According to a study by the U.S.-based economic consulting firm Rhodium Group, European investment in China is increasingly concentrated in a few large companies. This shows that most European companies are increasingly concerned about the long-term risks in the Chinese market.

European investments in China have become more concentrated over the past few years, in terms of the companies they invest in, the industries they operate in, and the countries they come from according to a report published on September 14.

The researchers argue that policymakers must take a closer look at the dependence of European companies on China. From an investment perspective, it is a mistake to think that European companies are generally dependent on the Chinese market.

The report stated, “While some large companies, many of which are German, continue to pour money into operations in China, many other companies with operations in China have stopped making new investments.” The report added that more recently fewer European companies have decided to get into the Chinese market. It appears that acquiring Chinese companies has stalled.

According to the report, between 2018 and 2021, the top 10 European companies (EU and UK) investing in China accounted on average almost 80% of total European direct investment in China. German companies accounted for more than two-fifths of the total investment.

Investments focused on 5 fields: automobile, food processing and distribution, pharmaceutical and biotechnology, chemicals, and consumer goods production accounted for nearly 70% of direct investment capital.

In terms of countries, European investment has also become more concentrated. Four countries, Germany, the Netherlands, the United Kingdom and France, have accounted on average about 87% of total investment over the past four years. Germany is the main investor, averaging 43% of the total.

Among German companies, however, only the three major carmakers (Volkswagen, BMW, and Daimler) and chemical group BASF, accounted for 34% of total European investment in China.

Rhodium Group advised, “As policymakers in Berlin and other European capitals consider measures to reduce economic dependence on China, they would be wise to take the growing concentration of corporate risks into account.”

After the outbreak of the Russia-Ukraine war, Europe’s dependence on Russia was exposed, and the relationship between European companies and China also received more attention.

Research shows that the COVID-19 pandemic has slowed the pace of investment. Challenges posed by the “zero-COVID” policy, and the CCP’s lockdowns have prevented many foreign companies from establishing operations in China.

Interviews between researchers and industry figures show that, in fact, few European companies have chosen to enter the Chinese market in recent years, and smaller European companies. are reluctant to accept the growing risks of investing in the country.

The report also noted that as the Chinese market becomes increasingly politicized, foreign companies face greater barriers to entry—an uneven playing field compared to domestic firms, and a hostile environment. Compliance is unclear, causing new entrants to falter.

European policymakers are trying to diversify their economies amid China’s economic slowdown, real estate crisis, and government crackdown on private companies, which may limit the rate of investment in China.

The researchers believe that perceptions of the Chinese market will become more distinct in the coming years. Most European companies are reducing their assets in China and shifting future investments to other markets.

However, a few large enterprises that continue to invest in China have begun to experience the phenomenon of “internal decoupling,” which means they tend to localize, limit employees, and supply chains and data flow.

The researchers believe that this “in China for China” operating model could create a wider gap between companies’ European headquarters and their China operations, and pose many long-term challenges.

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