1 Business Confidence Survey 2017/18 German Business in China 2017/18 Business Confidence Survey 2 German Business in China 3 Business Confidence Survey 2017/18 GERMAN CHAMBER OF COMMERCE IN CHINA BUSINESS CONFIDENCE SURVEY 2017/18 Since 2007, the German Chamber of Commerce in Chinas business confidence survey has been a key gauge for measuring the business sentiment of German companies operating in China. As of 2017 the German Chamber of Commerce in China has approximately 2,400 member companies, representing about 50% of German companies operating in China. This years survey was conducted between August 21st and September 29th 2017. In total the survey comprised 58 questions, focusing on business outlook and performance, market conditions and investment climate, as well as the Belt and Road Initiative. The survey was conducted online among member companies in China. After controlling the dataset for quality, 423 valid responses were collected, resulting in a representative and statistically significant sample for the analysis of German companies in China. 4 German Business in China ContentsProfile of Responding Companies 7 Economic and Business Outlook 11 Market Environment, Reforms and Policies 15 Business Challenges 21 Investment Prospects 27 Research and Development 32 Belt and Road Initiative (BRI) 34 5 Business Confidence Survey 2017/18 EXECUTIVE SUMMARY BUSINESS CONFIDENCE SURVEY 2017/18 Economic and Business Outlook German companies economic outlook has recovered from the low forecasted in 2016. Especially machinery/industrial equipment, as the largest German industry in China, evaluates 2017 as positive for the own industry and significantly better than last year. Automotive and business services keep up last years level with optimism for 2018. Nearly two thirds of German companies in China expect to exceed or achieve their business targets in the current year, with a similarly positive outlook for 2018. Turnover growth sees a strong rebound and the majority expects turnover and profit to increase next year. However, companies remain cautious regarding investment and employment. Despite improvements in the current year and positive expectations for 2018, the share of companies increasing investment and employment is not projected to reach the high levels of 2014 and before. Investment increases are to a large extent driven by the automotive industry. Market Environment, Reforms and Policies Overall, the Chinese market is not as significant to German companies as it was a few years ago, but the trend is pointing upwards again. Nearly 40% of German companies feel less welcome than before, but the vast majority has no plans to leave China in the near future. The economic reforms of the last years tend to be welcomed by German companies, but the initial enthusiasm has faded even more. The majority of respondents finds that reforms in the wake of the Third Plenum in 2013 had no notable impact on them. Of the more recent policies, nearly 40% of German companies attest a negative impact to the restriction of capital flows. The impact of the Made in China 2025 strategy on their China operations is seen positively by approximately half of respondents over the next five and ten years. Bilateral relations play an important role for German companies in China: 58% of respondents find bilateral relations extremely relevant or very relevant for their future business. More than half consider market access and a level playing field for foreign business in China urgent for the newly formed German government to act upon. Business Challenges Internet and HR issues constitute the Top 5 business challenges of German companies in China. Internet issues are more pressing than ever, two thirds struggle with slow cross-border internet speed and internet access restrictions. HR issues have consistently been among the Top 5 challenges over the years. A lack of qualified staff and increasing labor costs are a problem for nearly 80%. There is a great deal of uncertainty regarding the new Cybersecurity Law among German companies: one in three companies is unsure about the impact on their business activities in China while one in five expects a negative impact. 6 German Business in China Domestic competition ranks 6th among the business challenges which is underlined by the increasing innovation capacity of Chinese companies. More than 40% of respondents expect Chinese competitors to become innovation leaders within five years. For the first time, this share is higher than the share of respondents who think this scenario is unlikely. Preferential treatment of local companies, IPR issues, administrative hurdles and legal uncertainty also rank among the Top 10 business challenges of German companies. Nearly half of German companies have encountered legal or regulatory obstacles in the past year, with custom issues most prominent. More than one in three companies has found it more difficult to