China as a market for international firms is growing in size and importance by the day. Doing business here, however, can still be a huge pain.
At least that is the view of European companies operating in the country, according to a position paper released last week by the European Union Chamber of Commerce in China, a lobby group of 1,700 firms.
Presenting the annual report to business representatives and the media, Stephen Sack, chairman of the Shanghai chapter of the chamber, said that while improvements were noticeable, difficulties were also mounting. The number of “deteriorations” in the business environment such as unequal enforcement of regulations reported by EU companies operating in China had risen from a year earlier – marking the first time the chamber had noted such an increase.
Sack cautioned that this risked becoming a trend.
Worsening conditions are a major concern for companies that see China as the “promised land” where sales can offset stagnating business in home markets. Nearly half of European companies say China now accounts for more than 10% of their global revenues, according to a separate business confidence survey released by the chamber in May.
In certain industries that percentage is far higher. Chinese drivers have been the biggest buyers of autos worldwide for the best part of the last three years, boosting the fortunes of struggling foreign firms such as Buick of the US. German luxury automaker BMW sees China becoming its largest market by the end of 2013. Consumer goods brands are in thrall to the Chinese consumer.
Many of the obstacles faced by all foreign companies, not just those from Europe, appear to be entrenched.
Key among those is the partisan treatment received by domestic companies, especially larger state-owned enterprises. The report noted that they receive preference in the allocation of government research and development funding and are beneficiaries of regulations in certain sectors that force foreign companies to team up with a local partner to do business.
For many executives the biggest headache comes not from business restrictions, which almost all countries impose to some extent, but from legal opaqueness. China has a solid regulatory framework compared to many of its emerging market peers but enforcement is patchy at best.
Officials at the local level, who in fact have more autonomy from the central government that they are given credit for, often pick and choose what applies to foreign firms. For example, some business inspection fees scrapped by the government are still occasionally applied in some places.
The lack of consultation on new taxes, laws and regulations only adds to the frustrations.
A social insurance law that came into force in mid-July 2011 requiring companies to pay social welfare costs for foreign employees is still not applied equally in all regions. More recently, new visa regulations introduced at the start of this September have created disquiet because of longer processing times for residency permits.
Last year Shanghai became the first city to trial a new value-added tax that imposes a levy of 6% on logistics services. But companies are not readily able to pass this cost on, biting into their margins. “Normally we don’t even detail this in our invoices as customers wouldn’t understand it, wouldn’t be willing to pay for it,” the China sales director of a large European logistics company told China Economic Review. “They [tax officials] have no idea what VAT is.”
China is no longer the “Wild West” that executives who have been in the country for more than a decade remember with a mix of nostalgia and relief. Officials are better attuned to dealing with multinationals and tend to be more forward-thinking in their approach to global business. The EU report acknowledges that there has been progress in cutting back red tape on investment approval, liberalization in the financial services sector and opening up new business areas.
Yet progress is painfully slow. The pledges Beijing made to open China up when it joined the World Trade Organization 10 years ago have not been met. As Sack noted, the EU chamber has existed for 13 years but many of the “problems [today] remain the same.”
