business confidence survey 2014 press conference presentation

BUSINESS CONFIDENCE SURVEY 2014

Press conference, Beijing and Shanghai, May 29th, 2014

European Business in China

2 BCS 2014_Press conference_3rddraft_FV.pptx

A. Methodology and respondents' profile

B. Major Findings

C. Business has become more difficult

D. Sober new reality: Persistent market challenges are not easing up and optimism is waning

E. More modest expectations and revised investment plans

F. Regulatory and market access issues continue to present challenges, but reforms would present opportunities

G. Q & A

Contents


A. Methodology and respondents' profile


552 respondents

completed the survey

Response rate high - a stable data set

Survey design

> 63 questions on 4 core themes:

– Company profile

– Outlook

– Human resources

– Financial performance

> Special attention paid in survey design

to ensure consistency for year-on-year

comparability, with some new

questions to cover recent

developments and topical issues

Survey execution

> Almost equal representation of

companies across sectors:

– Professional services

– Industrial goods / services

– Consumer goods / services

> 64% of respondents participated

in last year's survey, which

contributes to a greater stability in

the data set, while also allowing new

insights from first-time participants

Source: BCS 2014, Roland Berger analysis

Methodology


N=552

31%

40%

6%

24%

Professional services

> IT and telecommunications (N=16) > (Non-legal) professional services

(N=73) > Legal (N=21) > Media & Publishing (N=8) > Others (N=13)

> Agriculture, food & beverage (N=31) > Cosmetics (N=9) > Fashion & textile (N=7) > Pharmaceuticals and healthcare (N=11) > Financial services (N=71) > Retail (N=7) > Hospitality (N=7) > Travel & tourism (N=7) > Education (N=8) > Others (N=12)

> Automotive and auto components (N=40) > Chemicals and petroleum (N=24) > Civil engineering and construction (N=16) > Machinery (N=38) > Utilities, primary energy & other commodities (N=22) > Medical devices & other healthcare (N=26) > Transportation, logistics & distribution (N=28) > Others (N=26)

Industrial goods / services:

Others

A strong distribution across industries

Main industry sectors of respondents (2014)


Consumer goods / services


Representing companies of various sizes

Revenue and employee numbers (2014)


Respondents' Mainland China revenue: Respondents' Mainland China employees:

10%

9%

19%

23%

23%

15% > EUR 1 bn

EUR 251 m - EUR 1 bn

EUR 1 m - EUR 10 m

< EUR 1 m

EUR 11 m - EUR 50 m

EUR 51 m - EUR 250 m 12%

17%

41%

20%

9%

>5000

1001-5000

51-250

251-1000

< 50

N=552 N=552


The majority have been operating in China for over a decade

Years of operation in Mainland China (2014)

24%

30%31%

11%

4%

< 2 years > 20 years 11-20 years 6-10 years 2-5 years


54%


B. Major Findings


Major Findings

Two thirds of large companies stated that business in China has become more difficult • More companies view SOEs as their main competitor

Half of European companies believe that the ‘golden age’ for MNCs in China has ended • The Chinese economic slowdown is now the top future business

challenge, overtaking rising labour costs

Companies are reacting by setting more modest expectations • Only 57% plan to expand their current China operations, down from

86% last year

Reforms would present an opportunity • 45% of companies believe that the Third Plenum reforms will be good

for their company


C. Business has become more difficult

11 BCS 2014_Press conference_3rddraft_FV.pptx Source: Business Confidence Survey 2014, Roland Berger analysis

by number of employees:

2014

9%

39%

51%

45%

34%28%

43%60%

68%

12%

>1,000

3%

251-1,000

6%

<250

20%

52%

44%

33%

28%45%

61%

11%

6-10 years

5%

>10 years < 5 years

by time in China:

Business has become more difficult

About the same

Business has become easier

Business has become more difficult

Judgement about the ease of doing business in China (2014)

Over half the

companies

(51%) stated

that business

has become

more difficult;

MNCs and

veterans in

particular

perceive this

14 12

EN CN


9%

16% 18%

23% 29%

37%39%

40% 36%

41%36%

22% 23%

12%

5%

2014

3%

2013

4%

2012

1%

2011

3% 2%

Source: Business Confidence Survey 2011-2014, Roland Berger analysis

A continued decrease in revenue growth

Evolution of company revenue in China year-on-year (2011-2014)

