© European Union Chamber of Commerce in China
All rights reserved
www.europeanchamber.com.cn
European Chamber
3
TABLE OF CONTENTS
EXECUTIVE SUMMARY…………………….…………………………………………….....…………6
1 FINANCIAL PERFORMANCE CONTINU...
European Chamber
4 In partnership with
TABLE OF FIGURES
Figure 1: Historic revenue performance, 2008-2014, and performance...
European Chamber
5
Figure 25: Future investment plans, 2013-2014, and investment destinations
outside of China, 2013-2014…...
European Chamber
6 In partnership with
Pressures on both top-line and bottom-line growth have led to a continued decline i...
European Chamber
7
business in China.
•	 Increased rule of law and transparent policy-making continues to be ranked first ...
European Chamber
8 In partnership with
1 FINANCIAL PERFORMANCE
CONTINUES TO MARGINALLY
DECLINE
The Chinese economy continu...
European Chamber
9
Revenue performance for the past year was comparatively similar across the main sectors:
•	 61% of comp...
European Chamber
10 In partnership with
From these results, we see a mixed picture of the dominance of manufacturing versu...
European Chamber
11
Margins are tighter than worldwide averages
The same trend towards less growth intensity is seen in re...
European Chamber
12 In partnership with
6BCS_Figures for report_FV_updated2.pptx
PRELIMINARYDRAFT
Figure 5: Performance pe...
European Chamber
13
•	 The most extreme example of an industry that has a more negative perception than would be expected ...
European Chamber
14 In partnership with
9BCS_Figures for report_FV_updated2.pptx
PRELIMINARYDRAFT
Figure 7: Judgement abou...
European Chamber
15
Note: For each challenge, participants were able to select between 4 answer options. Shown percentages...
European Chamber
16 In partnership with
11BCS_Figures for report_FV_updated2.pptx
PRELIMINARYDRAFT
Source: Business Confid...
European Chamber
17
12BCS_Figures for report_FV_updated2.pptx
PRELIMINARYDRAFT
Question: What are the biggest challenges y...
European Chamber
18 In partnership with
Competitive pressure has been a continuously growing challenge for European compan...
European Chamber
19
Clearly, POEs and SOEs have different areas of competitive advantage, but SOEs are believed to have mo...
European Chamber
20 In partnership with
Most companies see growth ahead, but a lower percentage than in the past:
•	 The n...
European Chamber
21
Pessimism about profitability prospects has continued this year:
•	 Less than one third of companies (...
European Chamber
22 In partnership with
Companies are divided overall when asked if the 'golden age' for MNCs is over, but...
European Chamber
23
The industry breakdown reveals broad consensus, although companies in the legal industry are conspicuo...
European Chamber
24 In partnership with
3	MORE MODEST EXPECTATIONS
AND REVISED INVESTMENT
PLANS
The importance and role of...
European Chamber
25
Companies are still investing in people, but are also increasingly keeping the same amount of permanen...
European Chamber
26 In partnership with
More companies plan to cut costs
22BCS_Figures for report_FV_updated2.pptx
PRELIMI...
European Chamber
27
24BCS_Figures for report_FV_updated2.pptx
Figure 21: Expansion plans of China operations, 2013-2014
Qu...
European Chamber
28 In partnership with
38%
FINANCIAL PERFORMANCE CONTINUES TO STEADILY DECLINE…
> REVENUE & PROFITABILITY...
European Chamber
29
…AND COMPANIES HAVE REVISED DOWNTHEIR EXPECTATIONSAND INVESTMENT PLANS
> TOP
INVESTMENT
DESTINATION:
>...
European Chamber
30 In partnership with
A Decade of the Busine
COMMITMENT TO THE CHINESE MARKET
IN CHINA FOR CHINA, GROWIN...
European Chamber
31
ess Confidence Survey
KEY OBSTACLES
MEMBERSHIP AND PARTICIPATION GROWTH
THE BCS HAS GROWN WITH THE CHA...
European Chamber
32 In partnership with
Organic growth is the most popular means of expansion, while M&A ambitions have de...
European Chamber
33
A shrinking percentage of companies are considering expanding to other provinces.
•	 45% of companies ...
European Chamber
34 In partnership with
28BCS_Figures for report_FV_updated2.pptxSource: Business Confidence Survey 2014, ...
European Chamber
35
4	REGULATORY AND MARKET
ACCESS ISSUES CONTINUE TO
PRESENT CHALLENGES, BUT
REFORMS WOULD PRESENT
OPPORT...
European Chamber
36 In partnership with
Note: Only industries with N>20 are shown
A significant percentage of companies pe...
European Chamber
37
31BCS_Figures for report_FV_updated2.pptx
PRELIMINARYDRAFT
Figure 27: Regulatory obstacles when doing ...
European Chamber
38 In partnership with
China's written IPR laws and regulations are mostly regarded as adequate, although...
European Chamber
39
Nearly half of European companies stated that they have missed out on business opportunities in China ...
European Chamber
40 In partnership with
Among the reforms outlined in the Third Plenum Decision, administrative and financ...
European Chamber
41
Figure 32: China (Shanghai) Pilot Free Trade Zone, 2014
Question: Please indicate your level of agreem...
European Chamber
42 In partnership with
4.3 Need for real reform and market opening
Transparency, fairness, increased mark...
European Chamber
43
Companies would like to see more transparency and fairness in China in addition to increased market ac...
European Chamber
44 In partnership with
Current reform is not enough
40BCS_Figures for report_FV_updated2.pptx
Figure 36: ...
European Chamber
45
A substantial number of companies announced that they would be more likely to increase investment if m...
European Chamber
46 In partnership with
5	CONCLUSION
China’s strategic importance has climbed year on year in the ten-year...
European Chamber
47
opportunities exist in China’s neighbours, with half the European companies in China routinely reviewi...
European Chamber
48 In partnership with
6	ABOUT THE SURVEY MOTIVATION
AND DESIGN
The purpose of the European Union Chamber...
Business confidence survey 2014 by the European Chamber - European Business in China
Business confidence survey 2014 by the European Chamber - European Business in China
Business confidence survey 2014 by the European Chamber - European Business in China
Business confidence survey 2014 by the European Chamber - European Business in China
Business confidence survey 2014 by the European Chamber - European Business in China
Business confidence survey 2014 by the European Chamber - European Business in China
Business confidence survey 2014 by the European Chamber - European Business in China
Business confidence survey 2014 by the European Chamber - European Business in China
Business confidence survey 2014 by the European Chamber - European Business in China
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Business confidence survey 2014 by the European Chamber - European Business in China

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Business conditions in China are getting tougher and this has led to a further weakening of the financial performance of European companies in the domestic marketplace. A new sober reality is developing, exemplified by a sense of pessimism that is becoming entrenched within the European business community in China, as persistent market challenges show little sign of abating. The key market dynamics contributing to these results include:
•A general slowdown of the Chinese economy;
•Increasing labour costs;
•Competition from both privately-owned Chinese companies and resurgent state-owned enterprises (SOEs).


This and has left many European companies wondering whether the "golden age" of MNCs in China is over. Many firms are in turn setting more modest expectations for revenue and profitability growth and are scaling back their investment plans for the Chinese marketplace.

In addition, market access issues as well as regulatory barriers have led European Chamber member companies to miss out on an estimated EUR 21.3 billion in revenues in 2013.

This is why the implementation of meaningful reforms and, in particular, increased market access would prompt European companies to scale up their investment plans in China.

This survey compiled responses from 552 European Chamber member companies and was produced in partnership with Roland Berger Strategy Consultants. European Chamber members are knowledge leaders in their areas of industry, and are the chief contributors to the Chamber's influential publications. Make your contribution by becoming a member.


Read this publication in ebook format on your iPad, tablet or Kindle. Click here for instructions on how to download and use .epub files or .mobi files.

