European companies cut costs, scale back investments in China as its economy slows

A recent survey by the European Union Chamber of Commerce in China reveals that European companies are reducing costs and investments in China due to the slowing economy and intense competition. Overcapacity in sectors like electric vehicles, driven by government subsidies, has led to price wars and declining profits, prompting Chinese companies to increase exports, raising concerns in Europe and leading to tariffs on Chinese EVs. The survey indicates that downward pressure on profits has increased, and business confidence has not yet bottomed out, reflecting challenges in the bilateral trade relationship.

Analysis

European companies are actively reducing operational costs and scaling back new investments in China, a strategic shift primarily driven by the nation's decelerating economic growth and intensified domestic market competition. The European Union Chamber of Commerce in China's Business Confidence Survey 2025, which surveyed approximately 500 member companies, highlights a significant deterioration across key business metrics, with respondents reporting increased downward pressure on profits and a business confidence level that has not yet stabilized. This challenging environment is exacerbated by Chinese industrial overcapacity, notably in sectors such as electric vehicles, which has been fueled by government subsidies. This overcapacity has resulted in severe price wars, eroding profit margins for both domestic and foreign firms operating in China. Consequently, Chinese companies are aggressively pursuing overseas markets, leading to heightened trade tensions with Europe, as exemplified by the EU imposing tariffs on Chinese EVs due to concerns over unfair subsidization. Jens Eskelund, president of the EU Chamber in China, noted the perception of an inequitable distribution of bilateral trade and investment benefits and emphasized the difficulty for businesses operating amidst declining margins, underscoring the need for China to balance supply growth with actual demand.

Key Decisions for Investors

• Investors should exercise heightened caution with European companies that have significant revenue exposure or investment concentration in the Chinese market, given the reported cost-cutting measures, reduced investment plans, and deteriorating business confidence.
• Closely monitor Chinese economic indicators, particularly those related to consumer spending, industrial output, and real estate, as well as any policy responses from Beijing aimed at addressing industrial overcapacity and stimulating domestic demand, as these will be critical for assessing the market outlook.
• Re-evaluate exposure to specific sectors within China characterized by significant overcapacity and intense price competition, such as the electric vehicle industry, which are directly impacting profitability and prompting aggressive export strategies that could invite further trade protectionism.
• Factor in the escalating trade tensions between China and the EU, including existing tariffs and the potential for further restrictive measures, which could materially impact companies involved in bilateral trade and their associated global supply chains.