The percentage of

companies that

reported an

increase in

revenues has

continued to decline

year-on-year from

78% in FY 2010 to

just 59% in FY 2013

Increased substantially (>20%)

Increased (5-20%)

Remained the same (+/-5%)

Decreased (5-20%)

Decreased substantially (>20%)

78% 59%

8 6

EN CN


Revenue performance differs markedly across sectors

AUTOMOTIVE & AUTO COMPONENTS

AGRICULTURE, FOOD & BEVERAGE

MEDICAL DEVICES & OTHER HEALTHCARE

FINANCIAL SERVICES (INCL. INSURANCE)

MACHINERY

55%

50%

46%

45%

Proportion of companies reporting increased revenues by industry sub-sector (2014)

79%

76%

64%

61%

60%

Note: only industries with N>15 are shown

CHEMICALS & PETROLEUM

(NON-LEGAL) PROFESSIONAL SERVICES

UTILITIES, PRIMARY ENERGY & OTHER COMMODITIES

TRANSPORTATION , LOGISTICS & DISTRIBUTION

9 7

EN CN


11% 13% 15% 16%

16% 14%20% 21%

74% 73%64% 63%

2014 2013 2012 2011


Fewer profitable companies

Evolution of profitability performance in China year-on-year (2011-2014)

Positive

Break-even

Negative

The percentage of

profitable

companies has

decreased year-

on-year from 74%

in FY 2010 to 63%

in FY 2013

10 8

EN CN

15 BCS 2014_Press conference_3rddraft_FV.pptx Source: Business Confidence Survey 2011-2014, Roland Berger analysis

30% 29% 34% 33%

37%29%

34% 38%

33%42%

33% 30%

2014 2013 2012 2011

Tighter margins

Comparison of China EBIT margins with global EBIT margins (2011-2014)

Better than company average worldwide

Lower than company average worldwide

Same as company average worldwide

More companies

(33%) noted that

their profit margins

in China are lower

than their

company’s global

average than vice-

versa (30%).

11 9

EN CN


D. Sober new reality: persistent market challenges are not easing up and optimism is waning


A slowdown in China is seen as the major future challenge

Top ten challenges for future business in Mainland China (2014)

Chinese economic slowdown

Rising labour costs

Attracting & retaining talent

Market access barriers

Ambiguous rules & regulations

Discretionary enforcement of regulations

Global economic slowdown

Competition from domestic POEs

Lack of sufficient and qualified talent

Competing against non-compliant competitors

1

2

3

4

5

6

7

8

9

10

Ranking relative to BCS 2013 Business challenge ranked in terms of significance

New

New

New 15 13

EN CN


12%

27%

20% 17% 18%22% 27%

83%

65%78% 79% 76% 71% 68%

8%5%

2014

5%

2013

1% 6%

2012

3% 3%

2011

1% 3%

2010

2%

2009 2008


Growth expectations are at the lowest level since the peak of the crisis…

Business outlook for growth (2008-2014)

Optimistic

Neutral

N./A.

Pessimistic

The number of

companies optimistic

about future short-

term growth now

stands at just 68%.

While still substantial

in isolation, it

represents a steady

decline from 79% in

2011 and is similar

to the low in 2009

20 18

EN CN


..with marked differences across industries



TRANSPORTATION , LOGISTICS & DISTRIBUTION

MACHINERY

LEGAL

Optimistic business outlook for growth by industry (2014)

88%

78%

78%

74%

73%

63%

61%

58%

52%

49%

Note: Only industries with N>20 are shown







19%

51%49%

30%36%

15%

2014 2013

Private companies remain the main competitors, but the threat from SOEs is re-emerging

Primary competitor analysis by company (2013-2014)

State-owned enterprise

Private-owned enterprise

N./A.