The original download link:
http://www.europeanchamber.com.cn/en/publications-business-confidence-survey

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Business confidence survey 2014 by the European Chamber - European Business in China

  1. 1. © European Union Chamber of Commerce in China All rights reserved www.europeanchamber.com.cn
  2. 2. European Chamber 3 TABLE OF CONTENTS EXECUTIVE SUMMARY…………………….…………………………………………….....…………6 1 FINANCIAL PERFORMANCE CONTINUES TO MARGINALLY DECLINE…………………8 1.1 Slowing revenue growth…………………………………………………………...…………………………..…......8 1.2 Pressure on bottom-line growth………………………………………………………….………………………….10 1.3 Overall performance perception in line with financials, but discrepancies seen in some industries...........................................................................................................................................11 2 SOBER NEW REALITY: PERSISTENT MARKET CHALLENGES ARE NOT EASING UP AND OPTIMISM IS WANING............................................................................14 2.1 The usual challenges, but more intense…………..…………………………………………………………..........14 2.2 Future outlooks reflect an entrenchment of the general downward trend………………………………………..20 2.3 Are the good times really over?.............................................................................................…………….........22 3 MORE MODEST EXPECTATIONS AND REVISED INVESTMENT PLANS………………….24 3.1 The changing role of China for European companies…………………………………………………………….24 3.2 Reducing investment ambitions………………………………………………………………………………………26 3.3 'Looking over the fence'……………………………………………………………………………………………..…33 4 REGULATORY AND MARKET ACCESS ISSUES CONTINUE TO PRESENT CHALLENGES, BUT REFORMS WOULD PRESENT OPPORTUNITIES...........................35 4.1 Regulatory and market access issues………………………………………………………………………………..36 4.2 Careful acknowledgement of improvements………………………………………………………………………40 4.3 Need for real reform and market opening…………………………………………………………………………42 5 CONCLUSION……………………………………………………………………………………..46 6 ABOUT THE SURVEY MOTIVATION AND DESIGN…………………………………….……48 7 PANEL OVERVIEW……………………………………………………………………………….49 7.1 Industry…………………………………………………………………………………………………………..........49 7.2 Revenue, size and time in China……………………………………………………………………………………49 8 ABOUT ROLAND BERGER STRATEGY CONSULTANTS………………….….........………52 9 ABOUT THE EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA.......................53
  3. 3. European Chamber 4 In partnership with TABLE OF FIGURES Figure 1: Historic revenue performance, 2008-2014, and performance by time in China, 2014…...…........……..8 Figure 2: Revenue performance by industry, 2014………………………………………………………………........9 Figure 3: EBIT of Mainland China operations……………………………………………………......………………..10 Figure 4: EBIT margin of Mainland China operations…………………………………………………………….......11 Figure 5: Performance perception versus actual performance, 2014…………………………………....………...12 Figure 6: Performance perception versus actual performance by industry, 2014……………………………........12 Figure 7: Judgement about the ease of doing business in China by size of company and time in China...........14 Figure 8: Challenges for future business in Mainland China, 2012-2014……………………………………......…15 Figure 9: Key HR challenges, 2013-2014…………………………………..…………………………………………16 Figure 10: Top challenges in attracting and retaining expat talent in China, 2014…………………………......….17 Figure 11: Competitive pressure business outlook, 2010-2014, and competitor analysis by company, 2013-2014........................................................................................................................18 Figure 12: Competitive advantage by company type, 2013-2014…………………………………………....…….19 Figure 13: Business outlook for growth, 2008-2014, and outlook by time in China, 2014……………....………20 Figure 14: Business outlook for profitability, 2008-2014, and outlook by time in China, 2014………......………21 Figure 15: 'Golden Age' outlook, 2014………………….……………………………………….……………….........22 Figure 16: 'Golden Age' outlook by industry, 2014…………………..……………………..………......…………….22 Figure 17: The role of China for European companies………………………………………......…………..………24 Figure 18: Permanent positions in China, 2010-2014………………………………………………………....…….25 Figure 19: Cost cutting plans, 2013-2014, and reasons, 2014…………………………………………….…....….26 Figure 20: Ranking of China as a new investment destination, 2011-2014……………………………….....……26 Figure 21: Expansion plans of China operations, 2013-2014………………………………………………....……27 Figure 22: Means of expansion, 2013-2014…………………………………………………………….....…………32 Figure 23: Expansion to other PRC provinces………………………………………………………………....…….32 Figure 24: Investment opportunities outside of China, 2014……………………………………………..…....……33
  4. 4. European Chamber 5 Figure 25: Future investment plans, 2013-2014, and investment destinations outside of China, 2013-2014…...........................................................................................................................34 Figure 26: Treatment of foreign-invested companies by the government, 2014………………....……………….36 Figure 27: Regulatory obstacles when doing business in China, 2013-2014………………………………....…..37 Figure 28: The effectiveness and enforcement of written laws and regulations, 2010-2014…………....………38 Figure 29: Analysis of missed business opportunities, 2012-2014……………………………………........………39 Figure 30: Importance of the Third Plenary Reforms, 2014……………………………………………......………..40 Figure 31: Implementation of Third Plenary Reforms, 2014…………………………………………………......…..40 Figure 32: China (Shanghai) Pilot Free Trade Zone, 2014………………………………......………………………41 Figure 33: Replacement of the business tax by a value-added tax, 2014…………………………....…………...42 Figure 34: Requirements for China's economic development, 2012-2014 and for the relationship with the West, 2014...................................................................................................…42 Figure 35: Impact of reforms on investment plans, 2014…………………………………………....………………44 Figure 36: The impact of greater market access, 2014……………………………………………......……..………44 Figure 37: Industry breakdown of respondents, 2014……………………………………………....……………….49 Figure 38: Breakdown of respondents' total revenues in China, 2014……………………………………....…….50 Figure 39: Breakdown of respondents' total employees in China, 2014……………………………....…………..50 Figure 40: Breakdown of respondents' operational presence in China, 2014………………………….....……….51
  5. 5. European Chamber 6 In partnership with Pressures on both top-line and bottom-line growth have led to a continued decline in the financial performance of European companies in China: • The proportion of companies reporting year-on-year increased revenues continued to decline from 78% in FY 2010, 75% in FY 2011 and 62% in FY 2012 to just 59% in FY 2013. • Likewise, there was a continued decline in the proportion of profitable companies, from 74% in FY 2010 to just 63% in FY 2013. • Some 63% of companies also failed to increase their profit margins in FY 2013. • For the first time in the history of this survey, more companies noted that their Chinese profit margins were lower than their companies’ global averages than vice versa. Business is tough and is getting tougher. A number of persistent market challenges are becoming entrenched and show little sign of abating: • 68% of large companies stated that business in China has become more difficult over the last two years. • A Chinese economic slowdown surpassed rising labour costs as the number one perceived challenge for future business in China. • Competitive pressure continues to be a steadily growing challenge. SOEs are perceived to have increased their strengths relative to their competitors over the last year and, as such, the proportion of European companies that view SOEs as their main competitor is increasing. A new sober reality is developing. An abiding sense of pessimism for future performance is setting in, which is leading many to question whether the good times have ended: • Growth expectations are at their lowest levels since the peak of the financial crisis, with only 68% of companies optimistic about growth in their sector over the next two years. • A general gloom about profitability prospects has continued, with only 31% of companies optimistic about profitability in their sector over the next two years. • Almost half (46%) of European companies believe that the ‘golden age’ for multinational companies in China has already ended. China will continue to remain a strategic market, but European firms are adapting to the new reality by setting more modest expectations for the Chinese marketplace. This in turn is leading many companies to scale back their investment plans and to ‘look over the fence’ to see what opportunities exist outside of China: • Only 21% of companies ranked China as their top global destination for new investments, a drop from 33% just two years ago. • Only 57% plan to expand their current China operations in the short-term, down from 86% just one year ago. • Likewise, the proportion of companies intending to engage in M&A in China in the short term plummeted from 41% last year to just 17%. • The number of companies considering expanding operations to other provinces dropped to 45% from 69% in 2012. • Almost half of the European companies surveyed (48%) regularly review investment opportunities outside of China but still within the Asia region. European companies still perceive themselves to be discriminated against in the Chinese marketplace. It is estimated that European companies that are members of the European Chamber missed out on EUR 21.3 billion in revenues in FY 2013 due to market access and regulatory barriers. Although there is careful acknowledgement of some positive policy developments, European firms remain sceptical and are yet to be convinced that real change is afoot: • Over half of European companies (55%) perceive foreign-invested enterprises to receive unfavourable treatment compared to domestic enterprises, whereas only 11% perceive the opposite to be true. • An unpredictable legislative environment is regarded as the most significant regulatory obstacle to doing EXECUTIVE SUMMARY
  6. 6. European Chamber 7 business in China. • Increased rule of law and transparent policy-making continues to be ranked first as the driver deemed most significant for China’s future economic performance, a position it has maintained ever since it was introduced as an option in this survey. • Just over half of European companies (53%) are confident that China’s leaders will start meaningful implementation of the reforms outlined in the Decision of the Third Plenum of the 18th Central Committee (Third Plenum Decision) in the coming one to two years. Were the authorities to ‘practice what they preach’ and implement meaningful reforms, especially administrative and market-access related ones, European companies are prepared to re-intensify their investment. However, despite the importance of, and exuberance surrounding, the Third Plenum―with only 26% of European companies more likely to increase investment due to the reform agenda as iterated in the Third Plenum Decision―it still fails to garner the confidence and commitment of European companies to the same extent that actual market access opening would bring. More than half (55%) of European companies would be more likely to increase investment if greater market access were afforded to foreign companies. In this regard, the European Chamber’s annual Position Paper remains the best source for understanding the reforms that would increase the confidence of European business in China.
  7. 7. European Chamber 8 In partnership with 1 FINANCIAL PERFORMANCE CONTINUES TO MARGINALLY DECLINE The Chinese economy continued to slow over the past year and this is reflected in the financial performance of European companies. Pressure on both bottom-line and top-line growth continues and the financial results of European companies in China have declined following the markedly poorer performance witnessed last year: • Fewer companies reported increased revenue. • Fewer companies reported profits, with less than half the companies reporting EBIT growth. • For most companies EBIT margins did not grow and are now lower in China than global averages. The perception that companies hold of their performance is generally in line with their actual financial performance. Yet there are some discrepancies in specific industries; a few industries are more pessimistic than one would expect from their financial results and vice-versa. The financial performance of European companies suggests that achieving financial targets in China has become more challenging, particularly for those companies that have been doing business in China for several years and have more substantial revenue bases and expectations about their performance. 1.1 Slowing revenue growth Decreasing revenue growth Continuing a downward trend that started in FY 2010―after a recovery from the poor financial results of FY 2009―there were again fewer companies that reported an increase in revenue this year. In particular, China ‘veterans’, i.e. companies that have been doing business in China for over five years, are driving this downward trend:  16% 12% 9% 20% 22% 27% 16% 18% 23% 29% 31% 32% 30% 37% 39% 40% 36% 45% 35% 20% 41% 36% 22% 23% 7%9% 2014 3% 2013 4%1% 5% 2009 2%3% 2010 201220112008 2% 1% 3% 11% 8% 28% 30% 28% 22% 36% 39% 42% 19% 20% 7% 6-10 years 4%4% > 10 years<5 years 0% Figure 1: Historic revenue performance, 2008-2014 and performance by time in China, 2014 Question: How did the total Mainland China revenues of your company evolve year-on-year? Increased substantially (> 20%) Decreased substantially (> 20%)Remained the same (+/- 5%)Increased (5-20%) Decreased (5-20%) N=376 N=262 N=224 N=452 N=453 N=67 N=140 by time in China, 2014: N=246N=233N=207
