'Burdensome' regulations frustrate European firms in China

Guangzhou, China — European firms say internet restrictions, regulatory barriers and market-access restrictions hampering prospects on the mainland.

Nearly half — 48 percent — of respondents to an annual survey by the European Union Chamber of Commerce in China say that doing business in China has gotten tougher in the past year.

"[It] is time for China to remove the training wheels in order to create a sustainable economy in the long term," said European Chamber President Mats Harborn. "We have seen some improvements this year in areas such as law enforcement, but we are still far from an environment that fosters fair competition."

Forty-six percent of respondents say market access restrictions and regulatory barriers have thwarted business plans. The same percentage expect regulatory obstacles to worsen over the next five years.

Last year, President Xi Jinping pledged reforms and greater market opening at the World Economic Forum in Davos, Switzerland. But change has come slowly in the eyes of the respondents to the survey run by the European Union Chamber of Commerce in China. Only 6 percent saw a significant increase in market opening from 2016. And 19 percent said they felt obligated to transfer technology know-how to China in order to maintain market access.

China's much-ballyhooed Made in China 2025 program favors domestic companies — 43 percent of respondents said they believed it discriminated against foreign companies, while 29 percent say they know of subsidies offered only to Chinese companies, with the environment and renewable energy seen as foci of favoritism.

Two-thirds of European companies see China's Belt and Road Initiative as largely irrelevant to their business, although aerospace and civil engineering and construction firms are optimistic about opportunities from the mammoth international infrastructure push.

Just over half, 51 percent, think foreign firms are treated less favorably than domestic ones, which is down slightly from last year, but sectors vary dramatically. While only 32 percent of chemical/petroleum firms see favoritism for mainland companies, 67 of medical-device companies believe they are treated unfairly.

Fully a quarter of European firms believe they will never see a level playing field for all companies.

Since the survey was conducted in February and March, U.S.-China trade talks have fallen through and both countries have followed through on tariff threats.

This year's survey shows for the first time that a majority of respondents — 61 percent — believe that Chinese firms are equally or more innovative than European counterparts. But while Chinese companies are meeting rising consumer demand by innovating in products and services, they still lag in more challenging forms of innovation, such as scientific research and engineering, respondents say.

Respondents were sanguine about recent developments in protecting intellectual property rights (IPR), but feel much work needs to be done. This year, 34 percent said IPR protections were adequate or better, up from a miniscule 13 percent only five years ago. Still, 29 percent reported significant damage from IPR infringement.

While Beijing has established 15 IP tribunals across the country since last year, European firms still complain about slow response times.

The number of firms with Mainland R&D units remains flat at 44 percent. One reason cited by the report: "[Many] European companies [are] still being reluctant to bring their core technologies to China for fear of infringement."

Three-fifths of the survey responders are bullish about growth prospects over the next two years, the highest rate since 2014. And 66 percent reported their companies mainland sales were up 5 percent or more in 2017, the biggest jump in that category since 2012.

However, respondents are slightly less optimistic on profitability. An all-time high of 46 percent plan to cut costs this year.

A major concern was internet access, with 64 percent of respondents saying restrictions have hurt their businesses.

China's rapidly aging population drove especially strong sales of medical equipment and pharmaceuticals. The automotive and chemicals/petroleum sectors also saw double-digit gains. Information technology companies saw their revenues tumble more than 10 percent as companies struggled to comply with a new Cybersecurity Law, which requires IT products and services to be "secure and trustworthy."

The survey reflects an accelerating shift of low-cost manufacturing to Southeast Asian countries as China focuses on high-end manufacturing.

Small and medium-sized companies said they were especially hurt by the SME Promotion Law that favors domestic businesses. Big Chinese companies, with more than 1,000 employees, are more innovative than their SME counterparts, European firms reckon.

On the environmental front, the percentage of respondents giving the government high marks for strong protection doubled to 45 percent. However, by a two-to-one margin, respondents believe the government is still much tougher on foreign than on domestic firms.

While respondents noted enforcement of environmental regulations is up, some complained that heavy-handed interpretations hurt foreign companies, even those complying with the law. Some of these companies are now contemplating moving some of their operations outside the country.

In terms of the overall business environment, respondents were most concerned about a potential Chinese economic slowdown, followed narrowly by ambiguous rules and regulations and a global economic slowdown.

The online survey was conducted by Munich-based consultancy Roland Berger. Of 1,195 EU Chamber members invited to participate, 532, or 44.5 percent, did.

The EU Chamber has been surveying its members annually since 2004.