Chinese POEs

continue to be the

primary competitor

in China, but the

challenge from

SOEs is increasing

18 16

EN CN


10% 10%

8% 12%

14% 12%

33% 28%

24% 31%

6%8%2%

2014 2013

1%

Rising labour costs are now the primary HR challenge

Key HR challenges (2013-2014)

Rising labour costs

Talent shortage

High staff turnover

Long training period needed to be fully efficient

Difficulty in convincing good candidates to join

None

Other

The two main HR

challenges identified

for two years in a

row have been

rising labour costs

and a talent

shortage, with

labour costs the

bigger issue this

year

16 14

EN CN


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

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

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

Air pollution is further aggravating HR difficulties

Top challenges in attracting and retaining expat talent in China (2014)

Challenges in ATTRACTING talent Challenges in RETAINING talent

17 15

EN CN


by time in China:

63%53% 52%

37%47% 48%

>10 years 6-10 years < 5 years 2014

54%

46%

Is the 'golden age' for MNCs ending?

Yes

No

Yes

No

Sentiment on whether the ‘golden age’ for MNCs is over (2014)

Companies are

divided overall

when asked if

the ‘golden age’

for MNCs is over,

but veterans

are more

inclined to

believe so

22 20

EN CN


E. More modest expectations and revised investment plans


19%26% 26% 26% 29%

7% 8% 7%9%

10% 11% 12%10%23%

17%21% 23% 20%

45% 40% 35% 32% 31%

7%

2014 2013 2012 2011 2010

6%


China is critical for revenue generation

The proportion of global revenues generated in Mainland China (2010-2014)

<5%

5-10%

11-15%

15-25%

>25% 32%

48%

The percentage of

companies that

generated 10% or

more of their global

revenue in China

has continually

increased over the

past five years and

is up to 48% in FY

2013 from 32% in

FY 2009

24 22

EN CN


9% 13%15%

19%16%

38%41% 43%

33%24% 21%

7% 8%8%

2014 2013 2012

6%

Fewer companies identify China as their top investment destination

Ranking of China as a destination for new investments (2012-2014)

Top destination

Top 3 destination

Top 5 destination

Top 10 destination

Not a top 10 destination

Only approximately

one fifth of

companies stated

that China was

their top

investment

destination in FY

2013 compared

with one third two

years ago

26 24

EN CN


6%

25%

86%

57%

18%7%

2014 2013

Substantially fewer companies plan to expand their operations...

Yes

No

Not sure

Expansion plans of China operations (2013-2014)

While over half (57%)

stated that they plan to

expand their current

China operations, this

is down considerably

from 86% the previous

year.

27 25

EN CN

28 BCS 2014_Press conference_3rddraft_FV.pptx Source: Business Confidence Survey 2013- 2014, Roland Berger analysis

2013

Note: All 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

Fewer companies have M&A intentions

Means of expansion (2013-2014)

M&A was mentioned by

just 15% of companies

– a conspicuously

low percentage

compared to the 41%

of companies that were

considering M&A the

previous year

32 30

EN CN


31%

48%55%

69%

52%45%

2012 2014 2013

Fewer companies are considering expanding to other provinces

Expansion to other PRC provinces (2012-2014)

Yes

No

A shrinking percentage of companies are considering expanding to other provinces in China, down to just 45% in FY 2013 from 69% two years previous

32 30

EN CN


2014

33%

48%

19%

9%

2014

80%

12%

Looking over the fence

Investment opportunities outside of China (2014)

Yes

No

Not sure

Regularly reviewing investment opportunities outside China but within Asia:

Shifted investment plans from China to other countries in the past 2 years:

Yes

No

Not sure

33 31

EN CN


F. Regulatory and market access issues continue to present challenges, but reforms would present opportunities


Regulatory obstacles remain a significant concern

Top ten regulatory obstacles when doing business in China (2014)

Unpredictable legislative environment

Discretionary enforcement of regulations

Administrative issues

Licensing requirement

Corruption

Discrimination against FIEs in public procurement

IPR protection

Ownership restrictions

Restrictions on access to financing

Other

1

2

3

4

5

6

7

8

9

10

37 35

EN CN


13%19% 18%

30% 23%

27% 26%18%

62%65%

49% 47%55%

7% 6%

6%

2014

3% 3%

5%

2013 2012

5%

2011

3% 3%

2010

0% 3%

4%

Laws and regulations are mostly often regarded as adequate…

Example: The quality of China's written IPR laws and regulations (2010-2014)

Excellent

Adequate

Inadequate

Very inadequate

N./A.