  8. 8. European Chamber 9 Revenue performance for the past year was comparatively similar across the main sectors: • 61% of companies in the consumer goods & services industries reported an increase or significant increase in revenue, which was slightly better than the 58% of companies in the professional services and industrial goods & services sectors. Stronger differences in revenue performance can be found when looking at specific industry sub-sectors: • Automotive and auto component companies achieved the highest revenue growth over the past year, with 79% of companies reporting increased or substantially increased revenue. • The medical devices & other healthcare sector, which comprises a mix of manufacturing and service companies, saw 76% of companies reporting an increase or substantial increase in revenue. • The machinery sector reported the third-highest revenue growth, with 64% of companies reporting increased revenues. • The two main service industries in our survey—financial services and (non-legal) professional services companies— ranked only number five and six respectively in the breakdown into nine sectors with regard to revenue growth performance, with only 60% and 57% of companies reporting an increase of revenue in FY 2013. • The revenue performance of companies in some highly-regulated sectors, often characterised by manufacturing overcapacity, such as the utilities & energy, petrochemicals & chemicals and transportation sectors, was expectedly disappointing. • The number of companies that reported an increase in revenues has continued to decline year-on-year, from 78% in FY 2010; 75% in FY 2011; 62% in FY 2012; and finally to just 59% in FY 2013. • Almost one third (29%) of companies reported stable revenues; one of a number of indications that the blockbuster years of Chinese growth are behind us. • 42% of companies that have been in China for less than five years reported that their revenue has increased substantially, while only 20% of veteran companies that have been in China for over ten years were able to substantially increase their revenues. However, this can be partly explained by the fact that these younger companies are growing from a lower base than the veterans. Revenue performance fairly stable across main sectors, but varies considerably by industry Figure 2: Revenue performance by industry, 2014 10% 15% 13% 14%16% 20% 24% 32% 25% 26% 40% 36% 44% 42% 40% 32% 25% 29% 32% 33% 32% 44% 37% 36% 32% 36% 31% 25% 13% 14% 9% 6%4% 3% 3% Chemicals & petroleum 6% Transportation, logistics & distribution 5% Utilities, primary energy & other commodities Financial services (incl. insurance) 4% Agriculture, food & beverage 4% MachineryMedical devices & other healthcare 4% Automotive & auto- components 3% (Non-legal) professional services 1% decreased substantially (>20%)decreased (5-20%)remained the same (+/-5%)increased (5-20%)increased substantially (>20%) N=38 N=25 N=34 N=28 N=48 N=68 N=15 N=22 N=18 9% 11% 8% 28% 30% 28% 35% 32% 33% 39% 48% 29% 25% 19% 0%6%1% 10% OthersIndustrial goods & services 2% Professional services Consumer goods & services 6% N=151 N=105 N=166 N=31 by industry, 2014:by sector, 2014: Question: How did the total Mainland China revenues of your company evolve year-on-year? Note: For the industry analysis, only industries with N>14 are shown
  9. 9. European Chamber 10 In partnership with From these results, we see a mixed picture of the dominance of manufacturing versus services in the economy. Some manufacturing industries are performing well while others are not. Services companies are in the middle of the performance curve. This suggests that China's efforts to create the environment and incentives to shift away from a manufacturing-based economy towards a more service-oriented one have yet to be fully realised. 1.2 Pressure on bottom-line growth Fewer profitable companies and sluggish EBIT growth The bottom lines of companies are also deteriorating: • The percentage of profitable companies has decreased year-on-year from 74% in FY 2010 to 63% in FY 2013. This figure tallies with the proportion of companies reporting profitability at the start of the global economic crisis in FY 2008. • Likewise, the number of companies reporting breakeven EBIT has increased from 16% in FY 2010 to 21% in FY 2013 and those with negative EBITs has increased from 11% in FY 2010 to 16% in FY 2013. EBIT growth is continuing to slow, with more companies reporting stable EBIT performance and the number of companies recording substantial increases remaining low: • Less than half the companies (48%) were able to increase their EBIT in FY 2013, which does not show much uptick from FY 2012 when just 43% of companies were able to increase their profits. The indication is that most companies are struggling to increase margins and that the average EBIT reported has only grown marginally since FY 2011 and has even declined for a not-insignificant number of companies. • At the same time, an increasing number of companies are reporting stable EBIT performance: 36% reported a stable EBIT performance compared with only 22% in 2011, further indicating a growing entrenchment. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Compared to the overall FY 2013 average, manufacturing industries had better EBIT performance than the consumer goods and services industries: for example, 74% of automotive & auto components companies reported a positive EBIT compared with 68% of (non-legal) professional services companies and 50% of companies in the agriculture, food & beverage segment. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 4BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT 16% 21% 18% 13% 15% 16% 14% 16% 23% 16% 14% 20% 21% 70% 63% 58% 74% 73% 64% 63% 11% 2014201320122011201020092008 Question: Please characterise the EBIT of your company in Mainland China last year. (2008-2014) Source: Business Confidence Survey 2014, Roland Berger analysis Question: How did your company's EBIT in China for last year compare to previous year's results? (2010-2014) N=390 N=262 N=224 N=452 N=453 NegativeBreak-evenPositive N=210 N=230 13% 10% 16% 11% 37% 22% 23% 35% 36% 29% 39% 37% 29% 34% 14% 32% 27% 14% 14% 7% 3% 2010 4% 20122011 3% 2013 5% 4% 2014 N=452 N=453N=390 N=262 N=224 Remained the same (+/- 5%) Decreased (5-20%) Decreased substantially (> 20%)Increased (5-20%) Increased substantially (> 20%) Figure 3: EBIT of Mainland China operations updated
  10. 10. European Chamber 11 Margins are tighter than worldwide averages The same trend towards less growth intensity is seen in reported EBIT margins: • The EBIT margins of nearly half (45%) the companies remained unchanged compared to last year, while just 37% of companies stated that their margins have increased. EBIT margins in China are now slightly lower than global averages: • 38% of companies stated that Mainland China EBIT margins are the same as their company's worldwide average, up from 29% in 2011. • Only 30% of companies stated that their Mainland China EBIT margins are better than their company’s global average, compared to 42% in 2012. A higher figure (33%) noted that their Chinese margins are lower than their global average. This is the first time in the history of this survey that more companies noted that their EBIT margins in China are lower than their global average than vice versa, after having reached parity in FY 2012. This shows that the Chinese marketplace is becoming much tighter, with fewer opportunities for easy profits and supersized growth. Despite this, almost half the companies (47%) noted that their market share had increased over the past couple of years, compared to just 14% that stated that they lost market share in this time. This likely shows that companies are strategically aiming to grow market share at the expense of their EBIT margins to edge out weaker competitors. 1.3 Overall performance perception in line with financials but discrepancies seen in some industries Perception is in line with financials: Figure 4: EBIT margin of Mainland China operations Question: How did your company's EBIT margin in China for FY 2013 compare to FY 2012 results? Question: How did the EBIT margins of your Mainland China operations compare to your company's worldwide margins in the past year? (2010-2014) 4% 2014 45% 26% 11% 14% Increased (5-20%) Decreased (5-20%) Remained the same (+/- 5%) Decreased substantially (> 20%) Increased substantially (> 20%) N=451 34% 30% 29% 34% 33% 29% 37% 29% 34% 38% 37% 33% 42% 33% 30% 2013201220112010 2014 Same as company average worldwide Better than company average worldwide Lower than company average worldwide N=389 N=262 N=224 N=450 N=453
  11. 11. European Chamber 12 In partnership with 6BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Figure 5: Performance perception versus actual performance, 2014 Question: How does your company view its performance in the China market? N=552 N=453 N=453 PERFORMANCE PERCEPTION EBITREVENUE content and very content positive 63%increased substantially and increased 59%60% average break-even 21%unchanged 29%26% discontent and very discontent negative 16%decreased and decreased substantially 12%14% Source: Business Confidence Survey 2014, Roland Berger analysis ✓ ✓ ✓ good/very good medium bad/very bad ~ ~ ~ ✓ Performance matches perception 7BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Figure 6: Performance perception versus actual performance by industry, 2014 Question: How does your company view its performance in the China market? AUTOMOTIVE MEDICAL DEVICES & OTHER HEALTHCARE AGRICULTURE, FOOD & BEVERAGE (NON-LEGAL) PROFESSIONAL SERVICES MACHINERY TRANSPORTATION, LOGISTICS & DISTRIBUTION CHEMICALS & PETROLEUM FINANCIAL SERVICES (INCL. INSURANCE) UTILITIES, PRIMARY ENERGY & OTHER COMMODITIES good/very good medium bad/very bad Note: Answer options were adjusted in order to make the results of the three questions comparable Source: Business Confidence Survey 2014, Roland Berger analysis Perception Revenue EBIT 79% 74%83% 16% 11%8% 6% 16%10% > < ~ Perception Revenue EBIT Perception Revenue EBIT 57% 68%64% 26% 21%27% 16% 12%8% ~ > < 44% 61%54% 44% 28%29% 12% 11%17% ~ ~ > Perception Revenue EBIT 76% 64%69% 20% 24%23% 4% 12%8% ~ ~ ~ Perception Revenue EBIT Perception Revenue EBIT 64% 74%63% 24% 9%21% 12% 18%16% < ~ ~ 60% 65%48% 25% 23%37% 14% 13%15% < > > Perception Revenue EBIT 61% 50%67% 32% 32%23% 8% 18%10% > < ~ Perception Revenue EBIT Perception Revenue EBIT 46% 59%61% 36% 27%21% 19% 14%18% > < ~ 46% 67%46% 40% 20%27% 13% 13%27% ~ ~ > ✗ ✗ ✗ ✗ ✗ ✗ ✗ ✗ ✗ ✗ ✗ ✗ ✗ ✗ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Performance matches perception ✗ Performance is better or worse than perception Note: Answer options were adjusted in order to make the results of the three questions comparable When looking at cross-industry data, the performance perception of companies is in line with the reported financial performances: for example, 60% of companies were content or very content with their performance, which roughly matches the 59% of companies that reported that their revenue increased or increased substantially and the 63% of companies that reported positive EBIT. Performance misperceptions seen for some industries On the other hand, when comparing the actual performance and performance perception for individual industries, several discrepancies can be seen:
  12. 12. European Chamber 13 • The most extreme example of an industry that has a more negative perception than would be expected by looking at financial performance data alone is the financial services sector: only 48% of financial services companies perceived performance to be good or very good, while 60% reported an increase or substantial increase in revenue and 65% reported a positive EBIT. This is likely because European banks are building from a low base. Foreign banks, due to market access constraints, only account for approximately 2% of the entire marketplace in which Chinese banks continue to post massive profits. • Automotive companies, in contrast, have a positive perception compared to actual financial results: 83% perceived performance as good or very good, while only 79% reported an increase or substantial increase in revenue and only 74% reported positive EBIT. This is likely a reflection of the relative performance of European manufacturers compared with their domestic peers. Automobile manufacturers, although restricted to operating in non-majority shareholding joint ventures with Chinese firms, continue to perform better on average than their wholly Chinese- owned competitors. European companies attribute their performance in China to their better use of technology over local brands as well as brand advantages, particularly given European brand histories and cachet among Chinese consumers.
