The German Chamber Business Confidence Survey is a key gauge measuring the business sentiment of German companies operating in China. As of 2014 the German Chamber of Commerce in China has nearly 2,400 member companies, representing about 50% of German business in the Middle Kingdom. The survey was conducted between May and June 2014.

1. Business Confidence Survey 2014
German Business in China – Press Conference
Lothar Herrmann | 19.06.2014

2. Page 2 19.06.2014
Content
German company profiles
Market importance
Market environment
Business challenges
Business outlook 2014
Conclusion
Q & A
1
2
3
4
5
6
7

3. Page 3 19.06.2014
1. German company profiles
• Survey conducted from May 12th to June 6th 2014
• Response rate 17.4% or 417 companies
• Regional and industrial distribution of companies remains stable
Geographic distribution Industry segments
Shanghai
42.0%
Other East
12.5%
Beijing
20.9%
Other North
7.7%
Pearl River
Delta
17.0%
7%
1%
1%
2%
3%
3%
3%
3%
4%
5%
5%
6%
6%
9%
14%
26%
Other
Tourism
Aerospace
Environmental Products/Services
Medical Supplies
Logistics
IT/Telecommunications
Consumer Goods
Construction
Finance/Insurance
Plastic/Metal Products
Electronics
Chemicals
Consulting/Legal Services
Automotive
Machinery/Industrial Equipment

4. Page 4 19.06.2014
• 55% of local operations have under 250 employees
• 66% with turnover under RMB 250 Million
• SMEs dominate German business in China
1. German company profiles
17%
26%
23%
10% 11%
13%
0%
5%
10%
15%
20%
25%
30%
35%
40%
<5 Million 5-50
Million
51-250
Million
251-500
Million
501-999
Million
>1 Billion
Number of employees Annual turnover in RMB
36%
29%
23%
5%
7%
0%
5%
10%
15%
20%
25%
30%
35%
40%
< 50 50-250 251-999 1000-2999 >3000

5. Page 5 19.06.2014
• Legal structure is stabilizing, with 67% of companies registered as WFOEs
• For the first time majority of companies have operated in China for over 10 years
1. German company profiles
67%
12%
8% 8% 6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Legal form Years in China
55%
5%
8% 7%
25%
27%
28%
0%
5%
10%
15%
20%
25%
30%
< 2 2 - 4 5 - 6 7 - 9 10 - 15 > 15

6. Page 6 19.06.2014
• Despite slower economic growth in China, importance of global business is increasing
• China remains a key source for growth of global profit and turnover development
57%
50%
60%
51%
61%
56%
0%
10%
20%
30%
40%
50%
60%
70%
Turnover Profit
2012 2013 2014
2. Market importance
China as top market for German parent company in global business

7. Page 7 19.06.2014
• German companies operate in China for the Chinese market
• Importance of exports to Europe continue to decline
• Exports to other Asian markets are stable at low levels
2. Market importance
China is the most important market for local operations
64%
75%
77%
29%
18% 17%
7% 7% 7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2012 2013 2014
Mainland China Europe Other Asia

8. Page 8 19.06.2014
• Central government initiated reforms widely seen as positive
• Impact on future investment decisions is uncertain
5%
4%
7%
9%
11%
10%
15%
13%
18%
18%
22%
31%
34%
35%
39%
42%
39%
46%
48%
51%
0% 10%20%30%40%50%60%70%80%
Reducing industrial over capacities
Interest rate liberalization
RMB exchange rate liberalization
Reduction of red-tape
Increased urbanization
Improved rule of law
Anti-corruption drive
Increased role of markets
Improved environmental protection
Expanding domestic consumption
very positive impact positive impact
3. Market environment
4%
34%
49%
12%
2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
very negative
negative
neutral / no
impact
positive
very positive
Impact of government policies Impact on future investment

9. Page 9 19.06.2014
• HR topics remain the most prominent challenge, but major challenge for smaller share
compared to previous years
• Slow internet most significant non-HR topic
• Corruption with biggest fall, dropping from 5th position to 10th
49%
50%
54%
56%
58%
59%
59%
67%
74%
75%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Corruption
Preferential treatment of local companies
Increasing commodity and energy prices
Domestic protectionism
Protection of intellectual property
Bureaucracy/administrative hurdles
Slow internet speed
Retaining qualified staff
Finding qualified staff
Increasing labour costs
2014 2013 2012
4. Business challenges
Top 10 business challenges

10. Page 10 19.06.2014
• HR issues decreasing from high level
• Impact from industrial action remains low but increasing
• Internet speed and domestic protectionism on the rise
• IPR issues continues to become more significant
4. Business challenges
-5.8
-4.1
-1.9
9.6
8.9
6.4
5.8
-8 -6 -4 -2 0 2 4 6 8 10 12
Slow internet speed
Domestic protectionism
Industrial action/strikes
Protection of intellectual property
Biggest changes amongst challenges 2013-2014*
Retaining qualified staff
Finding qualified staff
Increasing labor costs
Increasing
Decreasing
*change in percentage points

