies are expanding operations and geographical reach to achieve greater economies of scale and are strengthening in areas where they already hold advantages in order to maintain an edge over local competition."

More than half of the European companies are planning to expand their business from first-tier cities to the second- and third-tier cities in China, with interest growing in the western region of the country.

The survey found that Sichuan tops the list of destinations the companies are shifting their focus to, followed by Guangdong and Chongqing.

In recent years, the large-scale development strategy in the western region has drawn global attention, making the region a hot investment area for foreign companies.

Cucino said, "Western China is a growing interest for European companies, although coastal areas still remain key markets."

Kang added, "While foreign enterprises deepen their presence in the Chinese market, China's local industry players are continuing to improve in areas where foreign enterprises have long held dominance, and the market competition is becoming fierce."

The sector where this tendency becomes apparent is the consumer goods industry. Chinese consumers now have more options on daily necessities from both foreign and local brands. Domestic daily necessities and cosmetics companies are becoming more competitive, Kang said.

According to the survey, European consumer goods and service firms head the list of those that regard China as a priority market, with 74 percent of companies in this industry seeing the nation as an increasingly important market.

But an increasingly challenging market, rising labor costs and tough economic conditions in China have led to a fall in profits and revenue growth for European companies operating in the country.

Optimism on growth has fallen, with 71 percent of respondents hopeful about their prospects in China this year, down from 76 percent last year.

Fifty-two percent of the companies say rising labor costs are the key reason for a worsening financial performance, making it the top factor affecting net profit margins and challenges to their future business in China, the survey showed.