  13. 13. European Chamber 14 In partnership with 9BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Figure 7: Judgement about the ease of doing business in China by size of company and time in China, 2014 Question: How has doing business in China for your company developed over the last couple of years? Source: Business Confidence Survey 2014, Roland Berger analysis by number of employees: 2014 9% 39% 51% N=552 Business has become easierAbout the sameBusiness has become more difficult 45% 34% 28% 43% 60% 68% 12% >1,000 3% 251-1,000 6% <250 N=338 N=94 N=120 20% 52% 44% 28% 45% 61% 11% 33% >10 years 5% 6-10 years< 5 years N=83 N=170 N=299 by time in China: mistake not from RB ppt 2 SOBER NEW REALITY: PERSISTENT MARKET CHALLENGES ARE NOT EASING UP AND OPTIMISM IS WANING Business in China is already tough, and it is getting tougher. European companies face a sober new reality from several persistent and deepening market challenges, including: • A Chinese economic slowdown; • Rising labour costs; • Difficulties in attracting and retaining talent; and • Fierce competition from both privately-owned enterprises (POEs) and state-owned enterprises (SOEs). These challenges present no surprises. They are the same operational challenges that European companies identified in last year’s survey as most impacting business. The business outlook for growth and profitability suggests that these challenges are becoming entrenched and are here to stay. Confidence about growth and profitability continues to decline, and an abiding sense of pessimism about future financial performance is increasingly taking hold among EU companies. European companies are left wondering if the good times in China have already ended. 2.1 The usual challenges, but more intense Business is more difficult
  14. 14. European Chamber 15 Note: For each challenge, participants were able to select between 4 answer options. Shown percentages represent participants that selected the 'significant' answer option. 10BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Figure 8: Challenges for future business in Mainland China, 2012-2014 Question: Please indicate how significant you perceive the following challenges to be to your future business in Mainland China? Source: Business Confidence Survey 2012-2014, Roland Berger analysis N=552 Note: For each challenge, participants were able to select between 4 answer options. Shown percentages represent participants that selected the "significant" answer option ANSWER 2012 2013 2014 Trend (2012-2014) Chinese economic slowdown 65% 62% 61% Rising labour costs 63% 63% 56% Attracting & retaining talent n/a n/a 55% Market access barriers n/a 54% 52% Ambiguous rules & regulations n/a n/a 52% Discretionary enforcement of regulations 44% 47% 50% Global economic slowdown 62% 58% 50% Competition from domestic POEs 48% 51% 48% Lack of sufficient and qualified talent n/a 48% 46% Competing against non-compliant competitors n/a n/a 39% N=586N=557 Companies believe that business has become more difficult: • Over half the companies (51%) stated that business has become more difficult over the last couple of years and only 9% stated that business has become easier. Large companies in particular find business more difficult these days: • 68% of companies with more than 1,000 employees in China stated that business has become more difficult. • In contrast, only 43% of companies with fewer than 250 employees perceived business as having become harder. On average, veterans also find business tougher than newcomers: • 61% of companies that have been in China for more than ten years stated that business has become more difficult, while only 5% stated that it has become easier for them. • In contrast, only 28% of companies that have been in China for less than five years stated that business has become more difficult and 20% stated it has become easier. These findings are in line with the revenue results from Chapter 1: as presented in Figure 1, the percentage of newcomers able to increase revenues substantially was double that of veterans. However, the fact that veterans with over ten years of experience in China markedly perceive the business environment to have become tougher is particularly telling because of the longer memory time span that these companies possess. It means that these results likely reflect a more general observational trend over a number of years that business is increasingly becoming tougher. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Legal companies, in particular, mentioned that business has become more difficult, with 62% of companies making that claim. In contrast, machinery, transportation and automotive companies had easier times with merely 42%, 43% and 45% of companies stating that business has become more difficult. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- The Chinese economic slowdown is the top future business challenge
  15. 15. European Chamber 16 In partnership with 11BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Source: Business Confidence Survey 2013-2014, Roland Berger analysis Figure 9: Key HR challenges, 2013-2014 Question: What is the top HR challenge you face? N=551 10% 10% 8% 12% 14% 12% 33% 28% 24% 31% 6%8% 2% 20142013 1% Rising labour costs High staff turnover Other Talent shortage None Long training period needed to be fully efficient Difficulty in convincing good canditates to join N=552 mistake not from RB ppt The Chinese economic slowdown was ranked as the number one challenge for future business in China, surpassing last year's top identified challenge, which was rising labour costs: • 61% of companies indicated that they perceived a Chinese economic slowdown as a significant challenge going forward. • While rising labour costs is still considered a key challenge, only 56% considered this a significant challenge going forward. This is lower than last year, when 63% stated that rising labour costs were a significant challenge for future business. Another key challenge going forward is the attraction and retention of talent, which was ranked number three and regarded as significant by 55% of companies. Notably, the global economic slowdown has become less of a concern. It has dropped over the past three consecutive years and is now regarded as just the seventh most significant challenge for future business. China's economic health seems to be a more important driver for most European companies' success than the global economy, supporting another data point that an increasing number and vast majority (76%, up from 56% in 2011) of European companies are 'in China for China'. Top HR challenges continue to be rising labour costs and a talent shortage The two main HR challenges identified by EU companies for two years in a row have been rising labour costs and talent shortage, but the order reversed this year. The reversed order suggests that companies are fairing better at finding talent but have had to pay more for it: • 31% stated that their top HR challenge was rising labour costs in FY 2013, compared to 24% in FY 2012. • A talent shortage was ranked as the second most significant HR challenge, identified as the top challenge by 28% of companies this year compared to 33% last year.
  16. 16. European Chamber 17 12BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Question: What are the biggest challenges you face in ATTRACTING the right expat talent in China? Figure 10: Top challenges in attracting and retaining expat talent in China, 2014 Question: What are the biggest challenges you face in RETAINING the right expat talent in China? Source: Business Confidence Survey 2014, Roland Berger analysis Note: For this question, participants had to select their top three challenges; Percentages represented are the sum of percentages from top 1- top 3 challenges 68%Air quality issues 62%Lack of willingness to be assigned to China 56%Too high expectations on salary / package 25%Schools for children 27%Career opportunities not seen as promising 2014 N=310 64%Air quality issues 59%High expectations for expat packages 35%High expectations in pay / benefits 25%Schools for children 29%Employees not seeing promising career prospects 2014 N=232 mistake not from RB ppt Air pollution surfaced as the key challenge for attracting and retaining expat talent in China this year: • 68% of companies stated that air quality issues are one of the top three challenges for them to attract expat talent in China. • Likewise, 64% reported that air quality issues are one of the top three challenges for them to retain the right expat talent in China. In addition to the impact of air pollution on recruitment, almost one third (27%) of companies believe that air pollution is also contributing to higher HR costs, as companies need to compensate employees to move to polluted cities and need to take other steps to respond to employee concerns. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Beijing- and Nanjing-based companies, in particular, regard air quality as one of the top three challenges for attracting the right expat talent to China: 68% of companies in Beijing and 71% of companies in Nanjing stated this. In contrast, only 39% of companies in the Pearl River Delta and 58% of companies in Southwest China mentioned air quality as a key recruitment problem. Shanghai was slightly below the overall average, with 61% of companies regarding it as a top challenge. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Nearly two thirds of companies have taken steps to address employee concerns about air pollution, including 27% of companies that have installed air purifiers at the office, 21% that have provided employees with masks, 5% that have implemented a work-from-home policy and 6% of companies that have even increased the pay of employees. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Note: For this question, participants had to select their top three challenges. Percentages represented are the sum of percentages from top 1 to top 3 challenges. Air pollution is further aggravating HR difficulties
  17. 17. European Chamber 18 In partnership with Competitive pressure has been a continuously growing challenge for European companies in China for several years and it shows no sign of abating: • 38% of companies are pessimistic about the effect of competitive pressure on the business outlook in their sector. This number is in line with last year's results and up from 33% in FY 2011. • A stable and low 14% of companies are optimistic with regard to easing competitive pressure in the future, which is the same as it was in FY 2010 but down from 16% in FY 2011. Private companies are the main competitors, but the threat from SOEs is re-emerging Chinese privately-owned enterprises (POEs) continue to be the number one competitor in China, but the challenge from state-owned enterprises (SOEs) is increasing: • Some 49% of companies reported that POEs were their most significant competitor in FY 2013, a similar figure to FY 2012. • The relative percentage of companies viewing SOEs as their most significant competitor has increased from 30% in FY 2012 to 36% in FY 2013. This perceived strengthening of SOEs may be an effect of consolidation in many industrial sectors in China, in which SOEs have absorbed many weaker companies. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Industries have different takes when asked about their most formidable competitor: while the utilities, financial services and transportation industries clearly state that SOEs are their most significant competitors, professional services, medical devices and legal industries reported that POEs pose the greatest competitive challenge. Other industries, including the chemicals, automotive, machinery and agriculture, food & beverage sectors are somewhat in the middle, but slightly more fretful about POE competition. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 13BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Question: How would you describe the business outlook for your sector in China in terms of competitive pressure within the next two years? Figure 11: Competitive pressure business outlook, 2010-2014, and competitor analysis by company, 2013-2014 Question: Which type of company do you see as your most significant competitor in China? Source: Business Confidence Survey 2010-2014, Roland Berger analysis 43% 40% 33% 38% 38% 43% 44% 46% 44% 47% 14% 15% 16% 16% 14% 2014 1% 2013 2% 2012 5% 2011 2% 2010 0% N/APessimisticNeutralOptimistic N=450 N=596 N=557 N=598 N=552 19% 51% 49% 30% 36% 15% 20142013 N/APOESOE N=604 N=552 Competitive pressure continues to intensify
  18. 18. European Chamber 19 Clearly, POEs and SOEs have different areas of competitive advantage, but SOEs are believed to have mostly increased their strengths relative to their competitors over the past year: • POEs are stronger in marketing & sales and pricing. • SOEs have a competitive advantage in governmental relations, access to subsidies/tax incentives, access to financing and economies of scale. They are also perceived to have increased their strengths in all of these areas relative to their competitors over the last year. It could be regarded as surprising that SOEs increased their strengths in many areas in which they are already perceived to have an unfair advantage, for example, in terms of governmental relations and access to subsidies, tax incentives and financing, in a year in which the government noted that the market should take a more decisive role in allocating resources. However, this tallies with the concerns that many European companies hold that the hand of SOEs has been strengthened. They see that already powerful SOEs are gaining in strength as their sectors consolidate. This development is supported by the Chinese Government, which often aims to build strong local companies for each industry instead of supporting smaller ones. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- To counter growing competition and reinforce their strengths, the number one investment priority for European companies is marketing & sales, followed by management efficiency and brand recognition. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 14BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Source: Business Confidence Survey 2014, Roland Berger analysis Figure 12: Competitive advantage by company type, 2013-2014 Question: In each of the following areas, which type of company do you perceive holds the greatest competitive advantage? European Company N/APrivately-owned enterprise State-owned enterprise 5%2%6%Governmental relations 3%5%91%87% 1% 6%68%12%Brand recognition 5%10%16%14% 69% 11%3%17%Access to subsidies / tax incentives 10%16%70%68% 5% 8%6%16%Access to financing 9%11%77%71% 3% 8%36%39%Marketing and sales 8%38%19%17% 35% 8%8%56%Pricing 6%57%32%28% 5% 5%83%8%Product quality, variety and innovation 6%9%3%4% 81% 13%20%21%Economies of scale 11%20%50%46% 19% 9%62%14%HR management and ability to attract top talent 9%16%18%16% 56% 2013 2014 Trend N=552 2013 2014 Trend 2013 2014 Trend 2013 2014 updated "privately- owned enteriprise"; "Pricing" misalignment not from RB ppt Each has its own distinct competitive advantage
