Business Confidence Survey 2014 Press Conference Presentation

BUSINESS
CONFIDENCE
SURVEY 2014
Press conference, Beijing and Shanghai, May 29th, 2014
European Business in China

2BCS 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 years11-20 years6-10 years2-5 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

11BCS 2014_Press conference_3rddraft_FV.pptxSource: 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%
2014201320122011
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

15BCS 2014_Press conference_3rddraft_FV.pptxSource: Business Confidence Survey 2011-2014, Roland Berger analysis
30% 29% 34% 33%
37%
29%
34% 38%
33%
42%
33% 30%
2014201320122011
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%
20092008
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
CHEMICALS &
PETROLEUM
FINANCIAL SERVICES
(INCL. INSURANCE)
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
AUTOMOTIVE &
AUTO COMPONENTS
AGRICULTURE, FOOD
& BEVERAGE
MEDICAL DEVICES &
OTHER HEALTHCARE
(NON-LEGAL)
PROFESSIONAL
SERVICES
UTILITIES, PRIMARY
ENERGY & OTHER
COMMODITIES

19%
51%
49%
30% 36%
15%
20142013
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%
20142013
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 years6-10 years< 5 years2014
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%
20142013201220112010
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%
201420132012
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%
20142013
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

28BCS 2014_Press conference_3rddraft_FV.pptxSource: 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 20142013
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%
20132012
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%
20142013
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
CHEMICALS & PETROLEUM
FINANCIAL SERVICES (INCL. INSURANCE)
LEGAL
AGRICULTURE, FOOD & BEVERAGE
TRANSPORTATION, LOGISTICS & DISTRIBUTION
AUTOMOTIVE & AUTO COMPONENTS
MEDICAL DEVICES & OTHER HEALTHCARE
(NON-LEGAL) PROFESSIONAL SERVICES
UTILITIES, PRIMARY ENERGY & OTHER COMMODITIES
MACHINERY
63%
63%
62%
61%
58%
54%
53%
50%
50%
39%
44 42
EN CN

G Q & A

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