Continuous recovery of the China business of German companies already in 2020

Despite the slump in revenues associated with Covid-19 in the first half of 2020, 39% of the German companies in China surveyed succeeded in increasing sales and 42% in increasing profits in 2020. Furthermore, around a quarter of the surveyed German companies in China managed to achieve sales and earnings in 2020 that were on par with the prior year.

China is the only major global economy to expand in 2020  - if only by approx. 2%. German companies were among those to benefit from this growth the most and were able to partially compensate for the downturn in the EU- and the US-markets thanks to business picking up again in China in the second half of the year. 

China remains a key investment destination

Optimism abounds for 2021:

  • 77% of respondents expect that their sector will develop more positively in China than in other markets.
  • Consequently, 72% of those surveyed anticipate increasing sales in China for their company in 2021 and 56% expect increased profits.

This is also reflected in a strong level of commitment to the Chinese market:

  • Almost all companies polled (96%) indicated that they had no plans to leave China.
  • 72% are planning further investment, for instance in production facilities (44%) and machinery (34%), as well as in R&D (32%).

In many key industries China is setting the course for future developments. Local representation is crucial for generating sales in the Chinese market, but it is equally important to enter local partnerships and closely observe the competitors of tomorrow in their domestic market. The German companies surveyed see particularly significant business opportunities in China in innovative technologies (58%) and digital solutions (51%).

Operational challenges

Among the operational challenges present in China, the German companies polled viewed increasing personnel costs (51%) and the availability of qualified staff (45%) as the most significant. This is compounded by the continuing trend to replace German staff posted to China with local hires.

In addition, the respondents also noted restrictions to internet access (34%) and insufficiently fast, cross-border internet speed (28%).

As a result of the global pandemic, travel restrictions continue to represent the greatest difficulties for small and medium-sized German companies. 

Regulatory challenges

30% of the companies surveyed (63% in prior year) are still affected by formal entry barriers when going to market in China. This is a strong reduction over the previous year, thanks to the considerably updated and now shorter Foreign Investment Negative List in China. That said, there remain a series of indirect obstacles to market entry, such as disadvantages in tender processes and tender submission, difficulties in securing licences and certification, insufficient notice to implement new regulations and subsidies for local Chinese competitors.

Alongside the direct and indirect hurdles to market entry, there has also been no appreciable improvement in terms of protecting intellectual property (IP). As in 2019, only half of companies reported not having any problems in relation to IP, thereby indicating that one in two companies ran into difficulties. The companies concerned stated that IP-related laws and regulations provide insufficient protection against imitations (2%), that pursuing IP infringements in court is complex (1%) and that employees themselves commit IP theft (16%).

Competitive pressure rising

The survey, however, also revealed that the interaction with Chinese market players is becoming increasingly challenging. In addition, competitive pressure is on the rise; 61% of respondents noted mounting competition from private Chinese companies, but only 20% from state-owned businesses.

At the same time, the survey results confirm the deeper integration of German firms in China thanks to increasing localisation, which is accelerated by the economic ramifications of the pandemic and decoupling scenarios.

Hopes pinned on EU-China investment agreement

Expectations are high for the EU-China Comprehensive Agreement on Investment (CAI), which is yet to be adopted. The surveyed companies in China cited further improvements to market access (40%) and a level playing field for all market participants in China (39%) as key issues for the CAI.

The survey by KPMG and the German Chamber of Commerce in China is the most representative of its kind in terms of the opinions of German companies in the People's Republic. In total, 535 member companies of the German Chamber of Commerce in China took part in this latest survey in October and November 2020.

You can download the "German Business in China: Business Confidence Survey 2020/21" here.

You can download the Chinese version here.