U.S. Businesses in China Are Worried: Survey. Market Share Is Under Pressure.

Employees work on an assembly line in Zhongshan, in southern China’s Guangdong province. (JADE GAO / AFP / Getty Images)

While U.S.-China tensions may have reached a tentative de-escalatory lull, tariff threats and the strained relationship between the rivals is hurting U.S. companies operating in China, according to an annual survey of members of the U.S.-China Business Council.

The majority of members surveyed said they wouldn’t be able to remain globally competitive without their China operations—no surprise considering American companies sold nearly half a trillion dollars of goods and services in China in 2022, the last year for which data is available. Now, though, most members report business becoming more challenging, both because of geopolitical factors and what is happening inside China.

The results were released on Wednesday.

Trade frictions, with tariffs at a trade-weighted average of 50%; a strained U.S.-China relationship; and export controls, sanctions and investment restrictions topped the list of concerns for members, according to the survey.

Three-quarters of those surveyed said rising input costs due to tariffs are a major concern.

A related question is who will bear the cost of the levies. So far, the survey found, a third of companies are renegotiating prices with suppliers, while another third are passing the expense on to consumers.

A separate challenge is that about 40% of companies said U.S. export restrictions have resulted in lost sales, ruined customer relationships, or created reputational damage as Chinese firms increasingly see U.S. suppliers as unreliable, according to the survey.

Profitability is deteriorating, with 82% of those surveyed saying their China operations were in the green last year, compared with 97% in 2019. Fewer than half of businesses surveyed were optimistic about their future and less than half planned to allocate new money to China this year.

Part of that results from China’s economic malaise. China has increasingly relied on manufacturing as other parts of its economy remain subdued, creating an oversupply of goods that pushes prices lower, creating the risk of a self-reinforcing deflationary cycle. That overcapacity is now spilling beyond industrial sectors into areas such as healthcare and consumer goods, raising concerns that it will threaten profitability, according to the survey.

Increasing local competition is also a problem. Almost a third of companies said they have lost market share in China over the last three years and nearly 70% are concerned of losing ground in the next five years. Indeed, the share of companies that said they have increased market share—18%—is about half of what it was in 2021.

Adding to the struggle is Chinese industrial policy and support for local players, including procurement initiatives to reduce reliance on foreign suppliers.

Write to Reshma Kapadia at reshma.kapadia@barrons.com