  19. 19. European Chamber 20 In partnership with Most companies see growth ahead, but a lower percentage than in the past: • The number of companies optimistic about future, short-term growth in their sector now stands at just 68%. Although this number is still substantial when viewed in isolation, it represents a steady decline from 79% in FY 2010. • The number of companies that have a neutral view about growth has increased from 17% in FY 2010 to 27% in FY 2013, meaning that more than one third (27% + 5%) of companies believe that growth in their sectors will remain stagnant or decline over the next two years. The necessary reforms that China has identified to rebalance its economy are growth detracting in the short term. As such a projected decline in growth should not necessarily be regarded as negative if this sentiment is based upon expectations for reform. However, as will be seen in the fourth section of this report, European companies show mixed expectations and a general scepticism about whether the necessary reforms will be meaningfully implemented in a timely fashion. Newcomers are more optimistic than veterans: • 84% of companies that have been in China for less than five years are optimistic about growth, while only 60% and 67% respectively of companies that have been in China for five to ten years and over ten years are optimistic, showing that veteran companies are generally much more pessimistic about growth outlooks. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Industries have different levels of optimism with regard to growth: the most optimistic are medical device & other healthcare companies (88% are optimistic), followed by automotive & auto components companies (78%) and (non-legal) professional services (78%). Financial services firms are least hopeful with only 49% being optimistic about growth. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 15BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT by time in China, 2014: 12% 27% 20% 17% 18% 22% 27% 83% 65% 78% 79% 76% 71% 68% 6%3%3%8% 2012 3% 2011 1% 20092008 5% 2013 2014 1% 5%2% 2010 N/APessimisticNeutralOptimistic N=450 N=596 N=557 N=607 N=552N=207 N=233 34% 26% 84% 60% 67% 6% > 10 years 1% 6-10 years 6% <5 years 1% 14% N=83 N=170 N=299 Figure 13: Business outlook for growth, 2008-2014, and outlook by time in China, 2014 Question: How would you describe the business outlook for your sector in China within the next two years in terms of growth? Source: Business Confidence Survey 2010-2014, Roland Berger analysis 2.2 Future outlooks reflect an entrenchment of the general downward trend Growth expectations are at the lowest levels since the peak of the global economic crisis five years ago
  20. 20. European Chamber 21 Pessimism about profitability prospects has continued this year: • Less than one third of companies (31%) have an optimistic view about profitability, similar to the figure from FY 2012―the lowest level of optimism for profitability in this survey’s ten-year history―and down from nearly half (47%) in FY 2007. • At the same time, the number of companies with a neutral perspective has increased from 35% in 2008 to 51% this year. This seems to indicate an expectation that the business environment will continue to remain very tight and that companies are adjusting their expectations to this sober new reality. In line with Figure 13, veterans are less optimistic than newcomers: • 39% of newcomers stated that they are optimistic about profitability compared to 29% and 30% of companies that have been in China for more than five years and ten years respectively. • A mere 11% of veterans have a pessimistic view on profitability versus 22% and 15% of veterans. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Optimism varies strongly among industries: agriculture, food & beverage companies are the most optimistic (42% of companies are optimistic), followed by automotive & auto-components companies (40%) and legal companies (33%). Transportation, logistics & distribution companies are the least optimistic (14%). ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Optimism is overall quite low no matter which business area: a year-on-year unchanged 7% of companies are optimistic about labour costs and an unchanged 37% of companies are optimistic with regard to the productivity outlook. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Profitability expectations remain in line with last year's pessimism
  21. 21. European Chamber 22 In partnership with Companies are divided overall when asked if the 'golden age' for MNCs is over, but veterans are more inclined to believe so: • 54% of companies—regardless of size—believe that the 'golden age' for MNCs in China is not yet over. Of course this also means that nearly half (46%) of companies believe that the 'golden age' has already come to a close. • Only 37% of companies that have been in China for less than five years think that the good times are over, while 48% of veterans that have been in China for more than ten years think the best times have ended. A broad consensus across industries Note: Only industries with N>20 are shown 2.3 Are the good times really over? The 'golden age' for multinational companies (MNCs) in China might already be ending
  22. 22. European Chamber 23 The industry breakdown reveals broad consensus, although companies in the legal industry are conspicuously pessimistic: • 62% of companies in the legal industry believe that the 'golden age' is over. The most optimistic are machinery companies with 58% of companies believing that the 'golden age' is not yet over, potentially reflecting the opportunities that still continue to exist in technological upgrading in China. • The figures in all other industries closely resemble the industry average of 54%, believing that the 'golden age' is not yet over. This likely shows that we are currently in the midst of a highly uncertain period in China’s economic development and that opportunities are likely differentiated even across different product segments within the same industry sectors. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- More intense competition from local companies was cited as the key reason for why the 'golden age' is over: • "Chinese multinational companies are rising and improving. They have caught up with foreign players in terms of brands, quality and know-how." • "Competition from local companies is growing ever more intense in a lopsided playing field. China's cost advantage is eroding. [There is] No definite sign that 'domestic consumption' will become the next big growth engine for EU companies in China." • "Rising costs and [the] maturity of domestic companies are the main reasons for why the 'golden age' is over." • "China doesn't need FDI as it did a few years ago." ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Note: Quotations provided are from member companies in response to the question, "Why do you believe that the 'golden age' for multinational companies in China is over?"
  23. 23. European Chamber 24 In partnership with 3 MORE MODEST EXPECTATIONS AND REVISED INVESTMENT PLANS The importance and role of China for European companies is changing: China is still critical for global revenue generation and continues to be strategically important, but plans and actions suggest that European companies in China are developing more modest expectations: • An increasingly lower percentage of companies over the past four years deem China to be growing in strategic importance. • The expansion of the number of permanent positions at companies is slowing. • Cost-cutting plans continue. China no longer seems to be seen as the saviour and companies have further reduced their investment ambitions: • Fewer companies consider China as a top priority for investment. • Fewer businesses are considering expanding current operations. • Fewer firms are interested in M&A opportunities. • Fewer companies are looking to expand to other provinces. Companies are wary of placing all their bets on China and are 'looking over the fence' to see what neighbouring countries have to offer, either to complement what they are doing in China or to replace it. 3.1 The changing role of China for European companies China is still a key market for Europeans, although the proportion of companies that regard China as an increasingly important market continues to slide 20BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Question: What proportion of your global revenues was generated in Mainland China in the last year? (2010-2014) Figure 17: The role of China for European companies Question: How would you currently characterise the importance of China in your company's overall global strategy compared to last year? (2011-2014) 19% 26% 26% 26% 29% 10% 11% 12% 10%23% 17% 21% 23% 20% 45% 40% 35% 32% 31% 9% 8% 2014 7% 201320122011 7% 2010 6% 7% N=342 N=246 N=224 N=545 N=453 11-15% 16-25%< 5% 5-10% > 25% 18% 23% 30% 36% 79% 74% 64% 59% 20142013 3% 2012 6% 5% 2011 3% N=443 N=557 N=600 N=552 Same level of importanceIncreasingly important Declining in importance Source: Business Confidence Survey 2014, Roland Berger analysis updated
  24. 24. European Chamber 25 Companies are still investing in people, but are also increasingly keeping the same amount of permanent positions, too: • In 2014, 48% of companies stated that they increased the number of permanent positions while 61% did so in 2012. • 31% stated that they are expecting the number of permanent positions to stay the same over the next two years, while only 20% said so two years ago. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- A key driver for why headcount has remained relatively stable is the recent revenue slowdown: while 36% of companies stated that they significantly increased their revenue in 2012, only 22% and 23% did so in 2013 and 2014. As a result, companies significantly increased their headcount in 2012 but comparatively less so in 2013 and 2014. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Mainland China continues to be critical for global revenue generation: • The number of companies that generated 10% or more of their global revenue in China has increased over the past five consecutive years and is up to 48% in FY 2013 from 32% in FY 2009. • Likewise, fewer companies generated less than 5% of their global revenues in China; down from 45% in FY 2009 to 31% in FY 2013. As the world’s second-largest economy with a fast-expanding consumer market, China will almost certainly remain very important for European companies. Many of these companies are already highly reliant upon the Chinese marketplace for significant portions of their global revenues and will therefore continue to invest to try to maintain their positions and grow. Despite this, there is a notable downward trend relating to the growing strategic importance of China in the overall global strategies of companies: • Only 59% of companies ranked China as increasingly important in FY 2013. This represents a drop of 20% compared to 79% in FY 2010. Companies continue to invest in people but a downward trend continues
  25. 25. European Chamber 26 In partnership with More companies plan to cut costs 22BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Question: Do you plan on making cost cuts in China this year? Figure 19: Cost cutting plans, 2013-2014, and reasons, 2014 Question: If yes, why? Source: Business Confidence Survey 2013-2014, Roland Berger analysis N=114N=572 78% 76% 22% 24% 2013 2014 Yes No N=552 4 5 7 9 11 14 17 20 20 31 40 44 53 61 Other (please specify) Reduce procurement cost Reduce rental expenses Subcontracting / outsourcing Headcount reduction Sell existing assets Reduce / cut further benefits for employees Cancel planned assets investments Relocate to a less-developed area of China Localisation of staff Reduce total compensation to employees None of the above Relocate to a country with lower cost profile Suspend plant activity updated 23BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Source: Business Confidence Survey 2014, Roland Berger analysis 8% 9% 9% 13% 17% 15% 19% 16% 34% 38% 41% 43% 30% 24% 21% 7%9% 8% 33% 201420132012 6% 2011 Not top 10 destinationTop 10 destinationTop 5 destinationTop 3 destinationTop destination Figure 20: Ranking of China as a new investment destination, 2011-2014 Question: On a global basis, where does China rank as a destination for new investments for your company? Tomorrow:Today: N=595 N=556 N=554 N=552 11% 17% 12% 19% 16% 44% 46% 44% 48% 25% 30% 23% 20% 7% 9%7% 2014 5% 2013 5% 2012 5% 2011 7% N=595 N=496 N=464 N=552 A slightly higher percentage of companies plan on cutting costs in China this year: • In 2014, approximately one quarter (24%) of companies reported that they are planning to cut costs. This is a slight increase compared to 2013 when 22% of companies stated an intention to cut costs, but still likely reflects the increased pressures on companies’ bottom lines. • Cost cuts are planned mostly to reduce procurement costs, headcount and rental expenses. 3.2 Reducing investment ambitions Fewer companies consider China as a top investment destination
