U.S. companies doing business in China are increasingly concerned about bilateral tensions and are responding by changing the way they do business in that market. Those were among the findings of an annual survey of member companies by the U.S.-China Business Council, which garnered responses from 117 companies, most of which are large, U.S.-headquartered multinationals that have operated in China for more than 20 years.

A record-high 87 percent of survey respondents said their business in China has been affected by U.S.-China tensions. Top impacts included lost sales due to customer uncertainty of continued supply (45 percent of respondents), shifts in suppliers or sourcing due to uncertainty of continued supply (37 percent), and delays or cancellations of investment in China (36 percent). Lost sales from tariffs were reported by 16 percent of respondents with respect to U.S. tariffs and 11 percent with respect to Chinese tariffs.

Companies are responding to these tensions by, among other things, making their U.S. and Chinese businesses increasingly separate. Nearly a third of respondents said they are localizing more production, services, or intellectual property in China than they normally would to access local sales opportunities; 29 percent said they are developing new supply chains for China-specific, U.S.-specific, or region-specific businesses; and 26 percent said they are shifting away from certain industry or customer segments in China.

Of particular note, the survey found that 24 percent of respondents (up from 14 percent in 2021) have moved segments of their supply chains out of China, with two-thirds of those moving them to locations other than the U.S. Top reasons for making those moves included increased costs or other uncertainties from U.S.-China tensions (75 percent), supply chain resilience (75 percent), and COVID-related shutdowns and reopening unpredictability in China (58 percent). The percentage of respondents that have plans to move their operations out of China is still low at 15 percent but reached its highest level since the survey started asking the questing in 2015.

More broadly, this year’s survey reported a record-low 51 percent of respondents (down from 69 percent in 2021) expressing optimism regarding their five-year business outlook in China and a record-high 21 percent (up from 9 percent) expressing pessimism. Geopolitics was the top issue impacting this outlook (cited by 73 percent of respondents), followed by the policy and regulatory environment (66 percent) and domestic market growth (55 percent). Declining optimism has had a real impact, with the percentage of respondents saying they plan to curtail their resource commitments to the Chinese market doubling from the previous year and the percentage saying China is their top priority market falling 40 percent to an all-time low of six percent.

Other survey findings include the following.

- China’s COVID policies were the top identified challenge, with nearly half of respondents reporting severe negative impacts on their China business because of control measures and 44 percent saying it will take years to restore business confidence even if that strategy changes.

- Significant market access barriers in China remain: intellectual property protection has seen limited improvement, Chinese economic planners have expanded industrial policies to bolster domestic companies, localization requirements to qualify for state-affiliated procurement are increasing, and new Chinese data and privacy rules threaten to disproportionately increase costs for multinational companies.

ST&R’s Asia-Pacific Practice can help your company respond to challenges in China – click here for more information.

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