"Brussels - Berlin / The destructive effects of the COVID-19 pandemic on the global and specifically European economy have prompted the necessity of adopting new strategies related to supply chains towards the European Union. This includes exploring alternative economic zones to China as a hub for relocating some of the major European companies currently operating in China.
The pandemic has exposed the overreliance of European companies and governments on China across various sectors, from automobiles to pharmaceuticals. China has become the primary source in the supply chains for the European Union in vital sectors, ranging from pharmaceuticals and medical supplies to semiconductors, automotive, retail, and the highly sensitive technological sector.
In response, the European Commission has called for "strategic autonomy" in key sectors, such as pharmaceuticals, aiming to build more reliable and diversified supply chains as part of a proposed €750 billion recovery package.
Germany, which depends on global suppliers for 17% of its production, is also seeking to develop strategies to strengthen local supply chains and reduce future disruptions.
Several factors are driving the need for a strategic shift in relocating some European companies from China. Chief among these is the impact of the U.S.-China trade war, with unfair policies supporting state-backed or government-funded Chinese companies being a significant concern.
European countries have long collided with China's efforts to control key aspects of the European economy by acquiring controlling stakes in critical sectors through Chinese companies receiving government funding from Beijing. This has led Brussels to take precautionary measures by scrutinizing all acquisition deals made by Chinese investors, whether through individuals or companies.
An economic survey, conducted by the European Chamber of Commerce in China, revealed that the economic slowdown in China is the most significant concern for global European companies in the country, followed by global economic slowdown and the U.S.-China trade war.
According to the survey, 49% of European companies operating in China state that conducting business in China became more challenging over the past year. This reflects a 4-percentage point increase from the previous survey.
In contrast, 44% of companies expect an increase in regulatory obstacles in China, while 29% anticipate a reduction in these obstacles.
The European Chamber of Commerce highlighted that European companies in China are dealing with unprecedented levels of uncertainty. Companies are facing "levels of uncertainty not seen for generations." The survey indicates that the practice of doing business in China has become more difficult, and regulatory obstacles are expected to increase.
As China moves toward a more market-oriented economic model, it simultaneously increases reliance on state-owned enterprises at the expense of the private sector. The European Chamber emphasized the need for China to provide a fair and open market, moving towards a single economic model and system. However, concerns persist regarding the increasing dominance of state-owned enterprises.
The Chamber expressed that "hope for competition on a level playing field seems increasingly distant" and urged the Chinese government to leverage the current crisis as an opportunity to create a more equitable working environment and collaborate with the international community to promote progress and growth.
The optimism among European companies in China has declined since February 2020, coinciding with the initial spread of COVID-19 in China. The economic survey results depict a challenging landscape for European companies in China, shaped by the uncertainties brought about by the pandemic and geopolitical tensions."
"European Shift: A Move to Partially Relocate Factories and Companies from China
In the wake of successive developments, pre and post the COVID-19 pandemic, trade wars, and accusations that China does not practice fair policies between state-owned and private companies, we are witnessing an initial trend among major European companies to begin relocating part of their factories from China to other countries worldwide. This trend can be attributed to several reasons.
Firstly, there is a global consensus that China should no longer be the world's factory, especially after the impacts of COVID-19, disruptions in supply chains, and the devastating effects on the global economy.
Secondly, with the virus's effects and the global economic standstill, companies and governments are increasingly aware of the danger posed by having most of the world's factories in China.
Thirdly, European public anger, particularly in France and Germany, is rising due to the concentration of vital industries in China, such as pharmaceuticals, medicines, and medical devices. The halting of global shipping due to the pandemic exacerbated crises in France and Europe.
Fourthly, the economic wars of recent years have made European companies fear becoming victims of tariffs in future trade wars, pushing them to seek alternatives to minimize the impact of these trade wars.
Fifthly, most European and global companies are exploring new investment destinations, wary of the effects of political and economic conflicts among major powers.
Sixthly, accusations against China for not practicing fair policies in dealing with state-owned and private companies, especially European companies, coupled with anticipated trade disputes between China and the European Union, make European companies operating in China reconsider their calculations.
Therefore, these companies are now searching for new investment environments worldwide, seeking the strongest incentives and investment offers provided by countries.
Investment Incentives in China and European Companies' Trends
Traditional incentives offered by China to global companies, from cheap labor to lenient tax systems and lower customs duties, are not as enticing currently for European companies. The risks associated with investing in China, from trade wars to China's supportive policies for state-owned companies, make traditional incentives less attractive.
Areas for Economic Investment and Significant Opportunities for Projects like NEOM and the Suez Canal Axis
Given recent economic developments and changes in the global economic landscape, five economic regions stand out for attracting European companies as partners sought by the European Union to diversify supply chains. These regions are India, the Middle East, South Asian countries, Eastern European countries, and African countries.
European major companies' compass is likely to be corrected toward the Middle East, the Gulf, and North Africa due to the significant potential these countries offer in terms of investment environment, tax facilities, and the natural resources and energy they possess.
The Kingdom of Morocco is a notable example of this economic integration. The flourishing economic and trade ties, particularly with the European Union, massive investments in infrastructure, and incentives like tax and real estate exemptions have positioned Morocco as a leader in attracting foreign direct investment in Africa, with France being a major contributor in sectors like the automotive industry.
The ambitious NEOM economic project, involving Saudi Arabia, Egypt, and Jordan, and the Suez Canal Axis project emerge as promising investment environments for European companies considering a shift in their investment strategies and the relocation of some factories from China."
Incentives for Investment in the Middle East:
The Middle East emerges as the first and most attractive choice for European Union countries seeking to relocate a portion of major companies from China. This strategic move aims to ensure the diversification and stability of supply chains. The Middle East possesses key strengths that make it highly appealing for both the European Union and major European companies in their future strategies.
1. Geographic Proximity and Strong Infrastructure:
The geographic proximity of Middle Eastern countries to the European Union, coupled with robust infrastructure, makes these nations the ideal choice. With well-developed major ports and extensive industrial zones, European companies can be assured of the ease and smooth flow of supply chains, even during the most challenging global economic crises.
2. Energy and Raw Materials:
The abundance of energy resources, particularly oil and natural gas, along with the availability of essential raw materials for manufacturing, constitutes a significant attraction for European companies. The Middle East offers ample energy products and raw materials, essential for various industries. Additionally, the current decrease in labor and production costs, making the Middle East competitive with China, further enhances its attractiveness.
3. Major Economic Projects:
Significant economic projects in the Middle East, such as NEOM in Saudi Arabia and the Suez Canal Axis project in Egypt, provide enticing incentives and tax exemptions to stimulate investment by major European companies.
In conclusion, all the necessary factors are in place to attract European companies to the Middle East, especially as European strategies shift away from heavy reliance on China in their supply chains. The proactive engagement of Middle Eastern governments, economic institutions, and industrial entities becomes crucial in establishing stronger connections with European companies and offering the necessary incentives to attract them to the region.
Economic and Political Unit / European Union File
European Organization for Diplomatic and Economic Policies / Geneva Studies Center
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