U.S. Firms in China Grow Gloomier Over Deteriorating Bilateral Relations: Survey

American firms in China are becoming more conservative about their local investment plans, as they increasingly worry that U.S.-China trade frictions won’t be quickly resolved and could drag on for years, according to a new survey released on Wednesday.

“Dynamics caused by the pandemic coupled with uncertainties around the trade tensions, strong local competition and in certain sectors regulatory change have really put management of U.S. multinationals operating in China to the test,” said Ker Gibbs, president of the American Chamber of Commerce in Shanghai, whose 2020 China Business Report was based on responses from 346 members polled in June and July.

Some 28.6% of American companies in China currently plan to increase their local investment, down sharply from 47.2% who had such plans at the same time last year, the latest survey showed. At the same time, roughly half of all members surveyed said they now expect U.S.-China trade tensions to drag on for three years or longer, up sharply from roughly 30% who held such expectations last year.

“Despite the phase one trade deal, our members are less sanguine than last year about how long U.S.-China trade tensions will last,” the report said. “Growing talk of an economic decoupling may have weighed on minds.” The report said the most pessimistic industries included technology, hardware, software and services, as well as pharmaceuticals, medical devices and life sciences.

Staffing has become a growing issue as tensions remain high, with nearly a third of respondents this year saying trade tensions were affecting their ability to retain staff in China. Industries experiencing the problem most severely included education and training, and logistics, transportation and warehousing, where half of respondents or more said the conflict was affecting their ability to keep staff.

Moving some production out of China was also a hot topic. Such movement has been happening for much of the last decade due to rising costs in China, but has seen added urgency over the last two years amid the trade tensions.

Half or more of respondents that source in China from the automotive and non-consumer electronics sectors said they plan to move some of that sourcing to other domestic locations and also outside China. About a third of respondents that source in China from the chemicals and pharmaceuticals and medical devices industry said they also have such plans.

Such geographic diversification has also gained urgency after the global pandemic highlighted the risks of too much reliance on sourcing from one country. The Covid-19 outbreak first emerged in China and led to widespread work stoppages for much of the months of February and March, before most of the rest of the world was affected. That caused major disruptions to many global supply chains that relied on Chinese manufacturers during those early months of the year.

On the subject of the virus, 78% of companies said they expected negative impact on their revenues this year due to business disruptions caused by the virus. Those worst affected included the auto, education and industrial manufacturing sectors, as consumers stayed home, schools closed and factories were forced to remain idle for several months at the height of China’s outbreak. Some 59% of respondents said their revenue was down in the first half of this year compared with the same period of 2019, while just 27% said the figure rose.

Staffing issues continue to persist related to expat workers who left China earlier this year at the height of the local outbreak and were having trouble returning, though some workers have been allowed back in, said Gibbs. China went for several months without letting most foreigners in, though it has recently begun to ease that ban. But the U.S. has yet to appear on any publicly released lists of countries whose citizens can apply to return to China with relative ease.

“We’ve been pushing as hard as we can to get the (American) expats and their dependents back into China,” Gibbs said. “Every week there’s Americans being allowed back in. But the process has been challenging.”

Despite the challenges created by trade tensions and the pandemic, views of the longer term were roughly the same this year compared with last year’s survey. Of the companies surveyed, 59% were optimistic or slightly optimistic about their outlook on China over the next five years, down slightly from 61% who expressed such sentiment last year. But notably, the optimism level fell sharply in the 2019 survey when U.S.-China tensions were ratching up. Before that, about 80% of respondents had expressed some degree of optimism in each of the previous three years.

Contact reporter Yang Ge (geyang@caixin.com) and editor Gavin Cross (gavincross@caixin.com)

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