  26. 26. European Chamber 27 24BCS_Figures for report_FV_updated2.pptx Figure 21: Expansion plans of China operations, 2013-2014 Question: Are you considering expanding your current China operations in the next year? Source: Business Confidence Survey 2014, Roland Berger analysis N=484 7% 2013 6% 86% 2014 18% 25% 57% NoYes Not sure 16% 19% 20% 27% 25% 29%8% 13% 19% 15% 27% 25% 23% 29% 45% 48% 79% 78% 65% 65% 63% 55% 50% 46% 45% 24% 11%10%10%13% LegalMachineryTransportation, logistics & distribution Utilities, primary energy & other commodities Financial services (incl. insurance) (Non-legal) professional services Medical devices & other healthcare Agriculture, food & beverage Automotive & auto- components Chemicals & petroleum N=24 N=40 N=31 N=26 N=73 N=71 N=22 N=28 N=38 N=21 Note: Only industries with N>20 are shown N=552 by industry, 2014: updated Fewer companies consider China as a top destination for investment: • Only one fifth of companies (21%) stated that China was their top investment destination in FY 2013 compared with one third (33%) two years ago. • Likewise, only 20% of companies ranked China as the top destination for future investments, a drop from 30% just two years ago. Substantially fewer companies are planning to expand current China operations A significantly smaller percentage of companies are considering expanding their current China operations. However, strong differences exist between industry sectors: • While over half (57%) stated that they plan to expand their current China operations, this is down considerably from the 86% who said the same just one year ago. • Chemicals and automotive companies are driving expansion plans with 79% and 78% of companies planning to expand, while only 24% of companies in the legal industry plan to expand. Note: Only industries with N>20 are shown
  27. 27. European Chamber 28 In partnership with 38% FINANCIAL PERFORMANCE CONTINUES TO STEADILY DECLINE… > REVENUE & PROFITABILITY: > EBIT MARGINS: of companies failed to increase profit margins Chinese economic slowdown > EASE OF BUSINESS: 51% 49% 2012 2013 …AND PERSISTENT MARKET CHALLENGES ARE NOT ABATING > TOP BUSINESS CHALLENGES: > OUTLOOK ON COMPETITION: > MAJOR COMPETITORS: COMPANIES IN CHINA ARE FACING A NEW SOBER REALITY… …AND THIS IS GIVING THEM PAUSE OPTIMISM IS WANING…. > POTENTIAL OF CHINA: > SHORT-TERM BUSINESS OUTLOOK: of companies reported increased revenues of companies are profitable 2013 Rising labour costs Attracting & retaining talent of MNCs reported that business has become more difficult of companies stated that POEs are their most significant competitor 30% 36% 2012 2013 of companies stated that SOEs are their most significant competitor 33% 2012 2013 38% of companies are pessimistic about competitive pressure 76% 68% 2011 2013 of companies are optimistic about growth in their sector 34% 31% 2011 2013 of companies are optimistic about profitability 46% of companies believe that the 'golden age' for MNCs in China has ended For the first time in the history of the survey, more companies noted that their profit margins in China were lower than their company's global average. 74% 64%73% 63% 2011 2012 2010 2013 78% 75% 62% 59% Business Confidence S
  28. 28. European Chamber 29 …AND COMPANIES HAVE REVISED DOWNTHEIR EXPECTATIONSAND INVESTMENT PLANS > TOP INVESTMENT DESTINATION: > EXPANSION OF OPERATIONS: > M&A: > EXPANSION TO OTHER PROVINCES: > INVESTMENT OPPORTUNITIES OUTSIDE CHINA: READY WHEN YOU ARE REFORMS PRESENT AN OPPORTUNITY > INCREASED RULE OF LAW: > IMPLEMENTATION OF REFORMS: > GREATER MARKET ACCESS: REGULATORY AND MARKET ACCESS ISSUES EXACERBATE CHALLENGES > TREATMENT OF COMPANIES: > REGULATORY OBSTACLES: > LOST REVENUE: 54% of companies regard the unpredictable legislative environment as one of the top 3 most significant obstacles EUR 21.3bn in revenues are estimated to have been lost due to market access and regulatory barriers 33% 21% 2011 2013 of companies ranked China their top destination for new investment 86% 57% 2011 2013 of companies plan to expand their current China operations 41% 17% 2011 2013 of companies are considering M&A 69% 45% 2011 2013 of companies are considering expanding operations to other provinces 48% of companies are regularly reviewing investment opportunities outside of China but within Asia 71%of companies ranked 'rule of law & transparent policy-making' the #1 driver for future economic performance 47%of companies are unsure or not confident that China's leaders will start meaningful implementation of the 3rd Plenum reforms in the next one or two years, though 45% believe implementation would be good for them of companies would be more likely to increase investment were more market access afforded to foreign companies 55% 55% of companies believe foreign- invested enterprises receive unfavourable treatment Note: All years shown in this centrefold are financial years Survey 2014 Findings
  29. 29. European Chamber 30 In partnership with A Decade of the Busine COMMITMENT TO THE CHINESE MARKET IN CHINA FOR CHINA, GROWING WITH CHINA THE RISE AND FALL OF PERFORMANCE AND OPTIMISM FINANCIAL PERFORMANCE > REVENUE: > PROFITABILITY: OPTIMISM > BUSINESS OUTLOOK China GDP RMB 18.5 tn RMB 26.6 tn RMB 34.1 tn RMB 47.3 tn RMB 56.9 tn 1) Percentage was adjusted to be comparable to the new question design GDP Source: National Bureau of Statistics of China 1) 80% 76% 50% 62% 59%75% increased revenues 77% 70% 58% 64% 63%73% profitable companies 2005 2005 2005 2007 2007 2007 2009 2009 2009 2011 2011 2011 2012 2012 2012 2013 2013 2013 95% 65% 79% 71% 68% 31%29% 36%35% 62% 2008 2008 2008 2010 2010 2010 considering expanding their current China operations registered as a Wholly Foreign- Owned Enterprise 'in China for China' reported that China is increasingly important in their firm's overall global strategy rank China the top destination for new investment optimistic about growth optimistic about competitive pressure optimistic about profitability 2006 2006 2006 15% 16% 14%16% 29% Pre-Crisis Pre-Crisis Pre-Crisis Global Crisis Global Crisis New Sober Reality New Sober Reality New Sober Reality Global Crisis
  30. 30. European Chamber 31 ess Confidence Survey KEY OBSTACLES MEMBERSHIP AND PARTICIPATION GROWTH THE BCS HAS GROWN WITH THE CHAMBER # of European Chamber member companies # of European Chamber member companies that participated in the BCS A DECADE OF REGULATORY CHALLENGES IPR PROTECTION #1 #2 #3 2005 2007 2009 2011 2013 Government regulation / transparency Discretionary law enforcement Discretionary law enforcement Discretionary law enforcement Unpredictable legislative environment IPR protection Registration Processes Registration Processes Lack of coordination among regulators Discretionary law enforcement Licenses / Quotas Local implementation of national standards IPR protection Local implementation of national standards Administrative issues 2005 2007 2009 2011 2013 15% 16%14% 18% 23% 22% 34% 29%38% 48% 2006 2008 2010 2012 201320112007 20092004 2005 consider IPR protection a top three business challenge consider the enforcement of China's IPR laws and regulations as adequate Note: All years shown in this centrefold are financial years
  31. 31. European Chamber 32 In partnership with Organic growth is the most popular means of expansion, while M&A ambitions have declined: • 47% of companies reported an aim to expand through organic growth next year. • M&As were mentioned by just 15% of companies—a conspicuously low percentage compared to last year when 41% stated that they were considering investing in M&A. Most companies already have a sizeable presence in China and appear to be more interested in growing organically in the next year as they take a 'wait and see' approach to China's economic growth and opportunities in China. With the economy slowing over the past year and an expectation that this will continue, companies have become more tentative about doing deals in China. 25BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Source: Business Confidence Survey 2014, Roland Berger analysis 2013 N=399 Figure 22: Means of expansion, 2013-2014 Question: Via what means are you considering expanding in the next year? Note: Percentages represent the companies that stated 'yes' for each answer option. Alternative answer options were 'no' and 'n/a'. n.a.Organic growth on own n.a.Partnership with Chinese companies 41%Mergers & Acquisitions n.a.Partnership with MNCs 47% 19% 15% 5% 2014 N=317 Note: Percentages represent the companies that stated 'yes' for each answer option. Alternative answer options were 'no' and 'n/a'. M&A intentions are also substantially decreasing
  32. 32. European Chamber 33 A shrinking percentage of companies are considering expanding to other provinces. • 45% of companies reported that they are considering expanding to other PRC provinces compared with 69% of companies just two years ago in FY 2011. • By far the main reason for expansion continues to be the desire to be closer to customers. • Many provinces are considered for expansion, but companies continue to favour the eastern coastal regions rather than inland areas, with the major notable exceptions being Sichuan and Chongqing. This is contradictory to the 2002 'Go West' policy and raises the question of whether the policy is failing and if real expansion in inland areas will only occur once these regions start to pull in additional business. Right now, particularly (non- legal) professional services companies are interested in inland expansion. They make up 20% of all companies that want to expand to Chongqing and 16% of the companies that want to move to Sichuan. 3.3 ‘Looking over the fence’ Companies continue to consider investment opportunities outside of China A significant proportion of companies are routinely reviewing investment opportunities in Asia (outside of China), but only a small percentage of companies have shifted investment plans from China to other countries over the past two years: • 48% of companies routinely review investment opportunities in Asia and outside of China. • 9% of companies stated that they have already shifted investment plans originally earmarked for China to other countries over the past two years. 27BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Question: Do you regularly review investment opportunities outside of China but within the Asia region? Figure 24: Investment opportunities outside of China, 2014 Question: Did your company shift any investment plans from China to other countries in the past two years? Source: Business Confidence Survey 2014, Roland Berger analysis 2014 33% 48% 19% No Yes Unsure N=552 9% 2014 80% 12% No Yes Unsure N=552
  33. 33. European Chamber 34 In partnership with 28BCS_Figures for report_FV_updated2.pptxSource: Business Confidence Survey 2014, Roland Berger analysis N=573 90% 89% 11%10% 20142013 1) Others are: Africa and Australia N=552 Question:Are you considering shifting current or planned investments in China to other markets? Figure 25: Future investment plans, 2013-2014 and investment destinations outside of China, 2013-2014 Question: If so, where? Others1) 13% 0% South America 3%1% North America 4% 1% Europe 19% 2% Other Asian country 23% 63% ASEAN countries 39% 32% N=220 N=65 Yes No 2013 2014 A small percentage of companies are also considering shifting current or planned investments to other markets outside China. ASEAN/Asia continues to be the dominant region for such shifted investments, but companies are increasingly looking towards developed regions for opportunities, too: • As in 2013, only approximately 10% of companies are considering shifting current or planned investment in China to other markets. • Of those considering shifting investments outside of China, only 62% reported that they would shift investment to ASEAN and other Asian countries compared to 95% in FY 2012. • Developed regions like Europe and North America are becoming more popular again and amount to 23% from just 3% in FY 2012. This shows that more companies are considering potentially repatriating manufacturing and some operations to domestic and developed countries, likely due to diminished cost advantages in China caused by the rising costs of labour and raw materials and by the few years of stagnant or minor growth in the EU and the US during the global economic crisis. This is given further credence by the fact that a talent shortage is identified as the second largest HR challenge and by the fact that over half of respondent companies are either neutral or pessimistic about the likelihood of productivity gains in their sector over the next two years. This may further indicate that pressure arising from rising wages is outstripping productivity growth in China. In line with the slowed growth outlook as stated in Chapter 2, it is our view that China will remain a key market for European companies as it remains a large marketplace accounting for sizeable proportions of global revenues. However, as China’s upside potential is slowing and fostering bottom-line growth is becoming harder, European companies are beginning to scale down their China ambitions and adapt to this new, more sober, reality. They are considering the attractiveness of other countries and re-considering the attractiveness of bolstering operations in their domestic markets. 1) Others are: Africa and Australia
  34. 34. European Chamber 35 4 REGULATORY AND MARKET ACCESS ISSUES CONTINUE TO PRESENT CHALLENGES, BUT REFORMS WOULD PRESENT OPPORTUNITIES In addition to the Chinese economic slowdown and persistent market challenges, companies continue to report that the regulatory environment hinders their performance in China: • The majority of European companies perceive themselves to be treated unfavourably compared with local companies. • A number of regulatory obstacles for doing business in China continue to exist. • Written laws are mostly considered adequate, but their enforcement weak. • Companies continue to miss out on business opportunities because of market access and regulatory barriers. These issues do not look markedly different from when we started the survey ten years ago. Recent government initiatives such as the announcement of the Third Plenum reforms, the launch of the China (Shanghai) Pilot Free Trade Zone (CSPFTZ), the replacement of the business tax with a value-added tax and the commencement of negotiations for an EU-China Investment Agreement are positively acknowledged. At the same time, however, a large number of companies remain unconvinced about the likelihood that fundamental regulatory changes will be made that would positively impact their ability to operate in China. European companies are looking for substantive changes to the business environment. They have the capital to invest. Yet real changes in the form of increased transparency and increased market access are needed as incentives to minimise their caution.
