(Bloomberg) -- China wants the world to know its economy is open for business again, but foreign startups and smaller companies have a growing list of reasons the giant consumer market is losing its allure.

A sense of caution reigns as firms face an unpredictable business environment. Beijing’s absolutist pandemic policy effectively blocked newcomers from entering the market, while those already there were mired in a cycle of lockdowns and reopenings that hurt profit and highlighted the complexity of doing business in a country where the government exerts ultimate control.

While multinationals like Starbucks Corp. and Apple Inc. have invested too much in China to contemplate pulling back at this stage, smaller foreign brands and entrepreneur-led firms are rethinking what were once ambitious plans to tap the country of 1.4 billion people.

Inquiries from small and medium-sized companies wanting to enter China fell about 18% last year from a year earlier, according to the EU SME Centre, while interest from US companies has also dropped, says the American Chamber of Commerce in China.

Nutricare Holdings was one of the casualties. Three years ago, the Melbourne-based health-sector startup earmarked $1 million to get its hypoallergenic band-aids into China. But the country’s Covid shutdown put those plans on pause, and for now the business is shifting focus to different markets.

“We’re reassessing a new road map,” said founder James Dutton. “We’re in discussions with groups in Japan and expanding into the Philippines and others in the region like Taiwan that are making market entry easier,” he said.

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Small foreign firms make up a fraction of China’s vast business landscape, but their uncertainty underscores a broader change in sentiment about operating in a market that, pre-Covid, few could afford to avoid. 

The American Chamber of Commerce in China said in March that, for the first time in about 25 years, the Asian nation isn’t a top three investment priority for most of its members, while almost half of US firms already in the market plan no new investments. 

“I used to get hundreds of requests from SMEs and startups every single month,” said Pieter Verstraete, consultant and managing director at One-stop China, which helps European businesses enter the country. He recorded 278 inquiries from European companies in 2019, but an average of only 54 per year between 2020 and 2022.

It’s not just startups and the smallest firms scaling back. US fashion retailers Urban Outfitters and Everlane began withdrawing from China in 2021, only a few years after entering the market. Everlane blamed the impact of lockdowns and challenges of operating through the pandemic for shutting its store on e-commerce platform Tmall, though Chinese consumers can still buy from their global website.

While the abrupt end of the Covid Zero regime in December has reinvigorated some interest — Verstraete says he’s received 19 inquiries since January from companies looking to enter China — caution remains. Though there’s anecdotally been a slow uptick in SME business registrations, the British Chamber of Commerce in China says firms remain apprehensive. Australian and New Zealand business groups say there’s no sign of a re-entry surge yet.

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European firms in Shanghai — where last year’s two-month lockdown brought businesses including Tesla Inc. and Volkswagen AG to a standstill — have called on the government to do more to repair confidence. 

The shadow of Covid Zero isn’t the only reason for caution: Small foreign companies also face heightened competition from domestic brands, some of which grew stronger in their absence, while swelling consumer nationalism — fueled by a more confrontational relationship with the US and the west — has seen even top names like Nike Inc. lose market share in China.

Alan Peng, co-founder of Shanghai-based consultancy Sxper Dxper, which helps western brands enter China, said he’s advising lower- and mid-price point brands against trying to get into the country due to local competition. 

“The amount of investment that they have at their disposal and the speed at which they’re able to deploy capital and catch onto local trends” leaves little room for small foreign firms competition that lack the same resources, he said, adding that the country may struggle to regain its “gold rush” promise. 

Mindful of the hit it’s taken, China is trying to restore global investor confidence in its economy, recently vowing to ramp up efforts to attract more foreign investment to fuel economic growth. New foreign investment into the country increased in January to the highest level since June, though that  was mainly driven by large multinational companies.

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SMEs could be acting as a “canary in the coal mine” for China as an investment destination, said Joerg Wuttke, president of the EU Chamber of Commerce in China. 

“The fact that they stayed away from China over more than a year and then not a single new European company entered China over the last three years” may indicate “the perception on China has changed,” he said.

©2023 Bloomberg L.P.