Why have European companies lost their mojo in China?

The recent EU-China summit, held on the 50th anniversary of diplomatic relations between the two regions, marked a significant moment in a long and complex partnership. Beyond the diplomatic fanfare lies a sobering reality for European and other foreign companies operating in China, one that demands a fundamental rethink of businesses’ strategies and expectations.In a recent Working Paper, Théo Storella, Jianwei Xu and I use first-hand insights from the European Chamber Business Survey (conducted annually between 2017 and 2025) to shed light on the shifting landscape European businesses face in China. Their lowering business confidence, which reached a nadir in 2025, is well documented. Companies feel “stuck” grappling with a host of new challenges which, in some cases, call into question the viability of their long-term strategies. What is behind this deterioration in business sentiment?At first glance, major incentives remain for foreign companies to do business in China: the Chinese market is larger than ever, and China has recently undergone a metamorphosis from the world’s factory into a major innovation hub, which has only increased its share of global manufacturing. Its rapid advances in technology, infrastructure and domestic market sophistication are drawing global attention, transforming the country into a vital node in the global supply chain and even in technology networks.Consequently, European companies’ rationale for operating in China has evolved from cheaply producing goods for re-export to a “China for China” strategy. This has been supported by a massive innovation drive which has converted China into an attractive environment for companies to hone their competitive edge.Despite all this, global companies – including European ones – are not making as much money in China as in the past; simply being present in China no longer guarantees profitability or growth. There appear to be three key drivers of this new reality: the Chinese economy, its regulatory environment and external – mostly geopolitical – factors. Of these, China’s economy appears to be the most significant.The most notable trends effecting European companies are stagnant domestic demand and increased local competition. Regulatory factors come next, with the Chinese government tightening control over sectors it deems strategic such as semiconductors and data.  Less relevant, at least judging from European Chamber Survey results, has been the de-risking pressure stemming from the European Commission.Many European companies operating in China describe feeling “stuck” in the Chinese market, meaning that their diminishing profitability has not yet reached a point where market exit is justified. There are two main reasons why some companies are “stuck”. Firstly, changes in geopolitical relationships have brought about a high degree of uncertainty which has increased hesitance around major decisions, including whether to invest in or exit from major markets like China. Secondly, the European market is considered unappealing, leading many to adopt a wait-and-see attitude in China.Against this backdrop, it is uncertain what strategies European companies should adopt. The first step for most will be to accept that the era of easy market entry followed by rapid growth and financial returns in China is over, although in other growth markets such as India and Indonesia this may still be possible. China’s market has matured into a competitive environment where only the most sophisticated companies, able to mobilise deep local knowledge and strong government relations, can thrive.  Further, the fact that China sees its control of global supply chains as a source of economic and political leverage means that any foreign company operating in China – even those sophisticated and well connected enough to succeed – must incorporate some degree of diversification to reduce potentially harmful dependence.A possible response revealed by the European Chamber Survey is a growing trend of European companies eyeing emerging markets in southeast Asia as an option to balance the risks faced by their Chinese operations.In summary, the evolution of European companies’ presence in China is reflective of changes in business trends, geopolitics and economics, where China’s transformation into a mature market - characterised by stagnating demand and fierce competition – has made it harder for European companies to be profitable.For EU policymakers, an understanding of these dynamics must inform the design of trade and investment policies that can protect European interests without unnecessarily provoking China or losing its engagement. A delicate balance must be struck between strengthening economic sovereignty and promoting open markets. Similarly, for China, maintaining its appeal to foreign investment amid a turbulent global context requires transparent, stable and fair policies that reassure multinational companies. Excessive restrictions or political interference could push those companies to ‘pause’ or ‘pull back,’ depriving China of valuable innovation inputs and economic dynamism. Ultimately, the next 50 years of EU-China relations will be shaped as much by how governments manage geopolitical tensions as by how businesses adapt to on the ground realities.This is a reprint. This article has been published as part of Bruegel Zhonghua Mundus Newsletters within the EU Project China. (Original Link)