European tech businesses cool on China due to coronavirus lockdowns

Supply chain issues and other disruptions in China caused by strict COVID-19 lockdown measures have seen 23 percent of European businesses operating in the Middle Kingdom consider moving elsewhere, according to a recent report.

The report, from the European Chamber of Commerce in China and released on Thursday, said the number of European businesses considering leaving nearly doubled since the onset of 2022, a mere five months ago.

"The introduction of more stringent COVID-19 containment measures in 2022, with China imposing full or partial lockdowns in at least 45 cities, is causing massive uncertainty for businesses," said the authors.

Although the survey respondents came from a broad range of industries, regions, and sizes, over 90 percent were negatively affected by supply chain issues. Eighty-five percent struggled to access raw materials and components for production, 89 percent reported they were struggling to transport those materials and components, 87 percent were struggling to deliver finished product domestically, and 83 percent to deliver them internationally.

Goods leaving Shanghai's port dropped by a quarter and Chinese road-freight traffic fell by 40 percent between mid-March and early April 2022 as COVID began to surge in China's cities.

"This is impacting companies' upstream and downstream operations, with companies struggling to both transport raw materials and components to their factories, and to ship finished goods to customers in China and overseas," the report states.

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Within the IT and telecommunications sector, 75 percent of those surveyed found China a slightly or significantly less attractive investment destination, compared to 76 percent in automotive, 78 percent in machinery, 80 percent in transportation and logistics, and 100 percent in aviation.

"To restore confidence in the China market, European businesses need more predictability," the Chamber wrote.

China's tech execs have worried about this very outcome, warning the public of "severe consequences and losses" if the country's notoriously strict lockdowns continued and factories remained shut.

Several factories – like those operated by Tesla, Foxconn, and SMIC – have opted for closed-loop systems whereby employees live and work onsite to keep production running, even if in a limited capacity. For some, this system has worked, but for others like Foxconn, outbreaks within factories have caused repeat shutdowns.

While the survey looked at both the effects of the war in Ukraine and COVID-19 policies in China, the findings showed that COVID-19 presents a far more immediate challenge and has caused a considerable drop in European companies' confidence about operating in China.

The war has also changed attitudes – a third of respondents said it had made the Middle Kingdom a less attractive investment.

The biggest impact was from logistic disruptions, with 65 percent being negatively impacted as the war has made rail freight between China and Europe unviable to transport goods and materials.

Apple CEO Tim Cook said last week during the Q2 earnings call that freight is a "huge challenge" from an "inflationary point of view and from an availability point of view. And so right now the focus is on moving the freight to customers any way that we can do that. Over time, we'll do that much more efficiently.

"I would hope that the fundamental rates reset on both - I'm talking about both ocean and air. And so both of them have come under some significant inflationary pressure partly due to COVID and some other reasons." ®