  35. 35. European Chamber 36 In partnership with Note: Only industries with N>20 are shown A significant percentage of companies perceive themselves to be treated unfavourably when compared to Chinese companies. In particular, legal, financial services and transportation companies are inclined to think this way: • 55% of companies believe that they tend to receive unfavourable treatment compared to domestic Chinese companies. • Companies in the legal sector most strongly believe that foreign companies are treated unfairly, with 90% of companies in this sector making this assertion. This is likely owing both to the fact that foreign law firms are still unable to practice Chinese law despite repeated calls from business, civil society and the government that increased rule of law is required, as well as to the fact that European legal companies frequently represent foreign companies for the legal and regulatory issues they face in China, meaning that they are intimately aware of the difficulties that foreign companies encounter. • Agriculture, food & beverage (AFB) was the only sector in which a higher percentage of companies believed that they are treated equally (48%) instead of unfairly (42%). Notably, the AFB sector is highly regulated and is a sector in which approximately three quarters of companies regard non state-owned enterprises as their most significant competitor. • Consistent among all industries is the minority that believes foreign-invested companies are treated favourably when compared to domestic Chinese companies, averaging just 11%. Companies in sectors in which SOEs are perceived to be the greatest competitors believe that foreign companies are treated more unfavourably: or example, the financial services, transport & logistics and utilities sectors all perceive SOEs to be their major competitor. The only outlier is the legal industry. This strongly implies that SOEs continue to influence the regulatory and governmental environment for foreign companies in these sectors in order to maintain their own preferential partisan treatment. This goes against the identified need for market forces to be given a more decisive role in resource allocation. 4.1 Regulatory and market access issues European companies perceive themselves to be discriminated against
  36. 36. European Chamber 37 31BCS_Figures for report_FV_updated2.pptx PRELIMINARYDRAFT Figure 27: Regulatory obstacles when doing business in China, 2013-2014 Question: How significant are the following regulatory obstacles to you when doing business in Mainland China? Source: Business Confidence Survey 2014, Roland Berger analysis 17% 16% 13% 11% 11% 8% 7% 6% 7% 5% 18% 21% 11% 13% 9% 8% 7% 7% 6% 19% 13% 21% 11% 6% 7% 8% 8% 5% 1% 2% IPR protection 22% Discrimination against FIEs in public procurement 23% Corruption 26% Licensing requirement 34% Administrative issues 45% Discretionary enforcement of regulations 50% Unpredictable legislative environment 54% Other 8% Restrictions on access to financing 17% Ownership restrictions 21% top 2 top 1top 3 N=552 2014 N=569 20131) n.a. 43% 39% n.a. 30% 13% 20% 18% 14% 6% 1) 2013 percentages are slightly different when compared to the 2013 BCS publication as a result of a calculation method change. 1) 2013 percentages are slightly different when compared to the BCS 2013 publication as a result of a calculation method change. A significant number of regulatory obstacles continue to hinder companies doing business in China: • The unpredictable legislative environment was identified as the key obstacle in FY 2013; with a cumulative 54% of companies identifying it as one of their top three challenges. • The discretionary enforcement of regulations and administrative issues were ranked as the second and third most significant regulatory obstacles by a cumulative 50% and 45% of companies. • Regulatory issues are long-standing as indicated by the survey's history. Although the questions have been asked differently throughout the years, similar regulatory obstacles remain: — A cumulative 43% ranked the discretionary enforcement of regulations as the top challenge in 2013. — The discretionary enforcement of broadly drafted laws and regulations was seen as the number one obstacle to China's future economic performance from 2008-2012. This shows that European companies want, above all, to see administrative reforms that work to ensure that laws and regulations are fairly and transparently implemented in a predictable fashion. Companies still face a significant number of regulatory obstacles
  37. 37. European Chamber 38 In partnership with China's written IPR laws and regulations are mostly regarded as adequate, although the proportion of companies that regard the laws and regulations as either excellent or adequate is still lower than the 2010 and 2011 levels. What remains largely consistent is the level of concern that companies have about the inadequate enforcement of these laws and regulations: • 55% of companies rated the effectiveness of China's written IPR laws and regulations as adequate; this is a substantial number overall and up from 47% in FY 2012 although down from 65% in FY 2011. • In addition, the number of companies that rate the written laws as inadequate has dropped from 26% in FY 2012 to 18%. • Only 18% of European companies rated the enforcement of China’s IPR laws and regulations as adequate or excellent compared with the 64% that reported enforcement to be inadequate or very inadequate. As IPR laws tend to be drafted at central levels but enforced at local levels, this likely shows that many of the required administrative reforms need to be focused at local level implementation. Written laws and regulations are adequate but their enforcement is weak
  38. 38. European Chamber 39 Nearly half of European companies stated that they have missed out on business opportunities in China because of market access or regulatory barriers: • 47% of companies stated that they missed out on business opportunities in China in FY 2013. This number has been largely stable since 2012. • Over the past three years, slightly more than one third of companies stated that they missed out on 10-25% of their annual revenues due to these barriers. • From these responses, the European Chamber conservatively estimates that in FY 2013 the Chamber’s overall membership (including those companies that did not participate in the BCS) suffered approximately EUR 21.3 billion in missed opportunities owing to market access and regulatory barriers in China. In the last study, the amount of losses was estimated to be EUR 17.5 billion. Companies missed out on approximately EUR 21.3 billion in business opportunities due to market access and regulatory barriers
  39. 39. European Chamber 40 In partnership with Among the reforms outlined in the Third Plenum Decision, administrative and financial reforms are considered particularly important for China: • A cumulative 66% of companies ranked administrative reforms among their top three priorities. • Financial and industrial policy reforms were ranked as the second and third most important by a cumulative 59% and 53% of companies. This closely tallies with the fact that the major regulatory concerns identified by European companies related to the unpredictable legislative environment and the discretionary enforcement of regulations. Reforms and implementation of reforms are cautiously viewed in a positive light Note: For this question, participants had to select their top three reforms. Percentages represented is the sum of percentages from top 1 to top 3 reforms 4.2 Careful acknowledgement of improvements The reforms outlined in the Third Plenum Decision are considered to be important
  40. 40. European Chamber 41 Figure 32: China (Shanghai) Pilot Free Trade Zone, 2014 Question: Please indicate your level of agreement with the following statement: "The opening of the China (Shanghai) Pilot Free Trade Zone and the negative list for foreign investment are major steps towards opening up the Chinese market and creating a level playing field." Question: Has your company already established or does it plan to establish a presence in the China (Shanghai) Pilot Free Trade Zone by the end of this year? Question: In which area do you think the China (Shanghai) Pilot Free Trade Zone will benefit your business? 36% 40% 5% 10% 2014 2% 7% N=552 Strongly disagree Strongly agree Neutral Agree Disagree No opinion 17% 25% 30% 6% 2014 9% 13% N=87 None Market access Liberalization of interest rate Custom clearance Individual cross border transations Others86% 14% 2014 N=552 Yes No Nearly half of European companies believe that the China (Shanghai) Pilot Free Trade Zone (CSPFTZ or Zone) is a major step towards opening up the Chinese market, although only a small number of companies have already established or are planning to establish a presence: • 45% of companies believe that the CSPFTZ is a major step towards opening up the Chinese market and creating a level playing field. Only 14% of companies have established or are planning to establish a presence in the CSPFTZ. While this is a small percentage, the reforms being made in the Zone are limited. For example, the CSPFTZ ignores manufacturing sector opening and even maintains significant restrictions in the service sector through the extensive Negative List. Seen in this light, the 14% figure should probably be seen as a positive sign that European companies believe in the premise and opportunities the Zone has already created. The replacement of the business tax by VAT also received cautiously positive feedback The European Chamber has long supported the replacement of the business tax with value-added tax (VAT) and continues to support its rollout across various industry sectors. The business tax has now been replaced by VAT for a substantial number of companies, and while companies generally view the change as positive, many companies remain unsure as to whether it will be beneficial to their company. It is notable, however, that a higher proportion of those companies for which the business tax has already been replaced by VAT view the change as positive (39%) compared to the expectations of those companies in sectors in which the business tax has yet to be replaced by VAT, of which only 12% think it will be positive and most (58%) remain unsure. This likely shows that greater awareness of the advantages of the VAT needs to be raised among European companies. Reforms are generally viewed positively but not with the fervour one might have expected. Many companies remain unconvinced and are concerned or unsure when asked about the likelihood of the meaningful implementation of reforms: • 45% of companies believe that the implementation of reforms outlined in the Third Plenum Decision would be good for their company and large firms are especially optimistic. • However, half (50%) the companies remain sceptical as to whether the reforms would be good for their companies. • Only 53% believe that there will be meaningful implementation of the reforms while 40% remain unsure, further showing that many companies remain cynical about the prospect of consequential reforms following a decade of general inaction and regulatory stagnation as well as continued discrimination. The China (Shanghai) Pilot Free Trade Zone is seen as a step in the right direction
  41. 41. European Chamber 42 In partnership with 4.3 Need for real reform and market opening Transparency, fairness, increased market access and investment protection is needed 1) An Investment Agreement is a type of treaty between countries that addresses issues relevant to cross-border investments, usually for the purposes of protection, promotion and liberalisation of such investments. During the last EU-China Summit that took place in November 2013, Premier Li Keqiang and President José Manuel Durão Barroso announced that the EU and China would commence negotiations for an EU-China Investment Agreement that would cover these aspects and include market access opening. The negotiations formally started on 21st January, 2014.