obtain visa and working permits for foreign employees in the past year. Investment Prospects German companies remain hesitant regarding investments at new locations in China. A quarter plans to invest at new locations within the next two years, with Jiangsu, Guangdong and Sichuan/Chongqing as the most frequently named locations. However, the share of those not planning investment at new locations has reached more than half. The main source of financing are reinvestments of earnings from the Chinese market. Of new investments in 2018, more than half will be in new manufacturing facilities as well as in staff development and training. While market growth expectations and strategic business considerations are key reasons to not invest, one in four companies names regulatory reasons for not increasing investment. More than half of German companies have little or no confidence regarding the further opening of Chinas market, with just over 40 % feeling optimistic about the opening up in the medium term. The State Councils Document No. 5 which was published in January 2017 is not very well-known given that it is one of the major recent documents introducing reform measures to further promote foreign investment. Research and Development More than 40% of respondents conduct R&D in China. A focus on German R&D as well as concerns regarding intellectual property and technology transfers are the key reasons to stay away for those who do not engage in R&D in China, but in other countries. However, China has stepped up as a location for R&D over the last few years with lower shares of companies stating a lack of local technical expertise and an unfavorable research environment as reasons to not engage in China. Belt and Road Initiative An extra part to this years survey contains an assessment of German companies views of and engagement in the Belt and Road Initiative (BRI). More than one third see a positive effect of BRI on their future business, while more than half of respondents report no significant effect or no opinion about BRI. 30% of German companies are active in or considering to engage in BRI projects. For those who are not, a low relevance to their own industry or business model is the most frequently stated reason to not engage, followed by a lack of suitable projects and insufficient information. Nearly half of those who are active or considering to engage in BRI, are already implementing or planning concrete projects. 7 Profile of RespondingCompanies8 German Business in China 35.5%11.8%9.2%6.1%13.9%23.4%Shanghai Hong Kong Beijing Singapore Other NotapplicableWhere is your parent company's Greater China or Asia headquarters located? One in three respondents is headquartered in Shanghai. Outside mainland China, the most important locations are Hong Kong and Singapore. Joint Venture8.7%Representative Office6.6%WFOE72.6%Holding5.4%Other6.6%Please indicate the legal status of your company in China. Most German companies in China are organized as Wholly Foreign-Owned Enterprises (WFOEs). The share has gradually increased over the years and has gone up again slightly from last year. In which city in mainland China is your company located? German business in China is concentrated in the main economic clusters of the Yangtze Delta (East), the Bohai Economic Rim (North) and the Pearl River Delta (South) with a smaller number of companies in the Southwest and other regions. Be i ji n g16.4%O th e r N o rt h11 .8%S h an g h ai40.8%S u z h o u A re a 10.9%O th e r E as t6.6%Pe ar l Rive r D e l ta12.3%O th e r S o u th an d S o u th w e s t1.2%9 Business Confidence Survey 2017/18 Please indicate the number of employees working at your company's local operation. More than 70 percent of the participating companies employ 250 or less individuals, highlighting the relative importance of small and medium enterprises (SMEs). 36.4%35.0%19.4%5.4%3.8%299912.3%26.0%29.3%12.5%8.7%11.1%999 million29.8%19.4%12.8%5.2%4.5%4.0%3.1%3.1%2.8%2.8%2.6%2.4%2.4%0.5%4.7%Machinery/Industrial EquipmentAutomotiveBusiness ServicesPlastic/Metal ProductsHealthcare ProductsChemicalsElectronicsLogistics, Transportation and DistributionConstruction and Civil EngineeringTourism, Travel and HospitalityFinancial ServicesConsumer Products/ServicesIT/TelecommunicationsAerospaceOtherPlease indicate your local operation's annual turnover for 2016 in RMB. Turnover conveys the same message, reflecting the small to medium sized nature of German business. Two thirds of respondents indicate a turnover of less than RMB 250 million in their local operation. Please specify the main industry of your company. Companies from a broad range of sectors are represented among German business in China, with machinery/industrial equipment and automotive making up nearly half of respondents. Business services rank third. This distribution has remained stable over the last years. 