Question 1 - China’s economy is facing headwinds these days: lockdowns, supply chain, energy price volatilities and issues in the real estate sector let Q2 growth drop to 0.4%. What sentiment and concerns do you observe among Czech business in China? How fundamental are such concerns?
Czech businesses in China are currently mainly concerned with “Zero Covid” policy related uncertainties that may disrupt production and logistical flows at any time, such as travel restrictions and potential short-term lockdowns. They also need to navigate an environment of increasing political and hence reputational risk in light of China’s position in the Ukraine conflict. I believe these to be rather temporary.
More fundamentally, in industries ranging from high tech to medical devices, Czech and other foreign companies are observing a push by the Chinese government for more technological self-sufficiency, including initiatives to “buy local”. There is a real risk for foreign businesses of getting caught in the crossfire of the US-China trade and technology conflict. Such developments lower market opportunities for foreign companies and strengthen domestic competition. Despite these challenges, however, our member companies have to date no intention to leave, and instead plan to continue to compete for their market share in the huge and growing Chinese market.
Question 2 - Beyond these headwinds, to secure and drive future growth in China, what are the key topics that you observe to be “on the desk” of the management of China operations of Czech companies?
As a result of rising energy and material costs in Europe and the Czech Republic as well as high shipping costs, we see an increasing need for foreign companies to further localize their production in China. China manages to keep fixed costs for businesses relatively low and stable. Besides, the inflation in much of the world might not be only temporary. So, without more localized operations, European companies may these days quickly find themselves priced out of the market.
A second issue of top priority at the moment is knowing what is actually happening on the ground, as Covid-induced travel restrictions have rendered regular business trips for European executives difficult due to the low number of authorized flights, expensive tickets and the imposed quarantine upon arrival. Companies that have a local management in place and localized their decision making are able to make faster decisions in these times.
We also observe more strategic adjustments. Some companies are thinking about how to better diversify their supply chains to mitigate potential risks, moving parts of their current or new activities into other countries, at times even duplicating activities for their “in China” and “ex China” supply chains. A wholesale exit from China, however, is not an option for companies.
Question 3 - With complex recent developments in Sino-Czech bilateral relations starting with Prague’s unilateral cancellation of its sister-city partnership with Beijing in 2019, how do you expect this relationship to evolve, also considering the broader EU-China relations?
The Czech China policy lends itself largely to Brussel’s China policy. But I expect there to be a split between the often critical political and media rhetoric on the one hand and more pragmatic companies and businessmen on the other hand.
At the same time, the Czech government continues to sponsor business initiatives in China through programs such as the Projects to Support Economic Activities Abroad – or simply PROPEA – an initiative with public and private funding to boost economic activities in key markets. The currently rather negative and unbalanced media messaging may discourage more people in the Czech Republic and Europe to study Mandarin and work in China since they cannot travel and experience the situation on the ground for themselves.
Within China, however, we see great pragmatism as well as continued interest to collaborate with the Czech Republic and the Czech Chamber in order to create an environment for Czech companies to expand into China, despite the recent political turbulences. This equally applies to local governments, industrial parks and regional organizations such as the local bureaus of the China Council for The Promotion of International Trade (CCPIT). As “Zero Covid” is loosening up, some Czech companies are reviving plans to expand into China, very much in line with their other European peers.