11. Page 11 19.06.2014
• 94% of German companies report facing Chinese competition
• 70% expect competitive pressure from Chinese companies to increase
94%
88%
73%
68%
60% 59%
51%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
4. Business challenges
Increasing
70%
Unchanged
23%
Decreasing
1%
Not a
competitor
6%
Origin of competition Development of competition

12. Page 12 19.06.2014
• Competitive pressure from Chinese innovation has limited impact
• For vast majority IPR confrontation initiated by local companies has no effect
4. Business challenges
19%
33%
27%
4% 3% 3%
45% 43%
50%
0%
10%
20%
30%
40%
50%
60%
2012 2013 2014
Increasing Decreasing No effect
8% 10%
2%
9%
15%
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2012 2013 2014
Expected competition in the next 3 years IPR confrontation

13. Page 13 19.06.2014
5. Business outlook 2014
• German companies perceive economic environment similar to 2013
• Evaluation of economic conditions remains cautiously positive
• Automotive sector most positive
8% 7% 9%
22%
41% 40%
43%
38% 34%
23%
13% 17%
4% 2% 1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014
Significantly
worsening
Worsening
Neutral/unchanged
Improving
Significantly
improving
75%
42%
46%
4%
21%
19%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Automotive Machinery Other
Improving Worsening
Evaluation of economic environment ….by industry

14. Page 14 19.06.2014
5. Business outlook 2014
• General business sentiment remains positive for 2014
• Higher share expect to exceed targets compared to previous years
• Anticipated impact of slowdown for 2014 less severe
Exceed
23%
Achieve
36%
Mostly
achieve
23%
Partly
achieve
14%
Not achieve
4%
12%
32%
14%
21%
23%
17%
0%
5%
10%
15%
20%
25%
30%
35%
Exceed Not or partly achieving
2012 2013 2014
Expectations on reaching business targets ….compared to previous years

15. Page 15 19.06.2014
5. Business outlook 2014
• German business on stable footing with growth moderation setting in
• Higher share of companies expect increasing turnover
• Similarly a higher share report increasing profits
• Share of companies reporting growth >25% decreasing
Change in expected turnover Change in expected profit
21%
16% 13%
14%
17% 23%
30% 37%
38%
21%
21%
20%
15%
9% 7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014
Decrease
Similar
Increase (+4-14%)
Significant increase
(+15-24%)
Increase >25%
12% 8% 10%
12%
12%
14%
29% 35%
36%
28%
30%
28%
19% 16% 12%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014
Decrease
Similar
Increase (+4-14%)
Significant increase
(+15-24%)
Increase >25%

16. Page 16 19.06.2014
5. Business outlook 2014
• Revenue growth levels correlate to years companies have operated in China
• Turnover growth moderation set in after 5th year for most companies
• Rapid growth remains possible for newcomers
• Higher base of established companies translate into slower growth rates
Share of companies with turnover growth >25% by years in China
38%
39%
23%
13%
9%
4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
< 2 2 - 4 5- 6 7 - 9 10 - 15 > 15

17. Page 17 19.06.2014
• Majority plan to expand employment levels, but new employment is cooling
• Investment plans remain stable, but majority holding investment constant
5. Business outlook 2014
58%
61%
50%
33%
32%
40%
9% 8% 10%
0%
10%
20%
30%
40%
50%
60%
70%
2012 2013 2014
Increase Similar Decrease
Expected employment plans 2014 Expected investment plans 2014
44%
48% 48%
45%
50%
44% 41%
47%
7% 8%
11%
8%
0%
10%
20%
30%
40%
50%
60%
70%
2011 2012 2013 2014
Increase Similar Decrease

18. Page 18 19.06.2014
• Fewer companies plan to invest in new cities until 2017
• Companies more risk averse with investment decisions
• Following key customers and regional diversification main reasons companies plan new
investments in new cities
48%
35%
17%
30%
46%
24%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Yes No Maybe
2013 2014
5. Business outlook 2014
46%
21%
13% 11%
4% 4% 2%
64%
41%
26%
12%
8% 8%
3%
0%
10%
20%
30%
40%
50%
60%
70%
2013
2014
Investment plans for new locations Motivation for investments

19. Page 19 19.06.2014
Shanghai
14.2%
Beijing
11.3%
Chengdu
8.3%
Guangzhou
8.6%
Shenzhen
6.2%
Shenyang
2.7%
Chongqing
6.8%
Nanjing
2.7%
Suzhou
3.9%
Tianjin
3.8%
• Yangtze Delta, Bohai Rim, Pearl River Delta most attractive for over 50%
• Chengdu and Chongqing most likely to become next German business hub
• Central and North East Region less attractive
Top 3
New in 2014
Wuhan
5.1%
5. Business outlook 2014
Top 10 locations companies plan to invest within the next 3 years

20. Page 20 19.06.2014
6. Conclusion
• German companies performing robustly
• Business sentiment generally positiveBusiness outlook
• Turnover and profits growth at more moderate levels
• For the first time over 50% operate in China for over 10 years,
operating from higher base level with lower growth
Moderation of
growth
• Majority of companies perceive government reforms as positive
• Effect on future investments remains to be determined
Economic reforms
•HR issues remain top 3 challenge, but decreasing
•Slow internet and IPR issues increasing
•To be watched: labor disputes
Challenges