Headwinds blow European companies off track

Slowing growth in China hits sales as report by the EU Chamber of Commerce shows that many firms plan to cut costs

Jack Luo, a salesman at a German auto dealership in Beijing, plans to start looking for another job after four of his friends left to join other companies.

Before car sales started to stall this year, he could make at least 15,000 yuan ($2,346; 2,106 euros) a month. But now he has to rely on his basic salary of about 3,000 yuan.

Last month, new car sales dipped 2.5 percent to 1.3 million vehicles, according to the China Passenger Car Association. That was the lowest monthly level since February 2014.

Data published by another industry organization, the China Association of Automobile Manufacturers, shows car sales by its members fell 6.6 percent in July, also marking a 17-month low. The decline comes despite deep price cuts by manufacturers to woo customers back into showrooms in the world's largest car market.

"It is a tough business now," says Luo, 30, and married. "We have to work harder to make a sale because customers are very demanding and budget-savvy."

But then, Luo is not the only one who has tightened his belt because of the economic slowdown. As international companies here report slowing demand, many employees face pay cuts at the very least.

A survey by the European Union Chamber of Commerce in China shows that 39 percent of EU-based companies planned to trim costs this year through layoffs. In 2014, that number was only 24 percent.

At the same time, one-third of those companies polled revealed that they are putting investment and expansion plans on ice.

"China's economic slowdown is here, and it is already significantly impacting the performance of European business in China, which is increasingly concerned about the heightened threats that a deepening downturn will pose," the survey, based on more than 500 EU companies in China, says.

Firms in the machinery industry have been badly affected as have those in the legal sector. The automotive and auto components industry, along with the chemicals and petroleum sectors and financial services, have also suffered, according to EU Chamber of Commerce report.

In the car industry, Volkswagen Group and General Motors Co have cut their sales forecasts this year. VW announced in its first half financial report that growth in China, its single largest market, has been shrinking since the beginning of this year.

Other major EU companies, such as Philips NV, the multinational group based in The Netherlands that focuses on the electronics, healthcare and lighting sectors, are also feeling the pinch.

"China is our second biggest lighting market and it remains very challenging, fueled by the macroeconomic slowdown, tight liquidity and a very weak construction market," Frans van Houten, CEO of Philips, told analysts last month.

"We need to be much more modest on expectations with regard to China growth. That is just being realistic," he says.

But the economic "headwinds" have affected companies in different ways. Last year, Nokia Corp's mobile phone factory, a seven-story glass and steel building in Beijing's Yizhuang high-tech industrial park, was closed.

Nokia's new owner, Microsoft Corp, the Internet giant based in the United States, then shifted investment to Vietnam to bring down costs.

While surging salaries have hit manufacturers, it is not the only reason European companies are starting to reassess their China plans.

Many are concerned that favorable government measures toward domestic companies and price-cutting have squeezed their profit margins.

"In China, headwinds related to the government's anti-corruption measures, and efforts to favor domestic innovation, centralized tendering, and price erosion, will continue to impact the Chinese healthcare market in 2015," says Ron Wirahadiraksa, chief financial officer of Philips.

"It is, therefore, expected to limit the growth of the Chinese healthcare market to low single-digits, with little change expected in the second half of this year."

Adam Dunnett, secretary-general of the EU Chamber of Commerce, has called for more market access to stem the tide of falling investment.

"A significant 60 percent of companies says they would invest more if China allowed for greater market access," he writes in an email.

As larger international companies leave the country, there are fears that smaller feeder firms will shut up shop as well. Again, high costs and falling demand are cited as the main reason. But it is not all gray skies for the overseas business community.

"Although there has been a small number of companies that have left China for Southeast Asia, searching for cheaper labor, we are not talking about their withdrawing from the market," says Jiang Heng, a deputy researcher of Chinese Academy of International Trend and Economic Cooperation. "For any foreign company, China is too large to be ignored and there is still room for growth."

The EU Chamber of Commerce survey backed that up, with half the companies polled saying they were optimistic about growth prospects this year, despite a drop of 10 percentage points compared with 2014.

To deal with the new growth realities, European companies are adjusting their strategies and investing in profitable businesses.

ABB, a multinational corporation involved in robotics, and power and automation technology, and based in Switzerland, has managed to keep a lid on costs through "relentless execution".

"Targeted measures to increase productivity and simplify the organization are bearing fruit," says Ulrich Spiesshofer, ABB's CEO. "(This has) resulted in increased customer engagement and additional cost savings."

The changing economic climate comes at a time when China is trying to diversify from its export-fueled and labor-intensive growth model toward a more value-added and comsumer-generated environment.

"Countries in Southeast Asia are attracting more investment with favorable conditions such as lower tax," Jiang says. "But many multinationals still preferred to put their regional headquarters, and development and research centers, in China."

lvchang@chinadaily.com.cn

(China Daily European Weekly 08/21/2015 page23)