Survey of 120 Companies shows many Operations disrupted with deep concerns of more to come, especially in digital fields. At least One Europe-based business has already closed its manufacturing operation in Southwest China.

European companies are at risk of being stranded in the middle of any further US-China decoupling, with some firms predicting a “death knell” for their operations in China.

The stark findings were released on Thursday in a joint report by the European Union Chamber of Commerce in China and the Berlin-based think tank Mercator Institute for China Studies, which surveyed 120 Companies from October.

“The pain is most keenly felt in the areas where China’s self-reliance campaign collides with the US and other actors’ efforts to engineer economic decoupling most clearly in all things digital,” the report said.

“Decoupling: severed ties and patchwork globalisation” covered the dynamics of supply chains, critical components and innovation, revealing “rapidly growing concerns” over the setting of standards, as well as data and digital technology, such as AI and the internet of things.

“Many fear that a continuation along this perilous route towards a complete fracturing of economic and technological ties between the US and China may sound the death knell for their China business or force them into a dual track approach to technology and supply chains, either of which will cause irrecoverable damage to their global operations and home markets alike,” it said.

European companies have already had their operations disrupted by the US decision to cut the supply of chips to China. The report warned that decoupling trends were likely to worsen in future, “catalysed by political and strategic divergence”.

Chamber president Joerg Wuttke said the survey found 27 per cent of respondents relied on US semiconductors and international software which had no substitutes in China.

In one case, a European firm closed its manufacturing base in southwest China after it lost access to US chips. The chamber said the company had struggled to find a suitable substitute in Europe for the vital component in its highly specialised products, resulting in higher costs and lost competitiveness.

It also noted tightened screening for European firms offering digital solutions for their US operations, with demands for detailed information, such as the nationality of technicians who had worked on the code.

Faced with increasing digital divergence between the world’s two largest economies, European firms may have to devise dual solutions which served China and Western markets separately a move that would compromise innovation and efficiency, the chamber said.

“With the future trajectory of the US-China trade conflict up in the air, European companies with operations in China must make some tough choices to manage risks not only within their own company, but also with suppliers and customers up- and downstream,” the report said.

China’s push to expand its influence in the setting of global quality standards was also cause for concern, according to the report, which said Beijing had slowed the adoption of international norms while promoting its own domestic standards internationally.

Foreign Companies had also complained about a lack of access to standardisation activities within China, it said.

The report noted that Beijing had looked to promote Chinese standards in third countries through its Belt & Road Initiative, which could lead to tech dependency and a squeezing out of European business.

“Of more concern, particularly for companies involved in infrastructure or energy, is the promotion of Chinese standards along the Belt & Road Initiative, particularly in projects that are mostly Chinese-financed.

If a project recipient country accepts the use of Chinese standards, the immediate effect will be a drastic reduction in the chances for foreign companies to participate in such projects,” it said.

“Given China’s dynamic innovation ecosystem and its ambitious standardisation strategy, being at the table is an essential first step for European companies to address potential issues related to market access, competitiveness and localisation costs”.

The report also urged Beijing to address concerns over data and cybersecurity regulation, saying half of the companies polled had already delayed or dropped projects or services, or were considering doing so, because of China’s restrictive approach to personal information.

“China needs to give foreign actors more confidence that its evolving data management regime is governed in practice by a level of transparency and predictability adequate to protect foreign interests,” it said.

Author: Wendy Wu
Editor’s Note: The article reflects the author’s opinion only, and not necessarily the views of the editorial opinion of Belt & Road News.