10 German Business in China 50.4%46.6%40.0%14.9%14.7%12.5%2.4%Manufacturing/ProductionServicesSales/MarketingTradingSourcing/ProcurementR&DOtherPlease indicate your local entity's main field of business. Manufacturing/Production, services and sales/marketing persist as German businesss main fields of business in China. Half of German companies in China maintain local production facilities. 5.4%3.8%9.7%16.3%28.6%36.2%15 yearsHow long has your company been physically present in China? German business possesses considerable experience in China. Nearly two thirds of respondents have been in China for more than ten years a share which has continuously increased over the last years. 11 Business Confidence Survey 2017/18 Economic and Business Outlook12 German Business in China German companies economic outlook has recovered from the low forecasted in 2016. More than half observe an improving Chinese economy in 2017 and the How do you evaluate the development of the Chinese economy in 2017 and expect its development for 2018? How do you evaluate the development of your industry in China in 2017 and expect its development for 2018? Companies outlook for their respective industries underlines that the low forecasted in 2016 has passed. The trend is especially obvious for machinery/industrial equipment which sees a strong comeback in 2017. Expectations for 2018 show a slight downward adjustment of this years enthusiasm, but still remain positive. Automotive and business services keep up last years level, with optimism for 2018. optimism stretches into the coming year. This corresponds with GDP growth picking up slightly to 6.9% in the first three quarters of 2017. 39.3%62.1% 64.4%34.3%27.3% 25.4%26.4%10.6% 10.1%2016 2017 2018 (expectation)Improving Neutral Worsening48.9%27.0% 22.6%54.3% 53.5%33.6%39.2%34.6% 37.0% 37.5%17.5%33.8%42.8%8.7%9.0%2014 2015 2016 2017 2018Improving Unchanged Worsening13 Business Confidence Survey 2017/18 26.1%77.4%66.1% 64.7% 65.4%75.0%38.8% 38.5%54.3%38.7%14.5%24.2% 26.5%33.3% 20.0%38.8% 42.3%34.8%35.1%8.1% 9.7% 8.8% 1.3% 5.0%22.4% 19.2%10.9%2016 2017 2018(expectation)2016 2017 2018(expectation)2016 2017 2018(expectation)Machinery Automotive Business servicesImproving Neutral Worsening28.5%30.6%10.4%28.5%33.3%59.4%22.3%20.6%20.8%14.4%11.8%7.2%6.4%3.7%2.2%20162017 (forecast)2018 (expectation)Exceed Achieve Mostly achieve Partly achieve Not achieveTo what extent were you able to achieve your business targets in 2016, 2017 and what are your expectations for 2018? The same trend is reflected in the target achievement: 2017 is a strong year, with nearly two thirds forecasting to exceed or achieve their business targets. Companies have equally positive expectations for 2018, with as much as 70% predicting to exceed or meet their targets. 14 German Business in China 64.8%69.7%73.6%64.5%55.9%69.3%75.2%52.6% 54.2%59.8%51.2%41.8%48.6%61.1%58.0% 60.8%50.2%45.3%35.0%41.2%45.3%48.4% 47.6% 45.3%38.7%36.6%38.2% 42.7%2012 2013 2014 2015 2016 2017 2018Share of respondents expecting increases in key business indicatorsTurnover Profit Employment InvestmentTurnover growth sees a strong rebound from the previous year, but the other indicators do not keep up to the same degree. Profit, employment and investment have not gone back up to the 69.3% 75.2%48.6% 61.1% 41.2% 45.3% 38.2% 42.7%17.4% 20.6%37.0%31.4%47.6% 49.8% 51.9% 51.6%13.3% 4.2% 14.4% 7.4% 11.2% 5.0% 9.9% 5.7%2017 2018 2017 2018 2017 2018 2017 2018Turnover Profit Employment InvestmentIncrease Similar DecreasePlease indicate the year on year development for your company in China in the following areas. However, the share of companies seeing decreases in any of the indicators is low. Half of respondents indicate that they will keep employment and investment at similar levels. Investment increases are to a large extent driven by the automotive industry. 2015 or earlier percentages. The 2018 expectations for employment and investment do not reach the high levels of 2014 and earlier, indicating that companies remain cautious in these areas. 29.5% 36.1%63.3% 55.7%28.3% 30.4%59.0%56.6%29.1% 35.4%65.2% 67.4%11.5% 7.4% 7.6% 8.9% 6.5% 2.2%2017 2018 2017 2018 2017 2018Machinery Automotive Business services15 Business Confidence Survey 2017/18 Market Environment, Reforms and Policies16 German Business in China 10.3%10.1%8.4%42.4%35.4%34.2%28.6%31.4%30.9%6.8%10.1%13.7%12.0%12.9%12.9%TurnoverProfitInvestmentTop 1 market Among top 3 markets One among many Low priority Not applicable57.3%59.6% 61.5%48.4%43.9%52.6%49.8%51.1%56.5%41.8%37.7%45.6%2012 2013 2014 2015 2016 2017Share of respondents indicating that China is their Top 1 market or among Top 3 marketsTurnover ProfitChina is among the top 3 markets for around half of German companies operating in China. What is the status of your company's China business within your parent company's global turnover, profit and investment? The Chinese market is not as significant to German companies as it was a few years ago. However, the trend is pointing up