European companies operating in China: from digging in to rethinking their presence

EU firms in China face low profits, rising pressure and reduced expansion, prompting strategy shifts and calls for stronger EU support. Nearly a decade’s worth of panel data from European Union Chamber of Commerce in China business confidence surveys are used to analyse the deteriorating outlooks of EU firms in China from 2017 to 2025.

This investigation finds that EU firms operating in China have reached record levels of negative sentiment vis-a-vis their profitability, growth, competitiveness, and consequently that fewer firms than ever plan report plans to expand their China operations in the coming year.

• Disaggregated by sector, revenue size, and time operating in China, we find that smaller, younger, and asset-light firms are nimbler and more reactive than others which may be "stuck” in China.
• Deteriorating business sentiment has not occurred in a vacuum but under deflationary and involutionary pressures in China, shrinking FDI flows, rising geopolitical tensions across the world, and burdensome regulations from China and the EU.
• Under these circumstances, many EU firms are siloing their Chinese operations from the rest of their global businesses and shifting investments to other emerging markets.
• Finally, we estimate firm strategies based on statistical analysis of key sentiment indicators, disaggregating cohorts pursuing each strategy by firm size and time operating in China.

These strategies include:

• Doubling down: mostly large firms which plan to expand their positions in China despite reporting pessimism regarding their profitability.
• Hedging: firms expanding their positions in China while simultaneously shifting investments to other emerging markets, thereby securing new opportunities while keeping a "pied-à-terre” in China.
• Hibernating: large firms withthe financial capacity to operate at a loss but choose not to expand in China, potentially pursuing a wait-and-see approach.
• Ready to exit: a cohort composed mostly of mid-sized firms operating in China for more than ten years which lack optimism over their profitability or competitiveness, are retrenching from China, and shifting investments elsewhere.

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