European businesses pull back from China amid fierce competition and weak demand

European companies operating in China are slashing costs and pulling back on expansion plans as they face mounting challenges from a weakening domestic economy, intensifying competition, and opaque regulatory conditions, according to the European Union Chamber of Commerce in China’s annual Business Confidence Survey 2025.

The report, released on Wednesday (today), paints a grim picture of the business climate for European firms, many of which have had a foothold in China for decades. Nearly three-quarters of surveyed companies said it has become increasingly difficult to operate in the Chinese market –⁠ marking the fourth consecutive year of deepening corporate pessimism.

“The picture has deteriorated across many key metrics,” the chamber noted in its introduction to the survey. About 500 member companies, ranging from industrial giants like Volkswagen to smaller players in global supply chains, responded to the survey conducted between mid-January and mid-February.

Fierce competition and falling margins

The chamber highlighted that China’s overcapacity problem, particularly in targeted sectors like electric vehicles (EVs), has resulted in fierce price wars that have slashed profits. Chinese companies, often boosted by Government subsidies, have ramped up production far beyond local demand, pushing many into foreign markets –⁠ triggering concerns in Europe about the impact on local industries.

“The same forces that are driving up Chinese exports are depressing the business outlook in the Chinese market,” the chamber said.

European automakers have seen their market share eroded, while companies in sectors like pharmaceuticals and medical imaging have been squeezed out of parts of China’s state-run systems. Last December, Volkswagen agreed to sell its factory in Xinjiang, a region under international scrutiny over human rights abuses.

“I think there’s a clear perception that the benefits of the bilateral trade and investment relationship are not being distributed in an equitable manner,” said Jens Eskelund, president of the EU Chamber in China.

He welcomed Beijing’s recent efforts to boost consumer spending but stressed that the Government must also rein in unchecked supply growth. “It is just very difficult for everyone right now in an environment of declining margins,” Mr Eskelund said.

Investment intentions hit record low

The survey revealed that only 38 per cent of European firms plan to expand their operations in China this year –⁠ the lowest level on record. This marks a significant shift, given that European investment has historically played a key role in bringing Western technologies to China and connecting Chinese products to global markets.

The survey also uncovered a contradictory trend: even as European businesses scale back their local investments, some are increasing their purchases of Chinese components. With broad price declines in China and a weakening yuan against the euro, Chinese parts have become hard to resist.

“The one place where they actually get better components at a lower price than anywhere else in the world is here in China,” Mr Eskelund explained.

Global trade tensions

Escalating trade tensions have compounded the difficulties. The European Union imposed tariffs on Chinese EVs last year, accusing Beijing of unfair subsidies. Meanwhile, companies exporting from China to other markets face growing fears of trade barriers.

“That fear has turned into a nightmare for many at the moment,” said Klaus Zenkel, a businessman in Shenzhen and member of the chamber’s South China chapter.

Some European companies have adopted creative –⁠ if temporary –⁠ solutions, such as renting warehouses in Taiwan to carry out final assembly and avoid US tariffs by shipping goods without a Chinese origin label. However, US efforts to clamp down on indirect shipments continue, adding further uncertainty.

Shifting labour landscape

Interestingly, labour costs –⁠ once a top concern for foreign businesses –⁠ have fallen sharply in importance. China’s housing market crash in 2021 triggered a construction slowdown that eliminated many jobs, keeping wages flat or even declining. While this has eased wage pressure for businesses, it has also dampened consumer demand across sectors, fuelling deflationary risks.

“By a wide margin, it is China’s economic slowdown that is seen as having the greatest impact,” Mr Eskelund concluded.

The European Chamber’s findings underscore how China’s economic struggles and policy environment are reshaping the landscape for foreign businesses, raising questions about the long-term balance of trade and investment between China and Europe.