66% 72% 60%

China's written laws

and regulations are

mostly regarded as

adequate, although the

proportion of

companies that regard

them as either

excellent or adequate

is still lower than the

levels in 2010 and 2011.

38 36

EN CN


…but enforcement is weak

Example: The enforcement of China's written IPR laws and regulations (2010-2014)

Only 18% rated the

enforcement of

China's IPR laws and

regulations as either

excellent or

adequate, which

shows a deterioration

on the levels of 2010

and 2011.

14% 18% 18%27% 22%

21%23% 21%

50%51%

49%46%

43%

22%25%

15% 12%16%

2%

2014 2013

1%

2012

1%

2011

0%

3%

2010

0%

1% Excellent

Adequate

Inadequate

Very inadequate

N./A.

23% 28% 18%

38 36

EN CN


2014

55%

34%

11%

Foreign companies are treated unfairly

Perceived treatment of foreign-invested companies by the government (2014)

Foreign-invested companies tend to receive favourable treatment compared to domestic Chinese companies

Foreign-invested companies are treated equally

Foreign-invested companies tend to receive unfavourable treatment compared to domestic Chinese companies

55% of companies

believe that they

receive unfavourable

treatment compared

to domestic Chinese

companies

36 34

EN CN


14%

2014

9%

37%

22%

17%

Market access and regulatory barriers cost member companies EUR 21.3 billion – substantially larger than Estonia's annual GDP

Missed business opportunities in China due to market access and regulatory barriers (2014)

53% 47%

No

10 – 25 %

25 – 50 %

> 50 %

Don't know

< 10 %

Yes

Companies that missed out on opportunities: Amount of missed opportunities:

1 Number was conservatively calculated by considering the amount of missed opportunities and actual revenue

Member companies

missed out on

approximately EUR 21.3

billion1 in business

opportunities due to

market access and

regulatory barriers, which

is the equivalent of 15%

of the EU’s annual

exports to China

39 37

EN CN


5%

2014

50%

45%

Third Plenum reforms are positive, but uncertainty prevails

Third Plenum Reforms (2014)

Reforms will be good for my company

Unsure

Reforms will not be good for my company

45% of companies

believe that

implementation of reforms

would be good for their

company, although only

half are confident that

the Chinese leadership

will start meaningful

implementation in the

coming one to two years

40 38

EN CN

2014

40%

53%

Yes

Unsure

No 7%

Are you confident that the Chinese leadership will start meaningful implementation of the Third Plenum reforms in the coming one to two years? Companies’ perception of Third Plenum Reforms


10%

7%

36%

40%

5%

2014

2%

The China (Shanghai) Pilot Free Trade Zone is a reform in the right direction

Perception of the China (Shanghai) Pilot Free Trade Zone (2014)

"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."

Strongly agree

Agree

Neutral

Disagree

Strongly disagree

No opinion

45%

45% of companies

believe that the

China (Shanghai)

Pilot Free Trade

Zone is a major

step towards

opening up the

Chinese market

and creating a

level playing field

41 39

EN CN


70%

26%

4%

2014

However, current reforms still do not yet inspire substantial investment

Impact of Third Plenum reforms on investment plans

More likely to increase investment

Less likely to increase investment

No change

Current reforms do not

stimulate European

companies to make

substantial investments:

on average only one

quarter of companies

stated that they have

revised their investment

plans upwards as a

result of the Third Plenum

reforms.

44 42

EN CN


3%

42%

55%

2014

Note: Only industries with N>20 are shown

Increased market access would spur a re-intensification of investment

Impact were greater market access to be afforded (2014)

More likely to increase investment

Less likely to increase investment

No change



LEGAL


TRANSPORTATION, LOGISTICS & DISTRIBUTION





MACHINERY

63%

63%

62%

61%

58%

54%

53%

50%

50%

39%

44 42

EN CN


G Q & A

business confidence survey 2014 press conference presentation

Business

healthcare n

legal n

cosmetics n

commodities n

machinery n

petroleum n

construction n

hospitality n