Xi Jinping
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The opening of Playmobil’s experience store in Shanghai was delayed for four months due to the city’s lockdown. Photo: Handout

Zero-Covid policy has foreign firms re-evaluating China’s role in their global operations, trade group warns

  • The ‘efficiency, reliability and predictability’ of the China market have been called into question, the European Union Chamber of Commerce says
  • Yet China will continue to draw foreign companies, who express ‘unwavering confidence’ in their growth prospects in its massive consumer market
Xi Jinping

Joshua Li has had a challenging year after joining German toy company Playmobil last summer to spearhead its China growth.

The Brandstätter Group-owned brand is a household name on the level of Lego in Europe, but is little-known in China. Its extensive product lines – based on smiling, 7.5-cm-tall human figures who come in sets with a huge array of accessories, vehicles, and structures based on themes ranging from medieval castles to space pirates – mainly target kids from 3 to 12 years old.

As general manager, Li’s goal has been to connect the brand with the Chinese market, which boasts more than 225 million children under the age of 14.

However, a two-month lockdown earlier this year in China’s biggest metropolis hindered Li’s plans.
Children learn about Playmobil toys at a community event. Photo: Handout

“We pushed back the opening of our first experience centre for four months, and with a hit in our cash flow, we needed to apply for additional funds from headquarters,” Li told the South China Morning Post, adding that the company also had difficulty in staffing, especially filling on-the-ground roles. In July, a three-story store and office in Shanghai’s tree-lined Xuhui district finally opened its doors.

Chinese President Xi Jinping stressed the importance of openness in his opening speech at the China International Import Expo (CIIE) via a video on November 4, saying that “China will work with all countries and parties to share the opportunities in its vast market”.

But under Beijing’s zero-Covid policy, foreign companies have had to consider Covid-19 control measures, customs and logistics issues on top of existing business conundrums such as differences in the market environment and adjusting brand identities for Chinese consumers, experts said.

No opening up as yet for China, as top leadership doubles down on zero-Covid

“The efficiency, reliability and predictability of the China market, which had long underpinned its appeal to foreign investors, have increasingly been called into question,” wrote the European Union Chamber of Commerce in China in an email this week. As a result, companies are re-evaluating the role of China in their global operations.”

The chamber’s email came before Friday’s announcement of major changes to China’s Covid-19 measures for inbound travellers, reducing quarantine on arrival from seven days down to five, followed by three days of isolation at home.
The American Chamber of Commerce in Shanghai recently reported that its members’ revenue forecasts have dropped to the lowest level in a decade. Meanwhile US consumer-electronics giant Apple’s latest supplier listing signals a gradual move to diversify its manufacturing network to countries such as India and Vietnam. The Australian Chamber has not updated its China Business report since 2018.

However, thanks to its strong manufacturing capabilities and massive consumer population of 1.4 billion, the country remains the largest market for many industries. For growth reasons, new brands still eye China.

Foxconn to ‘resume normal productivity as soon as possible’ in Zhengzhou

“To become a market leader worldwide, the brands that are usually relatively young have to have significant sales in China,” said Simon Cai, the founder of digital marketing agency Triple Digit, which is focused on bringing foreign brands to the world’s largest e-commerce market.

The Chinese-Swedish businessman first saw the market’s growth potential after visiting World Exposition 2010 Shanghai China, and has focused on international business with the country ever since.

“There is a tremendous amount of uncovered business potential in China,” said Li of Playmobil. China is the world’s largest exporter of toys – reaching over US$100 billion in value in 2021 – and also has the largest toy market for consumers.

Market expectations of China reopening have little basis in reality

Although companies want to make plans based purely on market forces, they are unfortunately having to increasingly factor in outcomes from geopolitical events into their decision making, the European Union chamber said.

In the lobbying group’s 2022 to 2023 position paper, it recommends that China refocus on reform and opening up to address market access and regulatory issues, as well as fully vaccinate the population for a full border opening.

Due to strict Covid-19 regulations, some of Cai’s clients face long processes and excessive paperwork when shipping their products to China, he said, adding that he would like to see efficiency improvements in logistics and imports.

Why China’s local officials will remain caught in zero-Covid ‘paradox’

For Playmobil, one of Li’s China strategies is to develop roots among local communities and local government agencies, including fire departments and public security bureaus, which can “cultivate the target audience’s recognition and familiarity” with the brand, he said.

“Our headquarters has been unwavering in its confidence in China,” he said. “The new round of funding shows their confidence in the China market.”