  42. 42. European Chamber 43 Companies would like to see more transparency and fairness in China in addition to increased market access and better investment protection. This tallies with other survey results about the perceived regulatory challenges and the most desired reforms outlined in the Third Plenum Decision: • The rule of law and transparent policy-making was ranked the most significant driver for China's economic performance in the coming years by 71% of companies. Increased rule of law and transparent policy-making continues to be ranked No. 1, the driver deemed most significant for China’s future economic performance, maintaining this position ever since it was introduced as an option. This consistency shows the strength of conviction of European companies that increased rule of law is the reform with greatest potential dividends for China’s economy. The consistency also strongly implies that little improvement has been made in this regard over these years. • The promotion of fair competition and fewer monopolies was also highlighted as important by 65% of companies, but was again usurped into second place by the promotion of domestic consumption. • Increased market access, increased investment protection for European companies and increased transparency are the top three changes that companies would most like to see occur in China following completion of the EU- China Investment Agreement. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Only 38% of companies reported that there has been a market opening in their industry in China over the last one or two years, while, at the same time, the majority of companies (54%) reported that there has been no change with regard to market openings in their industry and even 9% stated that there has been a closing. In particular, financial services (56%), medical devices & other healthcare (46%) and agriculture, food & beverage (41%) companies have seen an opening. On the contrary, very few legal (24%), (non-legal) professional services (21%) and utilities (14%) companies have seen an opening. ----------------------------------------------------------------------------------------------------------------------------------------------------------------
  43. 43. European Chamber 44 In partnership with Current reform is not enough 40BCS_Figures for report_FV_updated2.pptx Figure 36: The impact of greater market access, 2014 Question: If greater market access were granted to foreign companies in your industry, how would this likely impact your company's investment decision? Source: Business Confidence Survey 2014, Roland Berger analysis N=552 2014 3% 42% 55% 38% 37% 38% 34% 40% 46% 48% 50% 46% 55% 63% 63% 62% 61% 58% 54% 53% 50% 50% 39% Agriculture, food & beverage 0% Financial services (incl. insurance) 0% Chemicals & petroleum 0% 6% Transportation, logistics & distribution 4% Utilities, primary energy & other commodities 0% Automotive & auto- components 0% Medical devices & other healthcare 0% (Non-legal) professional services 3% Machinery 5% Legal N=24 N=71 N=21 N=38 N=73 N=26 N=40 N=22 N=28 N=31 Note: Only industries with N>20 are shown More likely to increase investment Less likely to increase investmentNo change by industry: For European companies, current reforms do not go far enough. The reforms outlined in the Third Plenum Decision have increased the likelihood of investment for a number of companies but its announcement has not brought about a significant change: • On average, only one quarter of companies stated that they have positively changed their investment plans as a result of the Third Plenum. • Large companies and newcomers are slightly more likely to increase investment because of the outlined reform agenda. Lower market access barriers would increase investment
  44. 44. European Chamber 45 A substantial number of companies announced that they would be more likely to increase investment if market access barriers were lifted: • 55% of companies stated that they would be more likely to increase investment if market access barriers were lifted. • Companies in the chemical, financial services and legal industries would be most likely to increase investment if greater market access were granted, likely reflecting the severe barriers present in these mostly SOE-dominated sectors, while agriculture, food & beverage companies would be least likely to expand their investment. European companies do have money to invest and would like to increase investment. However, the combined difficulties of a tough operational business environment and lasting market access constraints are responsible for a slackening of investment plans. Companies see difficulties to further increase their bottom line, but greater access to the market and a meaningful implementation of―particularly administrative―reforms would ease pressures and inspire European companies to invest more in the Chinese marketplace.
  45. 45. European Chamber 46 In partnership with 5 CONCLUSION China’s strategic importance has climbed year on year in the ten-year history of this Business Confidence Survey. This trend is due to the massive opportunities that China’s breakneck growth has brought for European companies during this decade. It is bolstered by the fact that China has been the buttress of global growth since the onset of the global economic crisis. Expansion of top-line growth has tended to be relatively simple and, at times, this has meant that China has been perceived by many to be the saviour. As such, European companies have invested heavily in China and have to date largely focused on driving expansion, mirroring China’s seemingly ‘growth at all costs’ stratagem. Growth brings rewards, but also pressures. The fruits of China’s expansion have rightfully started to be better distributed into the hands of the workforce, but years of rising costs must be offset by years of proportional productivity growth. European companies now perceive rising labour costs to be the most significant factor influencing net profit margins, though the cumulative effect of years of fiercely intensifying competition from state-owned and, in particular, privately- owned Chinese companies, while undoubtedly good for China’s economy, is also presenting a challenge to business. However, when looking forward, companies are most concerned about an economic slowdown in China. After thirty years of almost unbroken rapid growth, the Chinese slowdown, caused primarily by rising labour costs and structural economic problems owing to a near decade-long stagnation of reforms―and further exacerbated by the massive stimulus package of 2009 that in effect turned the clock backward on reform―is already contributing to the steadily declining performance of European companies, both in terms of bottom-line and top-line growth. Revenue and EBIT growth have both dropped progressively since 2010 and most companies are struggling to grow their margins. Less than two thirds of European companies in China are now profitable and these pressures do not appear to be easing. Optimism for growth is at its lowest levels since the peak of the economic crisis as downward pressures on growth are becoming entrenched. Business is already tough, and it is getting tougher. This is leading many to the conclusion that the good times are over. Most businesses in China have known nothing other than growth and expansion. A Chinese economic slowdown is a game changer that would fundamentally and necessarily alter the corporate strategies of businesses in China. European firms are already reacting to this new reality. European companies will continue to regard the Chinese marketplace as strategically important because the sheer size of the marketplace means that they will continue to generate a high proportion of their global revenues in China. However, it is clear that they are starting to reappraise China’s role. More modest expectations are being set and investment plans are being revised downwards. Fewer European firms are considering China a top priority for investment, fewer are considering expanding current China operations, including through M&A, and fewer are looking to expand to other Chinese provinces as they come to terms with this new, more sober reality. The European Chamber also estimates that our member companies missed out on EUR 21.3 billion in potential revenues due to market access and regulatory barriers in 2013. This continues to manifest itself in a sense of inequity, as most European companies feel that domestic Chinese companies continue to receive comparably favourable treatment. On the regulatory front, the most significant challenges are the unpredictable legislative environment and the discretionary enforcement of regulations. As a result, the reforms that European companies most want to see are administrative in nature and related to fostering increased rule of law. The reforms laid out in the Central Committee’s Third Plenum Decision are viewed positively; however, after years of unrealised promises, European companies remain sceptical and have yet to be convinced that meaningful reforms will be implemented. These regulatory and market access issues heap further pressure on European companies in China at a time when the business environment is becoming increasingly testing and when most companies are worried about a sustained slowdown in economic growth in China. It is not surprising that European companies are adapting their China strategies and being cautious not to put all their eggs in one basket. European companies are ‘looking over the fence’ to see what
  46. 46. European Chamber 47 opportunities exist in China’s neighbours, with half the European companies in China routinely reviewing investment opportunities in other Asian countries. There is an opportunity to reverse this trend. China’s leaders have correctly identified the need for sweeping reforms. Recent actions and reforms, including the promulgation of the Third Plenum Decision, as well as the opening of the China (Shanghai) Pilot Free Trade Zone, VAT reforms, the launch of negotiations for an EU-China Investment Agreement and reforms to the administrative approval process are generally viewed positively by European companies. However, while the Third Plenum Decision is immensely important and welcomed by European industry, the reforms it lays out will only reap dividends in the medium term and are not short-term palliative remedies. On the contrary, the crucial reforms will inevitably be growth-diminishing in the short term, which likely explains why only approximately one quarter of European companies are more likely to increase their investment plans in China as a result of the release of the Third Plenum Decision. Instead, it is market-opening reforms that present an immediate opportunity. A lifting of market access constraints would spur over a half of European companies to re-intensify their China investment plans.
  47. 47. European Chamber 48 In partnership with 6 ABOUT THE SURVEY MOTIVATION AND DESIGN The purpose of the European Union Chamber of Commerce in China's (European Chamber's) European Business In China Business Confidence Survey (BCS) is to take an annual snapshot of European companies' successes and challenges in China. Published since 2004, the survey has enabled the European Chamber to build a rich data set to serve as a broad indicator of how European companies judge the business environment in China, both now and in the future. The European Chamber invited its members to take part in the BCS 2014 over a three-week period during February 2014. The survey was conducted in cooperation with Roland Berger Strategy Consultants and was published in May 2014. There were 1,487 eligible entities. With 552 respondents completing the survey, the BCS 2014 achieved a response rate of 37%. Of those respondents, 64% participated in last year's survey. This number has increased each year, suggesting an increasing stability in the data set. This has enabled year-on-year comparisons, coupled with new insights identified by first-time participants. To obtain a high response rate, which is an essential feature of high-quality results, the survey was condensed as much as possible while keeping the appropriate questions to make comparisons over time. An online and password-required survey platform was set up to address the member companies of the European Chamber. The survey comprised 63 questions, grouped under four key themes: • Company Profile and Statistics; • Outlook on China, Competition, Company Strategy and Regulation; • Human Resources; and • Financial Performance. Consistency was one of the motives that guided the design of the questionnaire and the data analysis. We gathered similar data from previous years so that we could trace and understand the development in strategies and perceptions. We focused on capturing the key issues for European companies operating in China and designed up-to-date questions that are in line with typical 2013 issues European companies faced in China.

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